‘BOOT arrangement is a debt trap’

Jun 13, 2022 News

…Economist urges govt. to use oil money to fund capital projects

By Davina Bagot

Kaieteur News – The PPP/C Government is quick to utilise the Build Own Operate and Transfer (BOOT) finance model to undertake major capital projects, a situation where contractors take on the responsibilities listed leaving users-in this case Guyanese- to pay for the utilities provided which is later transferred to the country.

Guyanese born Professor of Economics in the United States, Tarron Khemraj

However, one economist has warned that these arrangements have the potential to sink Guyana in more debts, even as he suggested that government make use of its newest source of income, oil revenue, to fund its capital projects. Tarron Khemraj, a United States Professor of Economics and also a born Guyanese made these points while appearing on a recent Globespan 24×7 broadcast. The discussion was centered on ‘The Impact of Guyana’s Oil Windfall on Poor Guyanese’ and was moderated by Trinidadian, Shalima Mohammed and also featured Dr. Terrance Blackman, an Associate Professor of Mathematics in New York.
Khemraj explained: “it might be better to use some of the oil funds to outright finance some of the big capital projects instead of going into let’s say a BOOT arrangement. A BOOT arrangement is a de facto debt right because the project contractor has to find the financing, market terms then you get the contract and supplies you the good, but what happens if the private contractor can’t, the revenue is drawn out of the Guyana economy to finance the debt, that private contractor’s debt.”
He added that because citizens will need the services being provided by that contractor, government will not be able to sit back and allow the contractor to fail which means that the shortfall will be supplied by Guyana. For instance, he said, “Can the government sit back and say okay your gas to shore energy, your natural gas power plant go belly up? It can’t, because the citizens will still need electricity so you are locked to this. It is a duplicitous debt so some level of optimal mix of using internal finance and oil finance will have to be arrived at.”
The Berbice Bridge is an example of a BOOT arrangement that Guyana currently has. It must be noted that despite the fact that the bulk of the money invested in the Berbice Bridge came from state-run National Insurance Scheme (NIS), Dr. Ranjisinghi ‘Bobby’ Ramroop, the best friend of Vice President, Bharrat Jagdeo is the largest shareholder. The National Industrial and Commercial Investments Limited (NICIL) has 10 percent shares in the bridge, NIS has 20.2 percent, Hand-in-Hand Fire Insurance has 10, New GPC has 20 percent, Queens Atlantic Investment Inc. has 20 percent and Secure International Finance Co. Limited owns 20 percent.
In 2018, it was reported that the privately-owned Berbice River Bridge was facing a major problem of maintenance, or lack thereof, of its pontoons, with the then Government recommending the company to seek ways to raise financing.
Since being commissioned in December 2008, there has been little or no maintenance of the pontoon which floats the bridge, with concerns raised by former board member and chairman, Bert Carter, and others. Back then, the NIS Chairman, Dr. Surendra Persaud, informed government of the maintenance issues. It was reportedly pointed out that the bridge was facing a financial shortfall and could not maintain the pontoons.
Former Minister of Public Infrastructure David Patterson, in confirming the state of affairs, said then that after Government was informed of the developments, a team of engineers from the Demerara Harbour Bridge was dispatched to Berbice.
The construction of the bridge under the Bharrat Jagdeo administration, while widely welcomed, was heavily criticized because a few investors were allowed almost total control, though putting up only a fraction of the almost US$40M used to build it.
More recently, government was seeking to enter into another BOOT arrangement with a Chinese company for the Amaila Falls Hydropower project. In this arrangement, Guyana would have been exposed to dangerous risks, while the contract’s investment would have been secured. However, Jagdeo recently said that the contractor, China Railway First Group was having difficulty in financing the project. He explained that the contractor had as late as April 22, last, written to the government “saying that they are having a hard time doing the BOOT (Build, Own, Operate Transfer) contract and they want to shift to an EPC (Engineer, Procure, Construct) plus finance” option instead.
One transparency advocate who resides in Canada, Dr. Jerry Jailall has concluded that this development may be a blessing in disguise given the burdensome risks Guyana would have carried in the BOOT arrangement with the Chinese.
For instance, if the falls run dry due to climate change, or if the 23 square kilometres reservoir is unable to feed the hydro plant, the Guyana Power and Light (GPL) would bear the incurred liability. Secondly, Guyana will be responsible for political force majeure, that is, if the government changes its mind about the project, it would still have to pay the Chinese contractor for its investment.
The third risk Guyana will stand, along with China Railway, is ‘other force majeure’. This relates to damage to the plant, by unforeseen circumstances.
Two other risks will be borne by GPL if the Amaila Falls project fails to meet the electricity demand.
The Amaila Falls Hydropower project was pegged at US$700M to hopefully deliver 165 megawatts (MW) of electricity upon its completion.
Under the BOOT arrangement Guyana would have, in 20 years’ time, take over ownership of the project.