Private participation in infrastructure: A risk analysis of long-term contracts in power sector

The objective of this dissertation is to assess whether the private participation in energy sector through long term contracting, such as Build-Operate-Transfer (BOT) type investments, is an efficient way of promoting efficiency in the economy. To this end; the theoretical literature on the issue is discussed, the experience of several developing countries are examined, and a BOT project, which is undertaken by the Enron company in Turkey, has been studied in depth as a case study. Different risk analysis techniques, including sensitivity and probabilistic risk analysis with the Monte Carlo Simulation (MCS) method have been applied to assess the financial feasibility and risks of the case study project, and to shed light on the level of rent-seeking in the BOT agreements. Although data on rent seeking and corruption is difficult to obtain, the analysis of case study investment using the sensitivity and MCS method provided some information that can be used in assessing the level of rent-seeking in BOT projects. The risk analysis enabled to test the sustainability of the long-term BOT contracts through the analysis of projects financial feasibility with and without the government guarantees in the project. The approach of testing the sustainability of the project under different scenarios is helpful to understand the potential costs and contingent liabilities for the government and project's impact on a country's overall economy. The results of the risk analysis made by the MCS method for the BOT project used as the case study strongly suggest that, the BOT projects does not serve to the interest of the society and transfers substantial amount of public money to the private companies, implying severe governance problems. It is found that not only government but also private sector may be reluctant about full privatization of infrastructure due to several factors such as involvement of large sunk costs, very long time period for returns to be received, political and macroeconomic uncertainties and insufficient institutional and regulatory environment. It is concluded that the BOT type infrastructure projects are not an efficient way of promoting private sector participation in infrastructure. They tend to serve the interest of rent-seekers rather than the interest of the society. Since concession contracts and Treasury guarantees shift the commercial risk to government, the private sector has no incentive to be efficient. The concession agreements distort the market conditions by preventing free completion in the market.