22 - 28 November 2001
Issue No.561
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Al-Ahram Weekly Online 22 - 28 November 2001 Issue No.561 |
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Re-inventing the wheel
BOT contracts are the reincarnation of concession contracts, but are they Egypt's ticket to development? Niveen Wahish takes a look
Yehia Hassan, 76, remembers a time when there were two bus lines operating in Cairo, each run by a different company. "Buses were clean, and you could sit down without fearing that a nail would tear through your clothes," he recalls wistfully. Buses were just one of many utilities run by private sector companies before the 1952 Revolution. Trams, electricity, and even trains were all privately operated.
Ticket to the future?: El-Sokhna Port awaits the "start" signal while the government and businessmen continue to debate BOT management
photo: Khaled EL-Fiqi
These companies operated under concession contracts, today known under the buzzword "BOT" (build, operate and transfer). Under a BOT contract, a private sector company finances, manages and maintains a facility that would normally be built and operated by the government. The government, meanwhile, maintains the ownership of the facility and supervises the performance of the company and its quality of the service. The facility could be anything from a power plant to airport, toll road, tunnel or water treatment plant.
At the end of a specified period, the private company either hands over full control of the facility to the government or renews its contract to continue operating the project. The concession period is determined by the length of time needed for the private company to retrieve its costs and make a profit.
BOT contracts are often hailed as a handy modern innovation, but the concept goes back a long time. For example, the Suez Canal was a BOT project, built according to a concession agreement ratified in 1866. The Compagnie Universelle du Canal Maritime de Suez, an Egyptian, French and British joint-venture, built the canal and operated it. Had it not been nationalised earlier, it would have been turned over to the government after a 99-year concession period.
What makes the BOT concept shine like new is that for the last half-century, the government has been the sole provider of public services. Since the late 1990s, as part of the government's reform programme, policy shifted towards allowing the private sector to establish infrastructure projects. This frees up funds for more pressing needs while holding on to the ownership of those infrastructure projects.
According to Mahmoud Fahmi, a former head of the Capital Market Authority and an expert on econmic law, all of Egypt's constitutions, starting with that of 1923 and ending with the 1971 constitution that still holds today, make clear that concession projects must strictly follow the guidelines set out by the constitution. Otherwise, a specific law for the project will need to be passed. Law No. 129 of 1947, modified in 1958, set down the rules and procedures of granting a concession.
The problem is that the law provides general guidelines, but does not allow for modern-day requirements. For example, it limits any concession to 30 years -- too short for many investors in large-scale projects to turn a profit. Also, Law 129 of 1947 states that the net profit of the company should not exceed 10 per cent of the capital. Any excess profits should be reserved for the years when the profit is less than 10 per cent.
To make up for such shortcomings, and to give some ministries more flexibility in their activities, three laws were issued dealing specifically with the sectors of electricity, airports and roads. These laws, passed in the last couple of years, represent an exception to the 1947 law. The legislation enables concerned ministries to sidestep restrictions like the limit on the percentage of profit and the duration of the concession period. In the new laws, the concession period is capped at 99 years. "The longer the concession period, the better off the plan," suggests Fahmi, explaining that when the period is shorter, investors may be forced to raise tariffs or other taxes in order to make a profit before the concession period ends.
Since the new laws were issued, a couple of airport contracts have been awarded to private investors, as well as three power-generating stations. There is also a long list of roads and water treatment plants which the government plans to tender out.
Fahmi believes that initiating any public service is better off in the hands of private companies than the government, provided that the company abides by its contract and hands over the service in strong working condition. Some of the services Fahmi singled out as potential BOT projects are the air-conditioned buses running through Cairo as well as taxis.
But not everyone agrees, however. Mamdouh Hamza, chairman of the consultancy firm Hamza Associates, believes that vital projects like power-generating plants should be built and run by the government. He pointed out that since Law No. 100 of 1996 was issued, three contracts for three plants have been signed. According to these contracts, the government committed itself to paying $325 million annually to buy the power capacity of these plants, which amounts to more than $58 billion in 20 years -- the duration of the concession period. Hamza says that the electricity sector has not used this amount in the period of 1982-1997 to establish, expand and rehabilitate the country's 90 power stations.
The government's commitment to buy the output of these plants has also meant that these companies readily acquired financing from local banks in foreign currency. Hamza believes that the government would have been better off borrowing money to build those plants itself, in which case servicing its debt would have been cheaper.
Financing of BOT projects has turned into one of the most controversial policy issues. Some critics believe that private companies carrying out BOT projects represent a burden on the Egyptian credit system because they borrow funds in foreign currency -- a much-needed commodity. But Fahmi points out that this shortcoming could easily be dealt with in the contract by stipulating that the bulk of financing should be procured from abroad.
Hamza is also critical of the fact that two major ports, the Sokhna port (see related article) and the East of Port Said were executed under BOT contracts, despite the fact that the government contributed huge sums of money to these projects. Hamza maintains that a public-private partnership formula, which would mean a sharing of ownership and management, would offer a greater share of the revenues.
Fahmi contends that the government can get the most out of a BOT agreement by stating its criteria up front, when it tenders out for offers, and then clarifying these points in the contract itself. A typical BOT contract should include all the criteria by which the project will be built, such as who it will service, any tariff levied and how the tariff will be modified. It also sets out how the profits will be split between the company and the government. The agreement stands for the duration of the project between the government and the private company.
Just as the contract guarantees the rights of the government, it guards the interest of the private company as well. In return for giving the government a share of the revenues and maintaining the project in good state, the tendered company has its own requirements. Not only does it want to make a profit, but it also wants to be compensated should any sudden event harm the profitability of the project. The government is expected to intervene in the event of any unforeseen circumstances, including measures implemented by the government that affect the feasibility of the project.
These principles exist in the original 1947 concessions law. To make matters easier for the investors Egypt is trying so hard to attract, Fahmi suggests that the various new laws recently issued be combined with the general principles of the old law and issued as one all-encompassing law for concession contracts. "The aim is to codify the law," he argues, saying that such a law should be "flexible" and include the general principles that govern public utilities, while still staying within the limits of civil law and the constitution. "The law should state that each minister is free to issue the executive regulations pertaining to projects under his auspices," Fahmi concluded.
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