Author Professor John Quiggin
Professor of Economics, James Cook University
Source Australian Centre for Independent Journalism
Copyright Professor John Quiggan, 1998
Abstract A transcript of a presentation made to the conference, BOOT: In the Public Interest? at University of Technology, Sydney, March 1998 organised by the Australian Centre for Independent Journalism, Australian Mekong Resource Centre, Sydney University and Community Aid Abroad.

Thanks very much for inviting me to be here. I haven't got a lot new to say, that hasn't already been said today. I can think of a few little points that haven't been raised but I thought I'd start up with just a typology of some of the different arrangements and then look at the advantages and disadvantages of the possible ways in which we can handle the mix of private and public involvement in infrastructure.

I think most of the focus has been on reasonably large scale infrastructure projects. These three acronyms are more or less standard. I wanted to put in something which I've just called (to keep the alliteration basics) - so what I've described is the basic scheme is the way in which I think most projects have been done for a while in Australia, prior to the rise of BOOT schemes, and that is that we put a infrastructure project up for competitive tender - the construction of the project. On satisfactory completion, the government pays the amount tendered and takes over ownership. The debt required to pay the constructor is then serviced by the flow of income generated by the asset. So that's what I would describe as the basic scheme. In the case of a road, if we decide to have a toll road, the government would pay the builder once it was finished and would then collect the tolls and use that toll revenue to service any debt.

I guess all of these then are reasonably straightforward [talks to slide]. We can now divide up the various roles of the parties. There's construction, which is always "build" in these things - so that's the B. There's "own"", there's "operate" and finally, in BOOT schemes, there's "transfer". So we could think of a bunch of little combinations of those things. Some of them, like cases where the government's already built it and then gets somebody else to operate it, are usually called contracting out - so they don't tend to have nice little acronyms like this, although you could possibly OO them or O them. But the kinds of options that have been popularly discussed in relation to new projects have been BOT, BOO and BOOT.

BOT is build, operate and transfer - a company builds a facility, an infrastructure project, gets to operate it for a while and is paid for that, and finally transfers it back to the public sector at the end of some time - determined by when the construction company is believed to have been paid a satisfactory amount.

Build, own, operate (BOO) is maybe the trickiest of these because here there's at least, up front, no government involvement whatsoever. The private sector builds the project, owns it, and operates it. Now there's lots of things, of course, that meet that criteria. Every time somebody builds themselves a house, they are building it, owning and operating it. What distinguishes things that are called BOO projects is typically that there is some continuing level of government involvement and so we distinguish BOO projects from private investment in general by the fact typically that there's an essential service of some kind being provided, in a situation where we can't simply rely on the existence of a large number of competitive suppliers of that service. So, in some way or another, the government remains involved. Another area of involvement in transport infrastructure projects is typically the need for the government to use powers of coercion to let the project go ahead in the first place. Say, for example, we're going to build a private railway line - it's typically the case that the viability of that depends on the capacity of the government to resume land, compulsorily, in order that the private or government builder of the railway line can proceed.

Finally, the topic of this conference - BOOT: build, own, operate and transfer. So the story here is the constructor builds the project, they then get to own and operate it for some period of time (like 20 or 25 years) during which they collect revenues. At the end of the day, the project is handed back over to the government.

So I want to argue that modern BOOT schemes are usually bad arrangements. Why is that? Well, I'll start with the BOT schemes - build, operate, transfer. Typically what we're doing there is bundling together construction, operation and maintenance. It's comparatively rare that that's an optimal pairing - the enterprises that are good at construction are not necessarily good at operation and maintenance. Furthermore, we'd like (as was discussed in terms of franchising in the past) to have that kind of service open to some sort of scrutiny and competition. We'd like, for example, to be able to re-open after five years, contracts with things like operation and maintenance in many cases. So it's rarely the case that tying together the building and the operation of a publicly owned project is a good idea.

Even more rarely is a BOOT project a good idea. The reasoning is simple here. We can think of some things, of course, which the private sector does better and some things which the public sector does better. Michael Porter and I would no doubt disagree over where we draw that line, but we both agree there are some things that ought to be left in the private sector and some in the public sector. A BOOT scheme is desirable only in a very odd case; it's something which says "This thing is best operated in the private sector between now and, say, the Year 2020. After that, it's best going back to the public sector".

Why would that be? Well, I guess we can imagine cases when that might be the case. I mean, if we think of this Olympic Village Project, we might imagine that it's going to turn, at the end of the Olympic Games, from a sporting stadium and residences for athletes into something quite different - and it might be that a move from the private to the public sector is optimal at that point. When we look at how is this chosen, it's never chosen on the basis of look, the private sector would do a good job in this phase of the project and then the public sector would do a good job in a subsequent phase. It's chosen solely in terms of financial packaging. At such and such a date, the stream of payments will have been sufficient to satisfy the tenderer. At that point, we can hand it over to the public sector.

The reason these schemes are so popular is because they appeal to the elementary human fallacy of wanting something for nothing. It appears, on a superficial glance, that the private sector builds the project, no public money's ever involved, and at the end of the day we get a free road or railway given to us by the private sector for nothing. Now, as Tony Harris pointed out, the only reason that's feasible is because the charges raised in the first 20 or 25 years of the project are sufficient to offset the full cost of the construction, rather than having the cost spread out over the entire life of the project. But, in general, the existence of a BOOT type arrangement is almost always an alert signal; it indicates that the project is being designed not on the basis of "let's look and see what's the best possible arrangement". It's "what's going to play best in a political framework" or "what's going to be the best way of shifting tax between levels of government; what's going to be the best way of getting around a policy of restricting borrowing". Almost always, where a BOOT scheme is used, the motive is cosmetics of one kind or another, rather than sensible allocation of resources.

So I think, looking at the prevalence of these schemes in Australia and the fact that nearly all of them have been bad deals from the public sector point of view - in a few cases (as has been argued this morning) the private investors have made a mistake and the public sector hasn't come out so badly. I guess I'm not so confident that we've yet reached the stage of best practice where we can really start exporting these ideas to other countries. I think our management of BOOT schemes in particular has shown a willingness to sacrifice long-term public interests in terms of budgetary cosmetics, which I certainly find pretty depressing.

It's interesting to look, indeed, at the different way in which the Federal and State governments and their instrumentalities have looked at this. The Federal Government, in some sense (and Federal government agencies) are neutral. They don't have big requirements for investment in infrastructure. They're selling off most of the enterprise that they did have. Of course, in a very wide range of inquiries conducted by the Federal Government, the view has been unanimous that BOOT schemes are best, second best and often worse. That's obviously true of the kind of analyses I've done when I was asked to make submissions to various parliamentary inquiries. It's true of the conclusion of parliamentary inquiries, like the Parliamentary Committee on Microform and Transport. It's true of conclusions drawn by people like the Industry Commission, with whom I hardly ever agree. It's true of the Task Force set up by the Economic Planning Advisory Council. In every case, these bodies have looked at these things and said BOOT is never going to be the best option.

State governments on the other hand, who have self-imposed zero debt targets, who have the capacity to shift taxes to the State government and who have lots of people pushing for projects, but a desire to conceal the fact that the government's funding them, continue to push ahead with these kind of projects. But I think basically my view would be - I have yet to see any project for which a BOOT scheme is the optimal arrangement. Certainly I would assert that none of the Australian schemes, financed on a BOOT basis, could not have been done in a less costly fashion either by the traditional method of the government simply setting up competitive tendering and then taking over ownership, or in some cases by outright privatisation.

I want to talk a bit about how we choose between private and public ownership and I guess I wouldn't draw the same line as Michael Porter does. I think though the critical issue is - where do things like ... (By looks of it, in the Tape change over some was lost... John may be able to fill this in here.)

... debt by the kind of external government affectable risk that I've talked about. So after the environmental kinds of effects of a project like that have been looked at and decided to be OK, it's very sensible for the government to say "OK, if you think you can make a quid out of this, go ahead and do it. Don't come back to us if you lose your money".

On the other hand, the more that the risk associated with the project has to do with subsequent decisions that are going to be made by governments or in general things that lie largely at the level of the macro economy, the less the appeal of having that risk handled by private sector enterprise is.

Now I'm afraid (there are two copies here, the second one should be private - I'm trying to scratch it out) ... so my conclusion is that where the risk is primarily systematic, external to the project and particularly where it's influencable by government, we have the best case for public ownership. Where the risk is inherent in the project is the best case for private involvement.

Now I want to talk a bit about urban roads. I think, again, in terms of the idea that we've already resolved a lot of the problems and that we've had teething difficulties, the continuing popularity of BOOT type arrangements for urban roads indicates, in my view, that we're a long way from being in a situation where we can export the ideas that we have. We are, in fact, still making elementary mistakes. In all respects - and I agree entirely with the points Tony Harris made - the idea of using urban roads as an instance for BOOT financing or more generally, or for that matter BOO don't operate financing, it's hard to think of a project that is less well set up for that kind of approach. It's integrated within a road network so we have the problem that, on the one hand, the benefits aren't captured by the builder as they collect the tolls (because a lot of the benefits flow to people on competing roads). On the other hand, again as was pointed out, the project is only viable because of the feeder roads that have already been built.

In fact, typically in the BOOT projects that have been undertaken, City Link, the Western one (I lose my numbers here in Sydney) - most of these projects have had large stretches of public road thrown in to the nothing. So the idea that the very first slide put up by John (I think it was) that only commercially viable projects be undertaken if we have BOOTs is simply totally inapplicable to a road project, which has been the primary case where the BOOT system has been operated. We can't tell from the fact that it's profitable, that it was desirable, or from the fact that it was unprofitable or undesirable.

Secondly, and this point arises very generally, we have the problem that's already been referred to. The profitability of an enterprise depends on a range of regulatory decisions that can be taken a long time into the future. The only way of persuading someone to invest in them is to make contractual commitments about those decisions well in advance. What that does is tie the hands of future governments and lock mistakes into the system and I think an ideal example of this was the commitment that the Labor Federal Government made to phase out the analogue phone system. That was made to induce private investment in digital networks which supposedly going to rapidly supplant analogue and supposedly going to rapidly provide security of service. It became apparent that that wasn't the case. If we had a flexible system of regulation, not constrained by the need to protect the interests of private investors by these contracts, we would have scrapped that decision and decided we would keep the analogue system after all. As it is, the government was stuck with the need to maintain the promises it had made to the investors in those projects.

The same kinds of issues arise when we talk about whether we should improve public transport? What sort of response should we take to greenhouse gas in the case of electricity? And so on and so forth. If we are going to induce private investment, we're going to have to either compensate the investors for the risk about adverse government decisions, by paying them a high premium, or we're going to have to tie the hands of government a long way in advance. Neither of those things is desirable and therefore, where the involvement of government is sufficiently great, where it's more than simply providing a basic legal framework of contracting and so forth, the case for the government handing over the operation of production of services to the private sector is correspondingly weakened. When you get to the case of activities where the profits are entirely determined by government fare - and an example is the blood types operation of Commonwealth Serum Laboratories, the case against privatisation is overwhelming.

But I just want to come back and mention - there are plenty of cases where private provision is desirable. In some of those cases that means that we may want to bring the private sector into areas where we previously had the government. What's almost certain is that if that's the case, we are going to be able to predict in 20 years time what the government backing is. So that, although private provision may in some cases be desirable, BOOT schemes in my view are never desirable.


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