Features of power industries in Southeast Asia: Study of build-operate-transfer power projects in China

Abstract

The construction of infrastructure projects has traditionally been undertaken and financed with public funds. The process of project development follows the conventional design and build sequence, in which the design and construction are carried out by separate groups, and are performed in succession. The role of a contractor is then to deliver a project in accordance with a set of design details and specifications, which have been prepared in advance by a separate design agent, very often after a competitive tendering process. In the case of private-sector participation in infrastructure projects, and in particular the build-operate-transfer type of project, the contractors play a much more significant role than that of just delivering projects on time, within budget, and to specification. First, contractors need to identify potential projects, which can be difficult for overseas contractors without good connections with host governments. Contractors then need to choose the right partners, especially local ones. Then, they are required to develop a joint venture structure, determine the local and equity participation, determine the profitability by considering price and profit formulae, equity/loan ratios and incentive schemes, and generate protection agreements to reduce risks relating to the market, foreign exchange and contracts. Finally, they need to organise the design, finance, construction and commercial operations for the project. It is particularly difficult to carry out build-operate-transfer projects in China, owing to the convertibility problem with renminbi, the paternalistic style of government, the embryonic legal system, and the length of negotiations, which is due partly to the Marxist economic training of the government officials and their distrust of foreigners. The paper investigates the implications of private-sector participation in energy projects, with particular reference to the power supply industry in China. The paper recommends the five Ps framework (project, partners, pattern, profitability and protection) to unlock the vast potential of the China market.