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
- 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].
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].
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.
- 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].
- 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].
- 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].
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].
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].
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 ofabove mentioned factors leaded to high political risks in South East Asia and China asshownintables 34 [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 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].
- 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
1
Table 1. Summary of Case Studies [3].Project / Country / Contract signed / Completion / Concession period (year) / Total project cost (U.S. million dollar quivalent)
Highway 407 Express Toll Route / Canada / 1999 / 2002a / 99 / 2,700
Dulles Greenway / United States / 1988 / 1995 / 40 / 340
State Route 125 South Tollway / United States / 1991 / 2004a / 35 / 464a
Cross Harbour Tunnel / Hong Kong / 1965 / 1972 / 30 / 28
Western Harbour Crossing / Hong Kong / 1992 / 1997 / 30 / 965
North-South Highway / Malaysia / 1988 / 1995 / 30 / 3,192
Second Stage Expressway System / Thailand / 1989 / 1996 / 30 / 1,350
Bangkok Mass Transit System / Thailand / 1992 / 1999 / 30 / 1,300
Guangzhou-Shenzhen-Zhuhai Superhighway / China / 1987 / 1994 / 30 / 1,900
Subic Power Plant / Philippines / 1993 / 1994 / 15 / 142
Paiton I Power Plant / Indonesia / 1994 / 1999 / 30 / 2,500
Shajiao B Power Station / China / 1984 / 1987 / 10 / 512
Rizhao Power Plant / China / 1995 / 2000 / 20 / 660
Note: a Estimated
1
Table 2. Risk Level of BOT Transportation Projects in North America [3].Project / Political Risk / Financial Risk / Market Risk
Highway 407 Express Toll Route / 1 / 1 / 2
Dulles Greenway / 2 / 2 / 3
State Route 125 South Tollway / 2 / 1 / 3
Table 3. Risk Level of BOT Transportation Projects in Asia [3].
Project / Political Risk / Financial Risk / Market Risk
Cross Harbour Tunnel / 3 / 3 / 2
Western Harbour Crossing / 3 / 2 / 4
North-South Highway / 5 / 4 / 3
Second Stage Expressway System / 5 / 4 / 4
Bangkok Mass Transit System / 4 / 4 / 4
Guangzhou-Shenzhen-Zhuhai Superhighway / 5 / 4 / 5
Table 4. Risk Level of BOT Power Generation Projects in Asia [3].
Project / Political Risk / Financial Risk / Market Risk
Subic Power Plant / 3 / 4 / 1
Paiton I Power Plant / 5 / 4 / 2
Shajiao B Power Station / 4 / 3 / 2
Rizhao Power Plant / 4 / 3 / 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 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 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.
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].
- 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].