10. Build, Own, Operate, Transfer (BOOT)

A BOOT funding model involves a single organisation, or consortium (BOOT provider) designing, building, funding, owning and operating the scheme for a defined period of time and then transferring this ownership across to an agreed party.

Customers enter into long term supply contracts with the BOOT operator and are charged accordingly for the service delivered. The service charge includes capital and operating cost recovery and project profit.

BOOT schemes are becoming an increasingly popular means of financing large-scale infrastructure development such as roads, bridges and hydro dams in Australia and developing countries.

Debt/Equity

A BOOT model is effectively 100 percent debt funding. Water users pay no upfront capital costs but are committed to regular water charges through a long-term take-or-pay supply contract. The capital cost is repaid over the term of the supply contract.

Security Requirements

The key requirement of a BOOT provider is long-term supply contracts with users. Similar to project financing, the certainty of cash flow is the key driver, while security is secondary. BOOT providers must also be confident of the credit worthiness (quality) of the water users over the term of the contract or they will not consider undertaking the project.

Term of Finance

BOOT terms vary between projects but for a water enhancement development the BOOT term is expected to be approximately 25 years.

10.1 Advantages and disadvantages of BOOT

10.1.1 Advantages

The majority of construction and long-term operating risk can be transferred onto the BOOT provider.
BOOT allows the water enhancement development to happen very quickly. The scheme is not constrained through a lack of funding, a lack or expertise or project management capability. Also, there are strong financial incentives for the BOOT operator to complete the construction and get the scheme operational as soon as possible.
Involving a BOOT operator gives the scheme certainty and makes it more believable for water users. This in turn encourages interest in the scheme from an early stage.
No upfront cost for water users frees up more capital for on-farm development to occur quickly. This is also positive for the scheme, as users are able to come online faster.
Using an output based purchasing model, the tender process will encourage maximum innovation allowing the most efficient designs to be explored for the scheme. This process may also be built into more traditional tendering processes.
Accountability for the asset design, construction and service delivery is very high given that if the performance targets are not met, the operator stands to lose a portion of capital expenditure, capital profit, operating expenditure and operating profit.
BOOT operators are experienced with management and operation of infrastructure assets and bring these skills to the scheme.
Corporate structuring issues and costs are minimal within a BOOT model, as project funding, ownership and operation are the responsibility of the BOOT operator. These costs will however be built into the BOOT project pricing.

10.1.2 Disadvantages

BOOT is likely to result in a higher cost of water for the end user. This is a result of the BOOT provider incurring the risks associated with 100 percent financing of the scheme and the acceptance of the on-going maintenance liabilities. The level of premium (if any) to be paid for a BOOT operator has not yet been determined.
BOOT has no real track record in New Zealand and is still a relatively new concept internationally.
Community and particularly water users may have a negative reaction to private sector involvement in the scheme, particularly if the private sector is an overseas owned company.
The full benefits of economic development may not be realised if the BOOT provider is a sole source entity as local business are not as likely to provide materials and services to the BOOT provider, particularly during the construction phase. Although local providers may be able to compete on an individual component of a scheme, sharing the whole project margin within the sole source entity will make it more difficult for local businesses to complete.
Management and monitoring of the service level agreement (operating contract) with the BOOT operators can be time consuming and resource hungry. Procedures need to be in place to allow users to assess service performance and penalise the BOOT operator where necessary. This is particularly the case with maintenance requirements. The users do not want to take over an asset at the end of the operating period that has no useful life remaining and high deferred maintenance requirements.
A rigorous selection process is required when selecting a BOOT partner. Water users need to be confident that the BOOT operator is financially secure and sufficiently committed to the New Zealand market prior to considering their bid.

10.2 BOOT Example - Kaipara District Council

Kaipara District Council is in the process of undertaking one of the first BOOT projects in New Zealand to fund the development of a wastewater treatment station for the Mangawhai Harbour on the East Coast of the North Island. Tenders have been short-listed and final proposals are due in April/May 2002.

Key lessons from Kaipara

7 responses were received to the "request for interest", demonstrating that BOOT providers (both overseas based and New Zealand consortiums) are active in New Zealand and looking for projects.
The project value ($10 – $20 million) is at the low end for a BOOT provider, but Kaipara was seen as a chance for these providers to get a reference site in New Zealand and then attract larger contracts.
The BOOT providers that made the shortlist were the ones that were willing to accept higher risks, including compliance with environmental regulations.
Project management skills were accessed from Australia given New Zealand’s general lack of experience with management of BOOT projects.
The Victorian based framework was applied to this project without significant alteration, demonstrating that this would be a good starting point for New Zealand in developing our own BOOT management framework.

10.3 Public Vs private BOOT providers

BOOT providers are typically either large international corporations (e.g. Tyco, Lend Lease, Thames Water) or a consortium of private companies with specialised skills (i.e. engineering companies, construction companies, financiers).

These private companies are established in the market and have delivered many large-scale infrastructure projects internationally.

As an alternative to private BOOT providers there may be an opportunity to fund large-scale water enhancement projects by developing a public BOOT provider.

For example:

A public BOOT provider may be made up of the following parties:

Local government (as owner and financier).
Design, Build, Operate (DBO) provider (as builder and operator).

Provided the scheme proves to be financially feasible, a public BOOT may work in the following manner:

Local government could access 100 percent debt funding for the scheme over an extended repayment period, based on the ability to rate water users, and the secondary security of the general rating base.
A DBO provider could be engaged to build the scheme and then operate it for the period of the debt finance.
Funding, operating and other overhead costs would be recovered from water users through rates set on a take-or-pay basis with a variable component for water consumption.
At the end of the funding and DBO period, the scheme could be transferred back into water user ownership.

This may make a BOOT model affordable for the scheme, given that there is no commercial return requirement built into this public BOOT model.

There are serious implications for local government taking on significant amounts of debt secured ultimately by general ratepayers that must be worked through before this could be considered a valid option. Local government investment criteria and prioritisation in relation to equity investment has been outlined further in the study on the Role of Local Government.

10.4 Key unresolved issues

BOOT has not been applied to a water enhancement scheme in New Zealand, and therefore there are a number of unresolved issues relating to the delivery of this model for water enhancement schemes. These have been outlined below:

Unresolved Issues for Water Users

Affordability

BOOT offers significant advantages to a water enhancement project including full capital funding and assumption of construction and operating risk, however, the premium paid for these advantages has not yet been determined.

Risk transfer

The process of risk identification and optimisation as it relates to water enhancement schemes in New Zealand has not been completed to date. This is key information required to understand the additional value provided by a BOOT model for funding and construction.

Contract Term

BOOT providers have indicated that the contract term is expected to be approximately 25 years. This has still to be analysed further and resolved.

Protection from corporate failure

Water users will require legislative protection against corporate failure to ensure that there are "step in" rights available to ensure continued operation of the scheme.

Tradability of water rights

Given that a BOOT model is premised on long-term supply agreements, it is unclear what the BOOT provider’s position will be in relation to tradability of water rights between users.

Unresolved Issues for BOOT Providers

Quality of customer supply contracts (affordability)

Internationally BOOT models have primarily been applied to the provision of Government core services. As Government is the customer, there is no real issue with the financial credibility. However, with a water enhancement scheme, the customers are the individual water users with a range of capacities to meet the ongoing commitments. It is unclear whether a BOOT operator will consider these customers sufficiently credit worthy, or whether additional guarantees will be required.

Supply/ownership of water

The Resource Management Act 1991 (RMA) does not provide long-term security over access to water. Additional conditions may be added or altered by Regional Council at any stage, impacting the viability of the scheme. BOOT operator response to this legislation is unknown.

Risk transfer

As outlined above, the risks expected to be managed by the BOOT operator are not clear at this point.

New Zealand legislative and control environment

The New Zealand legislative and control environment is new to BOOT operators and it is unclear whether there are changes required to the current investment environment to better facilitate BOOT investment. This includes a review of taxation policy.

Implications for Funding

BOOT is an exciting funding opportunity for water enhancement schemes to consider. However, there are potentially serious implications for both water users and BOOT operators if this opportunity is considered on an ad-hoc basis by individual schemes without a structured framework.

For example:

BOOT bids can cost an operator millions of dollars to prepare. BOOT providers will not be responsive to this market if the bids are used to "test the price" rather than having a firm commitment to select a provider.
Similarly, water users need to be fully aware of the commitment they are undertaking and know that risks have been transferred appropriately before signing a long-term commitment.

The Partnerships Victoria framework (see study 1 – Review of international models and experiences) provides a solid foundation from which to review the opportunities within BOOT funding in New Zealand. As discussed in Study 1, a Government funding contribution for an investigation of a BOOT as it relates to a pilot water enhancement project would assist to clarify these issues and could be used as a basis for a national framework/template for individual schemes to use when considering BOOT opportunities.