Recent discussions about the Statute for the Encouragement of Private Sector Participation in Public Infrastructure Projects (
To build a constructive conclusion on implementing BOT policies we must use the above approach as a basis for our discussions on the risks the private sector should shoulder.
BOT is a new class of projects characterized by private construction and maintenance of public projects. Private developers using the BOT model undertake to design, finance, construct, and operate public projects that generate revenues and, at the end of the franchise period, turn them over to the government. The private sector participates in public infrastructure projects for a reasonable profit. And the amount of profit they should request is supposed to be in proportion to the risk they shoulder. In general, there are risks in the three stages of a BOT project: planning, construction, and operation. Generally speaking, the risks in planning and construction stages are greater than that in the operation stage. Although private developers can estimate the potential risks in public construction project investment through research and investigation, they still face enormous uncertainty as the project period could encompass several decades. As a result, the cash flows and the self-liquidating ratio should be taken into account when evaluating the feasibility of the financing plan for a public infrastructure project. One characteristic of public infrastructure projects is the vast amount of money that the developer has to pour in during the planning and construction stages, and then to recover their investments and generate profits from future operations. Therefore, private developers have to withstand enormous financial pressure in the early stages of public infrastructure projects. Without proper financial planning, the projects could fail due to capital shortage.
The basic idea of the self-liquidating ratio is to assess if the net income in the operation periods would cover the total costs spent in the planning and construction periods. When the self-liquidating ratio is greater than one, that means investment in the project can be recovered and the anticipated profit can be generated. When the ratio is less than one and the government still adopts the BOT model, subsidies and other benefits have to be granted to private developers to make the project feasible.
Take Taipei's Mass Rapid Transit (MRT) systems, for example. Taipei City government covered the construction costs from its budget and handed over the MRT systems to the Taipei Rapid Transit Corporation (TRTC) in a voluntary conveyance (
However, if the government, under its current financial strain, draws up part of its budget to subsidize or invest in the BOT public infrastructure projects, it will crowd out other government functions or projects. This runs counter to the government's initial intent, which is to alleviate its financial burden through BOT projects. Therefore, creating extra financial resources through land and property development to supplement insufficient revenues during the operation period seems to better serve the aim of the current governmental policy.
We can take two approaches to observe whether the scope of expropriation by zone or section is too large for transportation infrastructures. First, the protests from landlords who get their property expropriated is not uncommon because the compensations for those landlords are calculated at prices set by the government, which are usually far lower than their market prices. With expropriation by zone or section, the benefits that come along with public construction will be shared with landlords and their resistance against expropriation will be significantly reduced.
Defining the scope of expropriation by zone or section involves financial planning, that is, the amount of subsidies needed from land development to make the project self-liquidating. If we consider the financial boost received by the project as part of the cost of expropriation by zone or section, the magnitude of expropriation then varies in proportion to the size of the subsidies required.
In my opinion, it is reckless to regard the expropriation by zone or section as land speculation before understanding the relevant financial planning. In recent years, the government has followed three basic principles when implementing the BOT model: no investment, no subsidies, and no guarantee. But for the public projects whose self-liquidating ratio is less than one, we should make up for the insufficient operating revenues with the benefits from land and property development. In other words, the goal is to achieve the "internalization of external benefits" by financing the projects with economic benefits from land and property development. Without this measure, few private companies would be willing to participate in the projects.
The passage of the Statute for the Encouragement of Private Sector Participation in Public Infrastructure has laid a legal basis for private-sector involvement in public construction projects. What we should do now is to adjust our perceptions and practices, put forth the related guidelines, and simplify the administrative procedures. At the same time, the government should also provide necessary assistance and support to the private sector in order to create a reasonable investment environment and reduce risks. This will attract plenty of capital, creativity, energy and efficient management from the private sector, speeding up the promotion of public infrastructure projects and creating a win-win-win situation for the public, private businesses, and government.
Chen Jiin-feng is an associate professor of accounting at National Chengchi University.
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