OUTLINE
1- INTRODUCTION
2
2- ADVANTAGES OF BOT PROJECTS
4
3- BOT PROJECTS RISKS
5
4- BOT PROJECTS FINANCING
STRATEGIES
9
5- CRITICAL SUCCESS FACTORS
FOR BOT PROJECTS
14
6- CONCLUSION
15
7- REFERENCES
16
1
1. INTRODUCTION
The infrastructure projects are large scale and complex type projects. Highways,
power plants, ports, railways and other public facilities are examples of the
infrastructure projects. To have such projects in place for serving public needs,
this requires adequate funding for designing, constructing, commissioning and
maintaining the facility. The limited budgets with public agencies and the serious
needs for such facilities helped in creating a new method for projects delivery.
This method is Build-Operate-Transfer (BOT) delivery system.
In BOT projects, there are two main participants. The first participant is the
host government of the country where the project will be built and the second one
is a private sponsor. The private sponsor usually represented by a consortium of
investors or private entity. He will be responsible for designing, constructing the
facility, maintaining and operating the facility after commissioning for an agreed
duration called concession period and arranging for financing these phases of the
project life cycle. By the end of the concession period, the ownership of the
facility will be transferred to the host government. The concession period is the
time when the private sponsor is collecting back its cost and gaining profits from
the service that they offer out of the completed project [1].
The concept of BOT is to utilize the private finance in constructing additional
infrastructure facilities without requesting money from public budget. Investors
are looking carefully to the rate of return and as this value is good enough it will
encourage the investors to participate in BOT projects and take the risk in
accomplishing such projects [1].
2
1.1.
BOT PROJECTS TYPES
There are different types of BOT have been used on different projects and this
paper will give a brief about these types.
1.1.1. Build-Own-Operate (BOO)
In this type, the private sponsor is owning the facility since beginning of
concession period as per the agreement and there is no requirement under
which the facility will be transferred back to the host government [1].
1.1.2. Build-Transfer-Operate (BTO)
Upon completion of the facility, the ownership of the facility will be
transferred to the government. After that, the private sponsor will operate
the facility for a certain period called concession period and the
government will pay him a certain amount or allow him to take revenues
from the end users in order to recover the amount which he invested and
get additional profits [1].
1.1.3. Build-Operate and Renewal of the concession (BOR)
This type is the same as BOT with one addition. The private sponsor can
request at the end of the concession for a renewal of the agreement and
goes in a negotiation with the government [1].
1.1.4. Build-Lease-Own (BLO)
In this type, the private sponsor is owning the facility since beginning of
concession period and leases the facility to the government for ever.
Facility Operation and maintenance are kept under government
responsibility [1].
3
1.1.5. Build-Lease-Transfer (BLT)
In this type, once the construction is completed, the private sponsor
leases the facility to the government during the concession period and at
the end the of this period the government become the owner of the
facility [1].
This paper will focus the research on the risks associated with BOT projects and the
suitable financing strategies to be used for different risks. The advantages of BOT
projects as well as the critical success factors for BOT projects will be discussed in
this paper.
2. ADVANTAGES OF BOT PROJECTS
In BOT projects, the projects financing is totally provided through private sector
and this approach has many advantages as following:

Public projects will be built faster in the availability of such financial
source. Most of these projects will not be existing if they were waiting
for government budget as the government is having limited budget
[2].

The dependency on private sector in financing public projects will
improve the credit rating of the government [2].

Private sector is more efficient than public agencies and that is going
to be reflected by having higher project efficiency and better services
[2].

In BOT projects, the private sponsor is managing the risk of such
projects [2].
4

BOT projects assist in transferring new technology to the host country
[2].

Completing one project through private can be used as a reference for
evaluating other similar projects [2].

The high experience of the private sponsor and his team lead to an
excellent project feasibility [2].
3. BOT PROJECTS RISKS
In BOT projects there are several risks which will be explained in this report.
3.1.
RISKS TYPES
3.1.1. Political Risks
It is related to the stability situation in the host country and any action of
the government that might endanger the project [5]. This type of risk is
higher in the developing countries [3]. Further explanation about two
types of political risks is shown below.
3.1.1.1.
Change In Low Risk
This risk covers all type of addition, correction, adoption or
reinterpretation of any low of the host government by governmental
authority after signing the agreement between the host government
and the private sponsor. It covers also any addition of conditions
which are related to the issuance, renewal or modification of any
approval after signing the agreement [5].
5
3.1.1.2.
Delay In Approval Risk
This type of risk covers the delay of the host government authority
in approving the submitted packages by private sponsor which are
related to the project or cancelling what has been approved earlier.
Getting the approval for any package from different level of the host
government is time consuming process and the delay in this process
might cause severe impact on the project [5].
3.1.2. Financial Risks
It is related to the inflation, interest rates and exchange rates. Some of
these factors related to the host country such as the inflation. On the other
hand, the interest rate is related to the countries from which the project is
financed [3].
3.1.3. Construction Risks
It is related to the different causes that impact the completion of the
project on its expected date. Any delay in commissioning the project will
directly impact the early benefitting from the project by collecting
revenues [3].
3.1.4. Operation Risks
It is related to the cost of maintaining the project and operating it during
the concession period. The actual cost of the above might exceed what
was planned in the early stage of the project [3].
6
3.1.5. Market Risks
For understanding this risk, it is needed to evaluate the demand risk and
price risk. The demand risk is the percentage of requests that is expected
from the end users (i.e. public) once the product or service becomes
ready for their use [3].
The price risk is related to the reasonable value that can be set for using
the product or service [3].
3.1.6. Force Majeure Risks
This risk is related to the phenomena beyond the host government or
private sponsor control. There are many examples of these circumstances
such as war, floods, volcano, fires and others [5].
3.1.7. Concession Period Risk
The host government and private sponsor need to pay more attention to
the concession period in order to protect their interests. As the concession
period becomes long, it indicates that private sponsor is the most one
getting benefit from the project. In addition, it indicates that the private
sponsor is risk taker. On the other hand, when the concession period is
too short, private sponsor will not accept to sign such agreement and in
case he accepted, he will jack up the price for using the end product or
service. As a result, the end user (public) will be the one who pays the
extra cost for reducing the concession period. So, the concession period
needs to be negotiated between both parties in order to protect the
interest of both parties and minimizing the risk on both sides [4].
7
3.2.
RISK ANALYSIS
The risk during the life cycle of BOT projects is different. During the
construction stage it is high risk while the operation and maintenance stage is
lower risk by comparison with construction stage. Thirteen case studies (see
table 1) were made on BOT projects risks with a conclusion that private
sponsors are capable to handle the risks related to construction and operation.
However, political, financial and market risks were difficult in identifying
them as well as managing them. Moreover, the understanding of these risks
are essential in choosing the most suitable financing strategy [3].
An evaluation for political, financial and market risks in these case
studies was done based on a scale of 1-5, where 5 indicates high risk. This
evaluation is a result of analyzing the host country conditions, contract terms
& conditions, types of the projects and the level of the private sponsor as a
risk taker. The risk level for each project is shown in tables 2-4 [3].
From table 2, it is noticed the low political risks related to these projects in
North America. The government full support to these projects, detailed
contracts and well legislative frameworks are the source of reducing the level
of political risks in these projects & at this area. On the other hand, the lack of
above mentioned factors leaded to high political risks in South East Asia and
China as shown in tables 3 & 4 [3].
By looking to the financial risk related to BOT projects in North
America, it is also low as the financing sources are available and these
countries are financially stable. Contract terms & conditions and specially the
one related to revenue collection is a major item that will make the financial
risk critical or normal. For example when the private sponsors were allowed
8
contractually to increase the fee of the service that they provide without
getting the host government approval, the financial risk of these projects such
as High way 407, State Route 125 and Western Harbour Crossing became
low [3].
In the market risks which depend mainly on the market demand,
market competition, purchase agreements and government guarantees, this
risk is low in power plants projects in the case studies. The reason beyond
that is the host government is guaranteeing to pay a fixed capacity fee and
keeping a rate for the sale of energy in BOT contract. In transportation
projects, the market risk is higher due to the competition from other
transportation systems and/or not achieving the targeted number of customers
[3].
4. BOT PROJECTS FINANCING STRATEGIES
In BOT projects, financing the project is the responsibility of the private sponsor.
The most suitable financing strategy is one of the challenges that private sponsor
is facing in addition to the project estimation and expected revenues during the
operation period. To come up with the best financing strategy for BOT projects
following characteristics need to be evaluated:
Availability of financing sources, the project conditions and project risks [3].
4.1.
AVAILABILITY OF FINANCING SOURCES &
FINANCING STRATEGIES
BOT private sponsor is the responsible person for allocating financing
sources. In BOT projects the possibility of using local market or international
sources are available to the private sponsors in most of the projects. The local
9
Table 1. Summary of Case Studies [3].
Country
Contract signed
Completion
Concession
period (year)
Highway 407 Express Toll Route
Dulles Greenway
Canada
United States
State Route 125 South Tollway
Cross Harbour Tunnel
Western Harbour Crossing
North-South Highway
Second Stage Expressway System
Bangkok Mass Transit System
Guangzhou-Shenzhen-Zhuhai Superhighway
United States
Hong Kong
Hong Kong
Malaysia
Thailand
Thailand
China
1999
1988
1991
1965
1992
1988
1989
1992
1987
2002a
1995
2004a
1972
1997
1995
1996
1999
1994
99
40
35
30
30
30
30
30
30
Total project cost
(U.S. million dollar
quivalent)
2,700
340
464a
28
965
3,192
1,350
1,300
1,900
Subic Power Plant
Paiton I Power Plant
Shajiao B Power Station
Rizhao Power Plant
Philippines
Indonesia
China
China
1993
1994
1984
1995
1994
1999
1987
2000
15
30
10
20
142
2,500
512
660
Project
Note: a Estimated
10
Table 2. Risk Level of BOT Transportation Projects in North America [3].
Project
Political Risk
1
Highway 407 Express Toll Route
2
Dulles Greenway
2
State Route 125 South Tollway
Financial Risk
1
2
1
Market Risk
2
3
3
Table 3. Risk Level of BOT Transportation Projects in Asia [3].
Project
Political Risk
3
Cross Harbour Tunnel
3
Western Harbour Crossing
5
North-South Highway
5
Second Stage Expressway System
4
Bangkok Mass Transit System
5
Guangzhou-Shenzhen-Zhuhai Superhighway
Financial Risk
3
2
4
4
4
4
Market Risk
2
4
3
4
4
5
Table 4. Risk Level of BOT Power Generation Projects in Asia [3].
Project
Political Risk
3
Subic Power Plant
5
Paiton I Power Plant
4
Shajiao B Power Station
4
Rizhao Power Plant
Financial Risk
4
4
3
3
Market Risk
1
2
2
1
firms if available are knowing the host country regulations more than others
and they might accept more risks [3].
4.2.
PROJECT CONDITIONS & FINANCING
STRATEGIES
There are several conditions for BOT projects such as government
involvement, concession periods, technical requirements, private sponsors
capabilities and others. The long concession period has advantages and
disadvantages to the private sponsor. In the long concession period private
sponsor will have financing flexibility as well as different financing strategies
where he can select the most suitable ones to his project. However, when the
11
concession period get longer, the market and financial risks becomes higher.
Regarding the political risk, it can be reduced by the right participation of
government authorities in the project such as providing guarantees [3].
4.3.
PROJECT RISKS & FINANCING STRATEGIES
The overall project risks were calculated for each project in the case studies
by adding the PR, FR and MR. If the total value is 8 or less, the project was
evaluated as low risk project. Investors and lenders are encourage-able to
participate in such projects. In the low risk projects, the project contingency is
low which by the end give the sponsor lower financing cost. Different
financing strategies are available to the private sponsor in low risk projects
(see table 5) [3].
4.4.
HIGH POLITICAL RISK
In the case studies there were several political risks such as changed policies,
lack of clear legislation, delays and instability of the government. The
financing strategies in the case studies involved international firms or
organizations and requested government participation to reduce the impact of
political risks. To avoid breaking the agreement with the host government,
private sponsors are involving international investors or lenders. More
financing strategies are listed in table 5 for mitigating the political risks [3].
4.5.
HIGH FINANCIAL RISK
In the case studies, the projects sponsors mitigated the high financial risks in
different ways. In three projects in South East Asia, projects sponsors
obtained the required loan from international lending institutions as these
12
sources offer low interest rates. Currency exchange fluctuations is another
risk which impacting BOT projects. To mitigate this risk, private sponsors
approached local lenders for financing their projects. The exchange rate risk
can also be mitigated by having a clause in the contract where it keeps a
hedge against the exchange rate risk. More financing strategies are listed in
table 5 for mitigating the financial risks [3].
Table 5. Recommended Financing Strategies for Different Project Conditions [3].
Risk Conditions
Financing strategies
Low risk
• Use high debt-to-equity ratio for maximum leverage and maximum return on
invested equity.
• Establish minimum contingency credit facilities to minimize financing costs.
• Use capital markets to procure debt financing to reduce interest costs.
• Procure long-term financing early to reduce financing costs.
High political
risk
• Involve international firms or organizations to create leverage with local
government authorities.
• Seek assistance from influential individuals or organizations who have rapport
with local
government authorities.
• Seek local government support and guarantees.
• Procure insurance from government
organizations such as the Overseas Private Investment Corporation.
• Establish contingency credit facilities to cover unanticipated expenses.
High financial
risk
• Obtain loans from international lending institutions.
• Use fixed-rate or standardized-rate debt financing.
• Denominate loans in local currency.
• Structure debt financing in the same currencies as anticipated revenues.
• Structure revenues in both local and foreign currencies.
• Seek government support and guarantees.
• Insert revenue escalation provision into the contract.
• Establish a contingency credit facility to cover unanticipated expenses.
High market
risk
• Finance early phases with equity and temporary loans and refinance during the
operation phase with lower-cost long-term debt.
• Structure the debt repayment schedule to start low and escalate during the initial
years of operation.
• Negotiate contract terms that allow increases in user fees.
• Establish a contingency credit facility to cover unanticipated revenue shortfalls.
• Restructure debt, if necessary, to solve cash flow problems during the
concession period.
13
4.6.
HIGH MARKET RISK
In transportation projects, the traffic volume is the main concern of private
sponsors. The consequences of having low traffic volume will be less revenue
compared to what is expected. The situation is different in power plants as the
host government pay a fixed capacity fee during the concession period. So,
market risk is a fact that private sponsors are requested to analyze carefully
and put the best strategies which can be used for minimizing the market risk.
Table 5 shows recommended financing strategies when the project has high
market risk [3].
5. CRITICAL SUCCESS FACTORS FOR BOT
PROJECTS
As the risk in BOT projects is available with different categories, it is useful to
highlight the practices or actions taken which normally assist in the success of
BOT projects and which can be used as a reference in future projects [6].
The quality of the service is one of main items that owner is expecting by the
completion of the project from the private sponsor. On top of that, the
continuation of this quality after the concession period is also needed. To make
this happen, the private sponsor shall provide adequate training to the owner's
personnel in order to allow them to maintain the same level of quality in operation
and maintenance of the system [6].
The short period for construction is another success factor. As the private sponsor
complete the construction in a short duration, that will allow him in getting the
benefit from the early revenues and avoiding the risk of high interest rates and
inflation. There are some additional critical success factors for BOT projects such
14
as largest revenue of profit sharing with government, fixed interest rates for bank
loans, safest for construction and most innovative solution [6].
6. CONCLUSION
The advantages of BOT projects were highlighted in this paper to show the
importance of such type of projects delivery systems. The paper discussed
different types of risks associated with BOT projects. The most critical risks while
selecting the suitable financing strategy are political, financial and market risks
[3]. Moreover, risks mitigations have been proposed based on an analysis of
different case studies in different areas around the world. Table 5 lists different
types of financing strategies which can be used by projects sponsors in case they
have a project with high risk. However, there are some risks which might happen
in the project where the involved parties (i.e. host government and private
sponsor) have no control on these risks which are the force majeure risks [5].
Finally, the selection of the right concession period which is acceptable by
both parties is essential to have the service ready for public use in the earliest
possible time and without paying extra fees [4].
15
7. REFERENCES
1 - A l g a r n i , A ye d M u h a m m a d , A r d i t i , D a v i d , & P o l a t , G u l . ( 2 0 0 7
). "Build-operate-transfer in infrastructure projects in the
United States." Journal of Construction Engineering and Management, 133(10), 728-735.
2- Askar, Mohamed M., & Gab -Allah, Ahmed A. (2002). "Problems facing parties involved in build, operate, and transport
p r o j e c t s i n E g yp t . " J o u r n a l o f M a n a g e m e n t i n E n g i n e e r i n g ,
18(4), 173-178.
3- Schaufelberger, John E., & Wipadapisut , Isr. (2003). "Alternate financing strategies for build -operate-transfer projects. "
Journal of Construction Engineering and Management , 129(
2), 205-213.
4- Shen, L. Y., & Wu, Y. Z. (2005). "Risk concession model for
build/operate/transfer contract projects. " Journal of Construction Engineering and Management , 131(2), 211- 220.
5- Wang, By Shou Qing, Tiong, Robert L. K., Ting, S. K., & Ashl e y, D . ( 2 0 0 0 ) . " E v a l u a t i o n a n d m a n a g e m e n t o f p o l i t i c a l r i sks in China’s BOT projects." Journal of Construction En gineering and Management , 126(3), 242-250.
16
6- Zhang, Xueqing. (2004). "Concessionaire selection: methods and criteria." Journal of Construction Engineering and Management, 130(2), 235-244.
17