Catalyses a step in the biosynthesis of the side chain of the aminoglycoside antibiotics of the butirosin family. FMNH2 is used as a free cofactor. Forms a complex with a dedicated NAD(P)H:FMN oxidoreductase. The enzyme is not able to hydroxylate free substrates, activation by the acyl-carrier protein is mandatory. Octanoyl-S-[BtrI acyl-carrier protein] is also accepted.