I’M compelled to contribute to the discussion on the PPP form adopted to develop the Tina Hydro Project basically to provide an answer to the question on whether Solomon Islands as the owner of the project (asset) stands to benefit under the PPP variant that has been chosen.
I believe the country needs to be assured that it won’t lose out on the development.
I also believe the Hon. Minister of Finance has been reassuring that all necessary due diligence has been executed prior to the decision to favour the PPP approach that is now part of the project development arrangement.
First of all PPP refers to public-private partnership. It is basically a form of procurement that works on the basis of forming partnerships with the private sector based on a contract. There are many variants (forms) of PPP.
The popular ones are Build Operate and Transfer (BOT), Build Own Operate and Transfer (BOOT), Build Lease and Transfer (BLT), Design, Finance, Build, Operate and Transfer (DFBO), Design, Build, Operate and Transfer (DBO) etc.
The Government in its wisdom (I’m sure with technical advice from knowledgeable entities or persons) has opted to adopt the BOT variant to develop the Tina hydro project.
Under the circumstances this is the best form because it is introduced after the project has been designed and all finances almost secured.
At this stage the main functions to be developed are to build the dam, and then followed by operating it successfully.
In an ideal situation, the most preferred variant would have been the DFBO form which then will have significantly minimized the risks fronting the SIG as owner of the asset.
But as I mentioned the project has advanced to a stage where the DFBO form would have been inappropriate hence my claim that the BOT form is the best under the circumstances.
For the information of interested citizens and stakeholders that are party to the development, in a PPP approach there are no shares to be allocated.
There is a contracted partnership which grants the private partner (which could be a consortium) the right to operate the asset or project for a term, normally thirty years as is the case with the Tina Hydro, In that arrangement K-Water has been granted under contract the right to operate the asset for 30 years.
This is perfectly normal which is consistent with the principles of a PPP operation.
The reason why K-Water or any private partner is allowed time to operate the asset is for it to recover the capital that it has injected into helping fund the project in the “build” stage.
Under normal procurement, the capital risked by the private partner (K-Water) to invest in the project would have been a term loan that would have to be repaid with interest.
Under the BOT arrangement that has been adopted, this is not the case.
So technically the SIG has been spared the burden of incurring another debt which is a benefit to Solomon Islands, and ownership of a long term asset (hydro dam) which potentially will contribute in a huge way to the economic development of this country – cheaper electricity in the long term, less reliance on fossil fuels and a head start towards reliance on clean energy therefore achieving one of the SDGs.
The argument around relatively expensive electricity tariffs after the dam has been completed is only relevant when reference is made to the 30 years that the asset will be operated by K-Water.
After 30 years, the asset (hydro dam) will be transferred at no recourse to the SIG.
This is a key feature of a project developed under a PPP model.
The asset is transferred at no recourse to the Government or an entity so chosen by the Government.
In this case Solomon Power could assume ownership of the asset.
At that future time, there is no obligation to set tariffs to reflect cost recovery therefore electricity will be much cheaper.
So perhaps the key points to note are that the BOT variant is the best under the circumstances, SIG under principle of PPP cannot have shares in the operation of the dam, K-Water will need to recover its $20 million dollar investment, after 30 years the asset (dam) will transfer to the Government at no recourse, and K-Water will be responsible for maintaining the asset to standards that will be specified by the Government.
The benefits for SIG and the nation will be enormous and cannot be financially estimated. The economy will benefit from cheap electricity going forward after thirty years.
All maintenance costs will be borne by K-Water during the 30 years. The nation will own a longterm asset which basically was built at no cost to the nation.
There are opportunity costs in the form of landowners losing their land.
However considering the difficult terrain and isolated area, the opportunity costs may be difficult to be quantified.
That said, the landowners must be compensated for giving up their land for this national project.
Therefore I would suggest that either an outright payment is considered or a benefit-sharing is agreed with the landowners that they will receive a certain amount over the thirty year period.
I hope with this brief, we are a bit more assured that our Government is doing the right thing over the development of the Tina Hydro dam project.
· Note:I was TA to SIG to formulate a study on PPP, to recommend which form would be best for SI and to formulate a PPP policy for Solomon Islands. This work has been completed and is now being progressed under assistance from ADB.
By PETER FORAU