Taiwan BOT Projects Survey: Still too Early to Partner?

January 31, 2004 | BY

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Taiwan has made greater private sector participation in infrastructure projects a government priority. A look into how conducive the regulatory environment to realization of government policy is in this area.

By Angela Wu, Yangming Partners, Taipei

In the past few years, Taiwan has introduced new policies and laws to attract more private foreign investors and contractors to take part in the island¡¦s infrastructure developments. The most important law is the Law for Promotion of Private Participation in Infrastructure Projects (the BOT Law), which was promulgated in February 2000. It is important for foreign contractors to understand the BOT Law and its requirements, especially the tendering system and the risk-sharing scheme for infrastructure projects in Taiwan, in order to secure contracts and adequately manage risk. Numerous regulations and working rules have already been implemented to facilitate the application of the BOT Law. These regulations set forth detailed guidelines on various subjects including incentives for private enterprise to lease public land, the scope of public infrastructure covered by the BOT Law, tax incentives for private enterprise participating in BOT projects, custom duties exemption or deferral on materials used for BOT projects, and dispute resolution mechanisms.

The BOT Law applies to infrastructure projects that are for public use or for the promotion of the public interest, including the following:

  • transportation facilities and common conduit;
  • environmental pollution prevention facilities;
  • sewage lines and water supply facilities;
  • hydraulic facilities;
  • sanitation and medical facilities;
  • social welfare facilities and labour welfare facilities;
  • power facilities and public gas and fuel supply facilities;
  • sports and parks facilities;
  • major industrial, commercial and hi-tech facilities;
  • development of new towns;
  • agricultural facilities;
  • cultural and educational facilities; and
  • major tourism facilities.

The BOT Law covers all projects that are in the form of public-private partnerships, including the following.

BOT. Such projects are owned, invested, built and operated by private enterprise. Ownership is later transferred free of charge to the government. The government commissions the same private enterprise to operate the project for a fixed period; upon expiration of the fixed period, the government assumes operation.

BTO. These projects are owned, invested and built by private enterprise with the government later acquiring ownership of the project by payment of compensation. The government then commissions the same private enterprise to operate the project for a fixed period; upon expiration of the fixed period, the government assumes operation.

ROT. In these projects, existing projects are renovated or expanded by private enterprise through commission or leasing agreements with the government. After completing the renovations or expansions, the private enterprise will operate the facilities for a fixed period of time; upon expiration of the fixed period, the government assumes operation.

OT. These projects are invested and built by the government and commissioned to private enterprises to operate for a fixed period; upon expiration of the fixed period, the government assumes operation.

BOO. Such projects are owned, invested and built by private enterprise that may operate the project by itself or commission operation control to a third party.

In addition, the BOT law covers other models approved by the Public Contruction Commission (PCC), which is the authority that administers all matters relating to public procurement.

There are two main approaches to initiate an infrastructure project under the BOT Law: an infrastructure project that is planned by the government (Article 42); and an infrastructure project planned by a private enterprise (Article 46).

Taiwan¡¦s current government policy is to encourage private participation in infrastructure projects. According to the BOT Law, the governing authority in charge of a government-planned infrastructure project may open the project to bidding by inviting qualified private enterprises to submit tenders. Such a project could follow any of the models described above. The project description sets out the respective responsibilities and rights of the party to be awarded the contract and of the governing authority. As a standard practice, the party awarded the contract is required to prepare and submit an environmental impact assessment study, and plans demonstrating the design for: (i) building the facilities; (ii) constructing (or demolishing existing) facilities in the area surrounding the project site; (iii) waste disposal; and (iv) operation, management and maintenance of the facilities to be constructed. The governing authority is responsible for acquiring the necessary land (public or private), and any existing structures on the land, assisting with the demolition of existing facilities and obtaining use of public infrastructure utilities (water, power, etc.), assisting the party awarded the contract in obtaining loans from financial institutions, and assisting with the maintenance and management of public facilities necessary for the project.

Under the BOT Law, the governing authority responsible for releasing the project has the discretion to set minimum tender requirements, and the tendering procedures and evaluation criteria. The requirements, procedures and criteria for the tendering process must be announced simultaneously with the public notice inviting private participation. The governing authority shall establish a selection committee to evaluate the proposals submitted by the tenders and select the best proposal based on the evaluation procedures and criteria announced in the public notice.

Except in limited circumstances, the concession agreement entered into between the governing authority and the party awarded the contract must be consistent with the contents of the public notice.

Any infrastructure project may be initiated by a private enterprise, except for an OT project. A private enterprise may apply to the governing authority of the locality where the proposed project is planned. In general, the governing authorities are either agencies of Taiwan¡¦s central government or city/county governments. For example, a wastewater treatment project in Taipei would be subject to the approval of the Taipei City government.

According to Article 46 of the BOT Law, to initiate an application, the private enterprise should submit a plan detailing land use, construction and operation and supply financial documents, such as a commitment letter from financial institutions, and other relevant documents to the governing authority. The operation and construction plan should include details of the technologies to be used and plans for integrating such technologies with existing public utilities.

Unsolicited Proposals and Approvals

According to guidelines issued by the Public Construction Commission, where the unsolicited proposal requires the governing authority to provide land or facilities for the project, the private enterprise must provide a description of the proposal idea, including basic information of the applicant, initial plan, required land, potential benefit to the government and any governmental assistance required to complete the project to the governing authority in order to obtain initial approval before submitting the full proposal in accordance with Article 46 of the BOT Law. After the initial proposal has been submitted, the governing authority shall publish the main contents of the proposal on its website within one week of receipt. If there are any other enterprises that also provide a proposal for the same land or facilities within a specific period of time after publication on the website, the governing authority shall consider these proposals together and choose the best initial proposal. After a party¡¦s initial proposal has been selected, such party must proceed in accordance with Article 46 and submit a full proposal to the governing authority. The governing authority shall publish the main content of the plan on its website. Other enterprises will have an opportunity to provide a competing proposal within a specific period of time after publication on the website, and the governing authority shall consider these plans together and select the best one.

It should be noted that the PCC guidelines described in the preceding paragraph are not binding law. However, it has been a common practice in Taiwan that government officials follow these guidelines in cases involving unsolicited proposals that require the governing authority to provide land or facilities for the project.

Financing a Project

In terms of financial assistance, the BOT Law provides that the governing authority may, under certain circumstances, subsidize a portion of the interest accrued from a loan obtained by the private enterprise pursuant to the project, or may invest in a portion of the construction. Further, the governing authority may coordinate with financial institutions to provide medium to long-term loans to the private enterprise. If the private enterprise is using a Taiwan company as its project vehicle, it may be afforded certain exemptions that allow it to more easily offer new shares to the public. The BOT Law allows the governing authority to raise funds by issuing non-discretionary corporate bonds. In terms of tax benefits, a five-year exemption from business income tax is offered to private enterprises investing in major infrastructure projects, and there is also a 5% to 20% credit available against business income tax expenditures invested in building, operation equipment, research and development, and personnel training.

The BOT Law does not distinguish foreign participants from local participants. In cases where a foreign investor is interested in infrastructure projects in certain industries where foreign ownership is limited to a statutory maximum, such statutory maximum may be modified with the approval of the Executive Yuan.

Government Initiatives

Since the promulgation of the BOT Law, the Taiwanese government has actively encouraged private participation in public construction. In 2003, the private sector¡¦s participation in public construction projects reached NT$59.2 billion (US$1.8 billion). Currently, there are about 89 BOT projects that are being released by the governing authorities. These projects range from 3-star accommodations, sewer systems, highway auto-fare collection systems, and harbour expansion schemes to a circular subway system linking the greater Taipei area. The value of these projects ranges from tens of million to several billion New Taiwan dollars.

An even more aggressive move made by the government culminated in the Executive Yuan¡¦s finalization of the draft Statute for Investment in Infrastructure Upgrading Projects in December 2003. The statute aims to push forward completion of several large-scale infrastructure projects within the next five years, with a total budget of NT$500 billion (US$18 billion). The budget is reportedly devoted to certain categories of projects: research centres and incubators; international performing arts centres and exhibition halls; a 6,000-km broadband network; Mass Rapid Transit System links to Taiwan Railway; a highway connecting Taipei, Taichung and the northeast coast; expansion of Kaohsiung Harbour; an additional 182-km extension of the Mass Rapid Transit System in Taipei, Taichung and Kaohsiung; NT$5 billion to support construction of underground sewer systems; and desalinization plants. Approval of the statute is pending in the Legislative Yuan.

In addition to the determination to allocate a budget for infrastructure projects, several proactive measures have been taken to create incentives for private investors to take an interest in large-scale projects. In October 2003, the Ministry of Interior Affairs formulated the Rules for Subsidizing Investment in Public Infrastructure Projects. The Rules allow investors in public infrastructure projects such as parks, children¡¦s amusement facilities, stadiums, roads, train stations and other projects approved by the Ministry to apply for a subsidy of up to 10% of the total construction cost from the municipal governments served by the projects. Also in October, the Environmental Protection Administration formulated the Rules for Promotion of Private Participation in Recycling General Waste and Compost. Under these Rules, the government shall assist any participating private enterprise in acquiring, or changing the purpose clause of, the land required for recycling projects, obtaining bank loans and tax benefits, carrying out environmental impact assessments, and in the granting of necessary licences and other matters that may require governmental assistance. In order to expedite dispute resolution regarding a BOT project, the Rules Governing Disputes Relating to Application and Review Procedures for BOT Projects were amended in 2003. The amendments shorten the time period allowed for any agency to handle an appeal application from 20 to 15 days, allow a 50% refund of the appeal fees for an applicant withdrawing his case before the first pre-hearing meeting, and allow a foreign appellant to file his case through an agent. In response to releasing Mass Rapid Transit projects under BOT or OT, the Executive Yuan also made amendments to the Mass Rapid Transit System Law in November 2003, to exclude MRT projects from the application of the 20-year maximum imposed on leases by the Civil Code.

On the policy front, the Executive Yuan decided in late 2003 to release management and operation of all highway toll fare collections to the private sector under BOT or OT arrangements. The premier has also proposed a plan to increase the sewer-served ratio of families from the current 10.5% to 20.3% in 2007. As a result, the first BOT plan in sewer systems was released by Kaohsiung City Government for sewer treatment of the Kaohsiung and Nan Tzi areas in December 2003. This BOT project is estimated at NT$70 billion, with NT$48 billion funded by the private concessionaire and the rest funded by the government, to treat a sewer volume of 75,000 CMD for a population of 360,000.

It is worth noting that the Taipei City government is also taking initiatives to encourage private participation in large-scale construction projects. A good example is the promulgation of the Taipei City Self-Governing Regulation for Promotion of Private Investment and the Taipei City Government Rules for Receipt, Custody and Utilization of Income from Private Investment. These regulations apply to major construction projects valued at NT$100 million (US$3.4 million) or more, or new projects and expansion projects by existing entities in industries such as biotechnology, information technology and telecommunications. They offer substantial incentives for private investors such as a total exemption from land and housing taxes for the first two years of the projects, subsidies for interest on loans for the first two years up to an amount of NT$50 million (US$1.3 million), subsidies for employee training and free rental of government-owned land during the project development period and a 50% discount on rentals up to five years from the date of first obtaining building permits.

Obstacles to Progress

Despite all of the initiatives made by the central and local governments in terms of legislative reform and realignment of priorities at the Cabinet level, it has been reported that there remains little interest in BOT projects from either local or foreign investors. The main obstacle to promoting BOT, BTO or OT construction projects in Taiwan has been a lack of understanding on the part of the government as to how to carry out projects jointly with private investors, i.e., how to form equal partnerships with the private sector. Such a lack of understanding or experience has been attributed to the absence of a central agency to administer or help facilitate BOT-related matters, a lack of inter-governmental agency coordination, and the absence of clear guidelines and implementation rules to reassure the private sector.

The Public Construction Commission drafted the BOT Law. However, while providing interpretation of the laws and regulations on BOT, and formulating policies and guidelines on BOT-related matters, the PCC does not have the power to award procurement projects under the BOT Law. The authority to grant government projects under the BOT Law is held by the governing authority in charge of the relevant industry or by the relevant local government. The government agency releasing the project has the discretion to set out the terms and conditions of the project and to negotiate directly with interested private enterprises. Although the Executive Yuan has set up a BOT taskforce that consists of vice ministers from each ministry, this unit serves as a consultation and policy formulating body rather than as an inter-agency coordinator. Public-private partnerships are still at an early stage in Taiwan and 80% of the budget of the first and only BOT project currently underway (i.e., the Taiwan High Speed Railway) comes from government-guaranteed funds and capital. As such, there have not been enough successful precedents for the public sector to follow. In the hope of following the examples of countries like the UK and France where public projects regularly enjoy private investment, the Executive Yuan made an announcement in December 2003 that it is necessary to implement regulations to ensure that risk allocation is specified in concession agreements. At this stage, Article 11 of the BOT Law prescribes that risk sharing should be included in the concession agreement but there is a lack of clear guidelines as to how such risk sharing provisions should be included. Indeed, risk sharing is only one of the many priorities for the initial public-private partnership. Many other issues such as expertise in environmental impact assessment and financial feasibility studies, clear-cut provisions for financial guarantees and inclusion of a schedule of completion in the bid notice, allowing a concessionaire company to raise funds by issuance of corporate bonds or public offering, and strengthening inter-agency coordination, must also be addressed.

It should also be taken into account that the major funding source of all BOT projects is financial institutions. The concession agreement should consider the laws and practices of the finance industry and allow financial institutions to participate fully in the bidding, screening, evaluation and negotiation of BOT projects.

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