Unproven B-O-T Scheme versus Site Value Taxation
|January 9, 2007||Posted by Staff under Progress Report, The Progress Report|
Unproven B-O-T Scheme versus Site Value Taxation
PUBLIC SUBSIDIES FOR PRIVATE SECTOR
Desperate to Maintain Land Speculation Profits, Fatcats Propose New Welfare Plan for Themselves
by Charlie Pahlman Build-Operate-Transfer (B-O-T) is being hailed by industry, government and multilateral banks as the wonder solution to financing large infrastructure projects such as dams, railways and roads – to create public infrastructure without draining the public purse – conjuring up images of ‘free development’. What is the reality behind the B-O-T mask?
Investing in public infrastructure such as roads, bridges, ports, power plants, public utilities or railways is conventionally considered to be a necessary prerequisite for industrialisation and economic growth. It has traditionally been the responsibility of governments, in both capitalist and socialist economies.
Governments use tax revenue or loans from commercial banks and international finance institutions, such as the World Bank, to fund infrastructure investments. While the private sector is often sub-contracted to carry out construction work on infrastructure projects, governments have borne virtually all project costs and risks.
Given the current rapid industrialisation in many Third World countries, especially in Asia, for governments to maintain adequate investment in infrastructure – which is very capital-intensive – means an enormous burden on public finances.
Third World countries now spend around US$200 billion a year on infrastructure investment, of which more than 90% is government-sponsored.
This emphasis on infrastructure investment has been a major cause of burgeoning government budget deficits and foreign debt, and cutbacks to ‘softer’ sectors, such as health, education and social welfare, often in connection with structural adjustment and other austerity programmes imposed by creditors such as the World Bank and the International Monetary Fund.
The past decade has seen a new global economic trend emerge, actively supported by the World Bank group, which emphasises privatisation, economic deregulation and reducing government’s role in virtually all sectors of the economy.
Supporting new mechanisms which enable direct private sector investments in infrastructure projects is part of this trend, and B-O-T is one model currently being promoted by the World Bank group, ostensibly as a strategy for increasing efficiency, reducing the drain on state revenue and enhancing private sector development.
B-O-T is a relatively new approach to infrastructure development, which enables direct private sector investment in large-scale projects such as roads, bridges or power plants.
B-O-T’s theory is quite simple. A private company or consortium agrees with a government to invest in a public infrastructure project (such as a road or power station). The company then secures their own financing to construct the project. Then, the private developer owns, maintains and manages the facility for an agreed concessionary period (e.g. 20 years) and recoups his investment through charges (like road tolls or electricity sales).
Finally, after the concessionary period is over, the company transfers ownership and operation of the facility to the government or relevant state authority.
Arguments for B-O-T: a World Bank report says increased private sector investment in infrastructure projects ‘offers the twin benefit of additional funds and more efficient provision…’.
This summarises the thrust of the argument in favour of B-O-T: Enabling the private sector to invest directly in infrastructure projects reduces drain on the public purse, and as the private sector operates on a commercial basis, efficiency will also improve, so the story goes.
It is a remarkably simple and seductive argument, and one which can easily conjure up visions of ‘free’ development – public infrastructure being created without having to invest public money.
Proponents also argue that by encouraging foreign investment, B-O-T can help to facilitate effective technology transfer between countries, and thus foster the growth of a strong local private sector.
The real imperative behind mechanisms like B-O-T however goes beyond this upbeat and pro-market rationale. The World Bank, the Asian Development Bank and other multilateral financial institutions that have been lending for large infrastructure projects in Third World countries for many decades, no longer have sufficient funds to meet projected demand.
The banks have been promoting the view that massive infrastructure development is both necessary and desirable. But they are hampered by limited funds, and an increasingly complex regulatory framework. The banks are therefore eager to find ways to transform their role from one of direct creditor-investor, to one facilitating and brokering private sector investment.
The reality: Despite the confident promises made by proponents, the supposed benefits of the B-O-T model are based more on ideology than on empirical evidence or fact. B-O-T has no track record. There is to date virtually no major B-O-T project that has successfully completed all stages of the cycle (built-operated-transferred) according to original plans.
Several B-O-T ventures have already run into problems due to cost overruns, unrealistic price and income projections, and legal disputes between private operators and the state. In virtually all these cases, it has been the state and the general public, not the private operators, who have ultimately shouldered the cost of failure. The assumptions and premises underpinning the B-O-T model need to be critically re-examined on rigorous economic terms.
There is no such thing as a free lunch. The notion that B-O-T is a way of creating public infrastructure at little or no cost to the public purse is of course nothing more than wishful thinking. Nobody does anything for nothing, least of all the private sector, who clearly will only invest in a project if they are reasonably certain they can recover investment and make adequate profits. Whether the investment is recouped through road-tolls, electricity sales or whatever, it is the the users, tax-payers or the state who ultimately pay the cost of the project.
Since large-scale infrastructure projects are generally associated with cost-overruns, uncertain economic viability and social or environmental risks, private investors are reluctant to go near such ventures unless the government is willing to provide various subsidies or ‘sweeteners’ – like investment grants, low-interest loans, special tax exemptions, land grants, public financing of social and environmental mitigation measures and state controls to curb competition.
This is a contradiction of ‘free-market’ ideals used to promote privatisation. Such subsidies tend to distort and undermine the market realities, generate waste and corruption, and lead to less accountability in the use of public resources.
In most large B-O-T projects, the private sector has only been willing to participate if governments or international financial institutions assume a significant portion of the project risks. By playing the role of ‘political guarantor’ for private sector projects, the World Bank and other international institutions are able to exert even greater leverage and control over economic reform and other government policy in Third World countries, with major implications for national sovereignty.
Foreign investors are often unable to secure financing for large infrastructure projects in Third World countries unless there is a significant level (say, 25%) of ‘government equity’ to ensure political commitment to the project. So, the government will have little control over cost overruns and delays, almost a standard feature of the infrastructure construction, but they are required to carry most of the risk.
Foreign investors, in particular, have little incentive to be concerned about long-term local impacts. Since the primary goal of private developers is to ensure adequate return on investment before the end of the concession period, minimum attention can be paid to maintenance and capital replacement costs.
Privatising public infrastructure facilities leads to a form of ‘flat’ taxation, where only those who can afford to pay have access to the service. This only serves the wealthy, at the cost of the poor.
The private sector will naturally be interested only in projects most likely to be ‘commercially’ profitable. Also, allowing foreign companies to invest in and have control over major public infrastructure facilities has serious implications in terms of national sovereignty and independence.
To whom are private companies accountable? Only to their shareholders, whose return has to be maximised. There are also questions over who really benefits from privatised infrastructure projects. As a Chinese environmentalist put it: ‘Those who have suffered are not the beneficiaries, while those who have benefited are not the sufferers.’
Will B-O-T help to get access to private funds and improve efficiency for essential public investment projects? Or, is it simply another way for the private sector to access public funds for projects designed primarily to meet their own needs?
Charlie Pahlman has been an agriculturist and rural development worker in Thailand and Lao PDR since 1986. This article appears at The Progress Report courtesy of Third World Network Features, whose web site is at http://www.twnside.org.sg
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