PGPM 14 - Infrastructure Development

Post Graduate Program in Project Management
Assignment PGPM 14 (Infrastructure Development)
Assignment: PGPM 14
Infrastructure Development
Submitted By
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National Institute of Construction
Management & Research Centre
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Assignment Title:
Public Private Partnerships refers to arrangements, typically medium to long term,
between the public and private sectors whereby some of the services that fall under
the responsibilities of the public sector are provided by the private sector, with clear
agreement on shared objectives for delivery of public infrastructure and/ or public
services. A PPP is generally a contract or agreement to outline the responsibilities of
each party and clearly allocate risk. In a BOT arrangement, the private sector
designs and builds the infrastructure, finances its construction and owns, operates
and maintains it over a period, often as long as 20 or 30 years. This period is referred
to as the "concession" period. Such projects provide for the infrastructure to be
transferred to the government at the end of the concession period. There are a
number of major parties to any BOT project, all of whom have particular reasons to
be involved in the project. The contractual arrangements between those parties, and
the allocation of risks, can be complex. Explain in detail structuring of BOT
projects.
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Table of Contents
1.
Introduction....................................................................................................... 7
1.1. Introduction............................................................................................... 7
1.2. Need of Study:.......................................................................................... 8
1.3. Aim of Present Study:.............................................................................. 8
1.4. Research Objective:................................................................................. 8
1.5. Scope:......................................................................................................... 8
1.6. Methodology:............................................................................................. 9
1.7. Literature Review................................................................................... 10
1.8. Contribution of the Current Study to the Existing Literature.........11
2. INFRASTRUCTURE PROJECT......................................................................12
2.1. Introduction............................................................................................. 12
2.2. Types of Infrastructure:.........................................................................12
2.2.1. Economic Infrastructure:.................................................................12
2.2.2. Social Infrastructure:.......................................................................13
2.3. Need of Infrastructure:..........................................................................13
2.4. Development of Infrastructure:...........................................................13
2.4.1. Public Sector Projects:....................................................................15
2.4.2. Private Sector Projects:...................................................................15
2.4.3. Public private joint venture:...........................................................15
Public Private Partnership...........................................................................15
2.5. Public Private Partnership:...................................................................16
2.5.1. Definition:.......................................................................................... 16
2.5.2. Types of Contract in PPP:................................................................18
2.5.2.1. Service Contract:...........................................................................19
2.5.2.2. Management Contract:.................................................................19
2.5.2.3. Lease Contract:.............................................................................. 19
2.5.2.4. Concession Contract:....................................................................19
2.5.2.5. Build, Operate & Transfer:...........................................................19
2.6. Build, Operate & Transfer:....................................................................20
2.6.1.
Definition:.............................................................................................. 21
2.6.2.
Variants of BOT:...................................................................................... 22
2.6.3.
Stages of BOT Projects:............................................................................. 23
2.6.3.1.
Preliminary study:................................................................................ 23
2.6.3.2.
Selection process:.................................................................................. 23
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2.6.3.3.
Project implementation:.........................................................................24
2.6.3.4.
Construction........................................................................................ 24
2.6.3.5.
Operation............................................................................................ 24
2.6.3.6.
Transfer.............................................................................................. 24
2.6.4.
Major Participants in BOT Projects:...........................................................25
2.6.4.1.
Host Government:................................................................................ 26
2.6.4.2.
Concessionaire:.................................................................................... 26
2.6.4.3.
Investors............................................................................................. 26
2.6.4.4.
Contractor.......................................................................................... 26
2.6.4.5.
Operator............................................................................................. 26
2.6.5.
Main Agreements in BOT Projects:.............................................................27
2.6.5.1.
Concession Agreement:..........................................................................28
2.6.5.2.
Loan Agreement:.................................................................................. 29
2.6.5.3.
Shareholder Agreement:.........................................................................29
2.6.5.4.
Construction Contract:..........................................................................29
2.6.5.5.
Supply Contract (Equipment/Material):....................................................29
2.6.5.6.
Off- take Agreement:............................................................................. 29
2.6.5.7.
Operation and Maintenance Contract (O & M Contract):............................29
2.6.6.
Advantages & Disadvantages of BOT Project:...............................................29
2.6.6.1.
Advantages:......................................................................................... 29
2.6.6.2.
Disadvantages:..................................................................................... 30
2.7.
Financing of BOT projects:...........................................................................30
2.7.1.
Project Financing:.................................................................................... 31
2.7.2.
Parties Involved in Project Financing:..........................................................32
2.7.2.1.
Sponsors & investors:............................................................................ 33
2.7.2.2.
Lenders:............................................................................................. 33
2.7.2.3.
Government:....................................................................................... 33
2.7.2.4.
Contractors (Construction / Operating Company):......................................33
2.7.2.5.
Suppliers and Customers:.......................................................................33
2.7.3.
Instruments Used in Project Financing:........................................................34
2.7.3.1.
Equity:............................................................................................... 34
2.7.3.2.
Subordinated debt................................................................................ 35
2.7.3.3.
Senior debt:......................................................................................... 35
2.8.
Conclusion:................................................................................................ 35
3. RISK INVOLVED IN BOT MODEL ROAD PROJECTS...................................36

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3.1.
Introduction:................................................................................................. 36
3.2.
Risk Identification in BOT Infrastructure Projects:..............................................36
3.3.
Type of Risks:................................................................................................ 37
3.3.1.
Pre- Construction risk:................................................................................. 38
3.3.2.
Construction risk:....................................................................................... 38
3.3.3.
Traffic & revenue risk:................................................................................. 39
3.3.4.
Performance & operating risk:......................................................................39
3.3.5.
Inflation risk:............................................................................................. 40
3.3.6.
Currency risk:............................................................................................ 40
3.3.7.
Political risk:.............................................................................................. 40
3.3.8.
Force majeure:........................................................................................... 40
3.4.
Allocation of Risks:......................................................................................... 41
3.5.
Risk Mitigation:............................................................................................. 42
3.5.1.
Risk Avoidance:.......................................................................................... 43
3.5.2.
Risk Reduction:.......................................................................................... 43
3.5.3.
Risk Retention............................................................................................ 44
3.5.4.
Risk transfer:............................................................................................. 44
3.6.
3.6.1.
Risk Mitigation Techniques:............................................................................. 44

Contractual Solution for Project Company:.....................................................45
3.6.1.1.
Turnkey Construction contract:..................................................................45
3.6.1.2.
Performance Guarantee:...........................................................................45
3.6.1.3.
Operation and Maintenance Contract:.........................................................45
3.6.2.
Government Support:.................................................................................. 45
3.6.2.1.
Equity guarantees:................................................................................... 45
3.6.2.2.
Debt guarantees:...................................................................................... 45
3.6.2.3.
Exchange rate guarantees:.........................................................................46
3.6.2.4.
Grants and subordinated loans:..................................................................46
3.6.2.5.
Shadow tolls:........................................................................................... 46
3.6.2.6.
Minimum traffic guarantee:.......................................................................46
3.6.2.7.
Concession extensions:.............................................................................. 46
3.6.2.8.
Revenue enhancements:............................................................................ 46
3.6.3.
Insurance:................................................................................................. 47
3.6.3.1.
Political Risk Insurance:........................................................................... 47
3.6.3.2.
Force Majeure Risk Insurance:...................................................................49
3.7.
Conclusion:................................................................................................... 49
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1.
Introduction
1.1. Introduction
Infrastructure represents the wheels of economic activity. People demand
infrastructure facilities not only for direct utilization but also for raising their
productivity. It contributes to economic growth both by increasing productivity and
by providing amenities which enhance the quality of life.
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There is a strong association between the availability of infrastructure

facilities such as telecommunications, power, roads & access to safe water and
per capita GDP. Adequate quantity & reliability of infrastructure are key factors in
the ability of countries to compete in international trade, even in traditional
commodities.
In the post-World War II era around 1945, most infrastructure projects in
developing countries have been built under the direct supervision of the
government itself, or of a government agency. But In early 1980s government
started to find the alternative ways to finance these projects because of the
following reasons :
With continued population and economic growth in many developing
countries, the need for additional infrastructure continues to grow.
The growing third World debt crisis has meant that developing countries
have had less borrowing capacity and fewer budgetary resources of their
own to finance the projects that are needed.
Limited resources of government & government agencies.
Government agencies are looking for creative ways to promote additional
projects by encouraging private sector enterprise, apart from shifting a portion
of burden of the infrastructure development, including financial arrangements to
the infrastructure development.
Beginning in the late 1970s and early 1980s, some of the major international
contracting firms and some of the more sophisticated developing countries
began to explore the possibility of promoting privately owned and operated
infrastructure projects financed under a concession type arrangement. One of the
variant under this category is BOT (Built, Operate & Transfer).
Other variants include: BOOT (Build, Own, Operate and Transfer); BOO
(Build, Own and Operate, i.e., without any obligation to transfer); BRT (Build,
Rent and Transfer); BOOST (Build, Own, Operate, Subsidize and Transfer).
BOT (Build- Operate- Transfer):

Build-Operate-Transfer (BOT) is a form of project financing, wherein a
private entity receives a concession from the private or public sector to
finance, design, construct, and operate a facility for a specified period, often as
long as 20 or 30 years. After the concession period ends, ownership is transferred
back to the granting entity.
During the concession the project proponent is allowed to charge the users of
the facility appropriate tolls, fees, rentals, and charges stated in the concession
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contract. This enables the project proponent to recover its investment, operating
and maintenance expenses in the projects.
1.2. Need of Study:

Infrastructure projects need massive investment, have long gestation period, yield
small and in some cases negative returns, Thus entry of private sector in
infrastructure financing and development must be well conceived.
As more & more infrastructure projects in developing countries are developed on the
basis of BOT model, therefore its various financial & contractual aspects must be
analyzed in detail.
1.3. Aim of Present Study:

To establish procedural guidelines & framework for the financial
contractual aspects for the realization of BOT model for Highway projects.
&
1.4. Research Objective:
To study the BOT model in Public- Private Partnership mode of development in

Road projects.
What are the various risks involved in the BOT model for Road projects & how
these risks are incorporated in Concession agreement and financial analysis of
projects?
To develop standard model for contractual & financial analysis of BOT

Road projects.
1.5. Scope:
Brief introduction of infrastructure projects & its need.
Development of infrastructure projects through BOT & its main differences

from conventional model.
To study the evaluation of BOT model in Highway projects
To study the various risks involved in the BOT model of Highway projects and
what are various risk mitigation techniques.
To study the contractual aspects of BOT Highway projects and how various risks
are incorporated in the concession agreement.
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To study the financial aspects of BOT Highway projects and how to

analyze the financial viability of projects while incorporating various risks
involved in the project.
To develop standard models for the Contractual & financial analysis of Road
projects to be develop on BOT basis.
1.6. Methodology:
Present study explores case studies available in India and some other developing
country in which BOT contracts have been used in various Highway sector.
The study mainly covers the important issues related to financial & contractual
aspects of concerned projects.
Need
Aim & Objectives
Infrastructure, meaning types, characteristics & other aspects.

Privatization of infrastructure.
BOT concepts& applications.
Risk management in BOT road project.
Financial & Contractual aspects of Road projects on BOT
Inputs from
Books
Journals
Seminars
NHAI &websites
Inputs from
NHAI
IL & FS
Private Firms
Analysis
Develop Contractual & Financial Analysis Model
Figure1.1: Flowchart for Methodology
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1.7. Literature Review

Various researchers have examined the various risks involved in the BOT model for
infrastructure projects and methods to incorporate the risks involved in concession
agreement and financial analysis of projects. Some of the studies done in this field
are as follows:
K. N. Vaid (1997) carried out various characteristics of Infrastructure projects,
its impact on communities and various reforming options. Infrastructure
services- including the power, transport, telecommunications, and provisions of
water and safe disposal of waste- are central activities of households and
economic production. Infrastructure failures quickly and radically reduce
communities quality of life and productivity. Conversely improving
infrastructure services enhances welfare and fosters economic growth.
R. Bharadwaj (1997) proposed the devise into three parts. First part discussing
the present state of infrastructure in India, Second part discussed with the
projected growth of infrastructure need and the third part look into the
investment need for infrastructure development.
TerciaArambam (1999) studies the various factors involved in the analysis of
BOT model for infrastructure projects. The work has been divided into two
parts, one is privatization of infrastructure projects & other one is BOT
concepts & issues.
Ajeet K Chaudhry (2001) studied the key issues involved in the development of
Indian road sector. He concluded various sections discussing the problems in
Indian road traffic, NHDP & Toll & Annuity model for project development.
Kulwinder Singh Rao (2004) carried out the various procurement methods
involved in the development of Indian road sector. He concluded into two major
parts; first part discussing the PPP in Indian road sector and other part discussing
the selection procedure and bid evaluation criteria.
Sudong Ye andYisheng Liu (2008) proposed that the infrastructure development
can beabstracted into development patterns. Based on the findings, they
investigated possible task allocations between public and private sector to build a
development decision tree of infrastructure projects.
Sudong Ye and Yisheng Liu (2008) studied the finance approach, the debt service
payment relies solely on project cash flows and the assets of the toll road
projects. They evaluated, quantified and identified the major financial risks
associated with project- financed toll road projects.
Young Hoon Kwak (2008) studied a detailed overview of Asian concession
market, 87 concession projects awarded between 1985 and 1998 covering 12
Asian countries were examined. The concession agreement is one of the
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infrastructure privatization models. In Asia, the rise of concession projects began

in the 1980s, and the number of such projects continues to grow.
1.8. Contribution of the Current Study to the Existing

Literature
The BOT scheme to financing infrastructure projects has many potential
advantages and is a viable alternative to the traditional approach using
sovereign borrowings or budgetary resources.
BOT projects involve a number of elements, such as host government, the
Project Company, lenders, contractors, suppliers, purchasers and so on. All of
which must come together for a successful project.
The application of the BOT scheme in Indian infrastructure development is being
carried out stage by stage.
There are two broad categories of risk for BOT projects: country risks
and specific project risks. The former associated with the political, economic
and legal environment and over which the project sponsors have little or no
control. The later to some extent could be controllable by the project sponsors.
A few researches of risk management associated with Indias BOT projects
focused on a particular sector. Different researchers appear to have different
points of view on risk identification because they have approached the topic
from different angles.
A particular risk should be borne by the party most suited to deal with it, in terms
of control or influence and costs, but it has never been easy to obtain an optimal
allocation of risks. Risk Management is a critical success factor of BOT
projects.
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2. INFRASTRUCTURE PROJECT
2.1. Introduction
Infrastructure assets are the physical structures used to provide essential services to a
society. These tangible assets can be viewed as the backbone of an economy. It is
the foundation on which the economic, social & political structure of the
society rests and its importance for overall development of the country cannot be
over-emphasized. It mainly includes transport, Railway, Energy sector, Water &
sanitation etc.
Due to its importance to a countrys economic and social development,
government institutions historically have provided infrastructure.
2.2. Types of Infrastructure:

Infrastructure can be classified into two categories:
Infrastructure Sectors
Economic Infrastructure
Transport
Social
Infrastructure
Energy & Utility
Toll roads
Distribution
Bridges
Storage
Electricity
Seaports
Airports
Rails
Distribution
Generation
Communication Healthcare facilities

s
Cable
Education facilities
Networks
Satellite
Social Housing
Systems
Judicial
and
correctional
facilities
Figure 2.1: Types of Infrastructure
2.2.1.
Economic Infrastructure:
Economic infrastructure consists of assets and services such as transport, utilities

and communications. Private agents can easily provide these goods efficiently.
For example toll roads.
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2.2.2.
Social Infrastructure:
Social infrastructure consists of assets and services that are provided either as a
free or subsidized good. Examples are education and health care. Infrastructure
and related services have significant implications for achieving sustainable
development objectives, as infrastructure services underpin many aspects of
economic and social activity. As a consequence, infrastructure failure can have a
widespread impact across the community. Without reliable power, wellconnected utilities and a modern transport network a countrys economy is not
able to develop successfully in the long term.
2.3. Need of Infrastructure:

Infrastructure represents the wheels of economic activity. People demand
infrastructure facilities not only for direct utilization but also for raising their
productivity. It contributes to economic growth by increasing productivity and
facilitating amenities which enhance the quality of life.
Population growth and rapid urbanization have placed enormous pressure on
existing infrastructure stocks in developed and developing countries. The
provision of new infrastructure and the maintenance of existing infrastructure thus
present a daunting challenge to governments worldwide.
2.4. Development of Infrastructure:

Initially infrastructure expenditure in developing countries has been funded
directly from fiscal budgets. However, several factors such as macroeconomic
instability and growing investment requirements have shown that public financing is
volatile and, in many countries, rarely meets crucial infrastructure expenditure
requirements in a timely and adequate manner.
Private sector organizations on the other hand, have a large pool of sources from
which they can seek funding, ranging from equity investors to capital markets
and banks. In addition, they can seek funding from both local and international
financial markets. Governments may not have access to, or the capacity to access, all
these sources of funding. As a result, private sector involvement in infrastructure
provision has been widely considered and implemented as a preferred method of
financing infrastructure provision. This collaboration between public and private
sectors is crucial in order to increase the sources of funding available for
infrastructure and reduce the pressure on fiscal budgets.
Like any other project infrastructure projects also have a life cycle with some
variations. In general a project life has following stages
1. Identification of need
2. Development of solutions to meet the needs (i.e. design facilities)
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3. Financing of the facilities

4. The Construction of facilities
5. Operation of facilities
6. Decommission of facilities
From an idea to physical facility, a certain amount of capital is required for
its design & construction. Once the physical facility is put into operation after its
completion, the project can produce products/ services, which may be sold for
revenues to recover capital investment in addition to socio economic benefits.
Sources of funds
Start
Pre-Development
Capitals
Design
Construction
Revenues
Operation of completed facility
Socio-economic benefits
Figure 2.2: Development Pattern and Cash Flow of Infrastructure Project
(Source: JCEM, Feb 08)
Hence, the development of infrastructure project involves two components:
1. Allocation of responsibilities of design, build and operation of project.
2. Finance & use of project revenue.
As project passes from one phase to the next there are various time points to make
decision on task allocations. Key decisions include a decision that who is
responsible for financing the project, followed by decisions on who is
responsible for the design, construction, and operation of the project.
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End

On the basis of above the development of infrastructure projects can be done

three ways:
1. Public sector
2. Private sector
3. Public private joint venture
2.4.1.
Public Sector Projects:
If whole of the project is developed by the public sector including the

finance, design, construction & operation, then it is called as public sector
projects.
2.4.2.
Private Sector Projects:
If whole of the project is developed by the private sector including the

finance, design, construction & operation, then it is called as private sector
projects.
2.4.3.
Public private joint venture:
In Public private joint venture, a project is jointly developed by public and private
sectors. In this mode, the public & private sectors collaborate to combine their
strengths and capabilities and agree on a sensible allocation of risks between
them.
Public Private Partnership
Works & Services

Management
Contracts
& Maintenance
Operation & Maintenance
Contracts
Build Operate
Concessions
Transfer Concessions
Full Privatization
Low
High
Figure 2.3: Extent of private sector participation (Source: JCEM, Feb 08)
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2.5. Public Private Partnership:

Privatization is a process in which the delivery of goods and services,
usually administered by the government, is shifted to the private sector.
Privatization can be divided into primarily three areas:
1. The selling of governmental holdings (i.e., British Airways and British
Telecom).
2. The subcontracting of government services to private undertakers (i.e.,
US Postal Service, park maintenance).
3. The subcontracting of financing and developing public facilities (i.e.,
Channel Tunnel). Public Private Partnership comes under this category.
Under a public-private partnership approach, a cooperation between government
and private parties is achieved where the government works together with the
private sector to provide for public requirements. However, the differences
between privatization and public private partnerships are difficult to detect,
depending on the level of government participation. Complete privatization
has no government participation.
2.5.1.
Definition:
Private financing and operations of public infrastructures- often also called

Public- Private Partnerships or PPPs. PPP is a partnership between the Public
sector and the Private sector for the purposes of delivering a project or a
service traditionally being provided by the public sector. A host of terms exists
to define such partnerships like Private Finance Initiative (PFI as it called
in UK), Privatization, Delegated management, Concessions (as generically
known in Europe) etc.
Given the current economic sate of many developing countries and in order
for the government to maintain adequate investments in infrastructure, an
enormous burden is placed on public finances. Developing countries spend
around US $200 billion in a year on infrastructure investment, of which
more than 90% is government- sponsored. Current estimate point to financing
needs of about 5.5% of GDP for all developing countries- for both new
investment and maintenance expenditures. The financing needs in low income
countries can potentially be as high as 7% of GDP. These figures translate into a
requirement of US $ 465 billion annually by the developing countries with the
demand split almost down the middle between new investments & maintenance.
PPP structure enable leveraging of additional sources of funding of infrastructure.
These can help to bridge the gap between the forever increasing financial
demands for infrastructure especially transports infrastructure and financial
shortfall in available public funds. Thus, PPP can help to implement
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development projects without to having to wait for future government

budgetary supports for funding.
Key roles of private sector in PPP:
There are four key roles for the private sector in PPP scheme
1. To provide additional capital.
2. To provide alternative management and implementation skills.
3. To provide value added to the consumer and the public at large.
4. To provide better identification of needs and optimal use of resources.
Advantages of PPP:
1. Source of additional funding to meet the supply demand gap for
funding of new infrastructure.
2. Enhance governments capacity to develop integrated solutions.
3. Facilitate creative and innovative approaches.
4. Reduce the cost to implement the project.
5. Reduce the time to implement the project.
6. Transfer certain risks to the private project partner and better risk allocation.
7. Acceleration of infrastructure provision.
8. Reduce whole life costs.
9. Better incentives to perform.
10. Generation of additional revenues.
However, while PPPs can present a number of advantages, it must be
remembered that these schemes are also complex to design, implement and
manage.
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Table 2.1 Potential advantages of using PPP

Financial Advantages
Easing
of
constraints
Economic and Social Political Advantages

Advantages
budgetary Streamlined
A new role for the public
construction schedule authority
and reliable project
Optimal allocation and Modernization of the Allocation and not abdication

transfer of risk to the economy
and
private sector
improvement
of
services
Realistic evaluation and Access to financial Project stability
control
of
costs markets,
combined
implementation
with the development
of local financial
markets
They are by no means the only or the preferred option and should only be
considered if it can be demonstrated that they will achieve additional value
compared with other approaches, if there is an effective implementation
structure and if the objectives of all parties can be met within the
partnership.
2.5.2.
Types of Contract in PPP:
When a decision is made to involve the private sector in the provision of

infrastructure, there are various options or procurement routes that can be
followed. It is important to consider these various options for private sector
participation because the procurement route followed defines which party (public
vs. private) will be responsible for various crucial aspects such as the financing of
the project. The various options for private sector participation in infrastructure
provision are:
1. Service contract
2. Management contract
3. Lease contract
4. Concession contract
5. Built, Operate & Transfer (BOT)
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2.5.2.1.
Service Contract:
The Service Contract is an institutional arrangement whereby a private

company is contracted to provide a clearly defined technical task (i.e. A
mains rehabilitation exercise, design engineering) or administrative task
(i.e. payment collection) for the public sector.
2.5.2.2.
Management Contract:
With this option, the private sector is paid a fee for operating and
maintaining a government - owned business and making management
decisions. In service contract the customer remains legally clients of the
public sector.
2.5.2.3.
Lease Contract:
Under the lease option, the private sector leases facilities and is responsible
for operation and maintenance in exchange for payments. Public sector
doesnt pay any free to the private player (on in contrary, it may receive
some) and private partners profits are solely dependent on its own profit.
2.5.2.4.
Concession Contract:
Under concessions, the private sector finances the project and also has full
responsibility for operations and maintenance. The government owns the
asset and all full use rights must revert to the government after the
specified period of time.
2.5.2.5.
Build, Operate & Transfer:

Public
These are similar to concessions but they are normally used for new
Greenfield projects. The private sector receives a fee for the service from
the users.
Con
ces
sio
n
BO
T
Lea
s
Private
Management
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Private Ownership
Public
eC
Ma
nag
em
Ser
vi c
eC
Municipal Utility
ont
ent
ont
Direct Private Utility
rac
t
Con
t
rac
t
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rac
t
Public Wat

Figure 2.4 Types of contract in PPP

Table 2.2 Comparative Analysis of Contracts in PPP
Option
Asset
Ownership
Operations
and
Maintenance
Service
Contract
Public
Public
Private
Management
Contract
Public
Lease
Capital
Investment
Commercial
Risk
Duration
and Public
Public
1-2 years
Private
Public
Public
3-5 years
Public
Private
Public
Shared
8-15 years
Concession
Public
Private
Private
Private
25-30
years
Build
Operate
Transfer
Private and Private

Public
Private
Private
20-30
years
2.6. Build, Operate & Transfer:

Build Operate Transfer enables direct private sector investment in large scale
projects such as water plants, sewage plants, transport, power plants, etc. and is a
relatively new approach to infrastructure development. The theory of BOT is quite
simple:
Build: A private company/consortium agrees with a government to invest in a

public infrastructure project. The company then secures their own financing to
construct the project.
Operate: The private developer then owns, maintains and manages the facility
for an agreed concessionary period (e.g. 20 years, depending on the detail
project) and recoups their investment through charges or tolls (e.g. treated fee).
Transfer: After the concessionary period the company transfers ownership and
operation of the facility to the government or another relevant authority.
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2.6.1. Definition:
In the BOT approach, a private party or concessionaire retains a concession
for a fixed period from a public party; called principal (client), for the
development and operation of a public facility. The development consists of
the financing, design and construction of the facility, managing and
maintaining the facility adequately, and making it sufficiently profitable. The
concessionaire secures return of investment by operating the facility and,
during the concession period, the concessionaire acts as owner. At the end of the
concession period, the concessionaire transfers the ownership of the facility free
of liens to the principal at no cost.
BOT is a new approach to the infrastructure development. The host government
identifies the infrastructure projects that must be constructed and chooses the
investors (private companies) from domestic or international society by
inviting public bidding and permits the winner to build a project company.
The government signs the agreement with the project company. The government
grants investment companies operational concession within a period of time and
permits them to construct and administrate certain public infrastructure by
financing and authorizes them to pay off loans, reclaim investment and make a
profit through charges from users or selling products. At the expiration of the
concession period, the infrastructure shall be transferred to the government
without any expense. In such a legal relation, one subject is the local government
and another is the investment enterprise. Their mutual rights, obligations and
all relations are established by BOT Investment Contracts. The investment,
construction and operation of the BOT projects are constituted by a series of
contracts.
BOT financing
Govern
Bidding
Project Identifying
Investment
Project Packing
Operating
Inviting Public Bidding
Concessional
Project construction
Project Operation
Make a Profit
Accept the project
Transfer the Project
Figure 2.5: The BOT Concept

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The key characteristic of BOT is private financing. In BOT, the government

subcontracts the entire development process, including the associated risks, to the
private entity. One of these risks is financing, which must be obtained by the
concessionaire, who is ultimately responsible for all aspects of the project.
2.6.2. Variants of BOT:

Build-Operate-Transfer (BOT) is a generic term taking different forms. The
other major types are Build Operate Own (BOO), Build Transfer Operate
(BTO), and Build Lease Transfer (BLT).
Build-Operate-Transfer (BOT): The private sector is responsible for design,
finance, construction, operation and maintenance of the facility. The title of
ownership is retained by the concession company during the concession period.
The facility is transferred to the government at the end of concession period
Build-Operate-Own (BOO): The private sector is responsible for design,
finance, construction, operation and maintenance of the facility. Here the title of
the ownership remains with the concessionaire. There is no transfer of ownership
to government.
Build-Transfer-Operate (BTO): The private sector constructs the facility and
transfer the ownership to the government. The concessionaire operates the facility
by taking a contract to operate the facility.
Build-Lease-Transfer (BLT): The private sector constructs the facility and
leases the facility o the government. The facility will be transferred to
government at the end of concession period.
Project
Delivery
Concession period
B.O.T.
build
operate
B.O.O
build
own
operate
B.T.O
build
transfer
operate
B.L.T.
build
lease
build
transfer
Figure 2.6: Analysis of variants of BOT
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2.6.3. Stages of BOT Projects:

The length of the concession period is determined in the concession
agreement between concessionaire and principal. Within the concession period,
the concessionaire must be able to recover investments for all funding parties.
Six stages are identified during the concession period. After the preliminary
study, usually conducted by the government, a consortium is chosen
following a specific selection procedure. After the selection, the concessionaire
starts the implementation of the project by forming the team, executing studies,
obtaining permits, and proceeding with design development. Once the design
is approved, construction begins. Upon completion of construction, the facility
opens for use and the repayment of the facility is covered by the incoming
revenues. After a predetermined concession period, the facility transfers to the
principal and then state agencies will own and operate the facility.
Six stages of BOT projects are:
1. Preliminary study
2. Selection process
3. Project implementation
4. Construction
5. Operation
6. Transfer
2.6.3.1.
Preliminary study:
The preliminary study usually takes place prior to the involvement of the
concessionaire. This stage is executed by, or on behalf of, the principal.
Feasibility studies are necessary to prove the forecasted success of the
project, in order to attract private funding. Alternatively, a private
party may identify a need and initiate the BOT project and in such a
case, the preliminary study is conducted by the private entity with limited
government involvement.
2.6.3.2.
Selection process:
The selection process depends on who initiates the project. In a public

selection process where the initiative is coming from the public sector
(government), a request for qualification is distributed. After receiving
applications, the government selects a few consortia to submit proposals
(request for proposals) and from these a concessionaire is chosen.
During this process, the consortia will group interested parties as required
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for the efficient and adequate execution of the project. Alternatively, in a

speculative selection process, the private sector initiates the project and
contacts the appropriate government agency for approval. The project is
granted after proper negotiations.
2.6.3.3.
Project implementation:
After the selection stage and the foundation of the concessionaire, the
proposal is finalized. Together with all the involved parties, the
concessionaire develops a detailed program and preliminary design,
and applies for permits. This process can be shortened if a
government agency is actively participating. Once permits are issued, the
final concession agreement is signed. During the project implementation
stage, in addition to the interests of the involved parties, the interests
of the external parties also require attention. The influential power of
politics, the opposition, and environmental agencies are significant
factors and, if not taken into account, may hinder or even dissolve the
project.
2.6.3.4.
Construction
Once the necessary permits are obtained, construction begins. Often BOT
projects are fast track projects where the design is not complete when
construction starts. This is feasible because of congruent financial
interests within the members of the consortium and the pressing need
to complete construction and start collecting revenues. Less controversial
designs allow a quicker construction period with fewer uncertainties.
2.6.3.5.
Operation
During the operation stage, the facility is operated and maintained by the
operator who is paid by the concessionaire. The concessionaire, as the
owner of the facility during the operation period, is obligated to
operate the facility in a manner that adequately services the public
user. The concessionaire is also responsible for maintaining the facility in
working condition.
Both the concession and operation agreements specify the condition of the
facility at the time of transfer to the principal.
2.6.3.6.
Transfer
The facility is transferred to the principal, usually at no cost. Transfer time

is determined in the concession agreement. After transfer, the principal is
the sole owner of the facility and can choose to operate and maintain the
facility directly or hire an independent operator. If the principal is the
government, it may choose after transfer not to charge the final users
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anymore. In essence, the facility at that time will have become

public, and its maintenance and operation can be funded by indirect
taxation.
2.6.4. Major Participants in BOT Projects:

Five Major participants are identified in every project. Very simply, the principal
grants the concession to the concessionaire. The concessionaire, usually a
consortium of companies, undertakes the financing and development of the
project. Financing is obtained from sponsors and lenders. The contractor builds
the facility and the operator runs the facility.
Responsibility for Project
Public Sector Role
Private Sector Role
Development
Start of Construction
Construction
Ramp-up
Maturity
Time
Figure 2.7: Role of Public Private Partnership in BOT projects
There are basically five major participants in BOT project:

1. Host government
2. Concessionaire
3. Investors
4. Contractor
5. Operator
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2.6.4.1.
Host Government:
In a BOT project, the principal is usually a government agency, a local or

federal government body that recognizes the need for a public facility
but is unable to financially support the project. The government agency
is thus forced to look for alternative options.
2.6.4.2.
Concessionaire:
After the identification of the need for the facility, the government,
following a due process, will grant a concession to the concessionaire. The
concessionaire is usually a consortium and takes the responsibility of
developing (designing, financing and constructing), maintaining and
operating the facility, on behalf of the principal. The concessionaire is the
owner of the facility during the concession period and realizes profits on the
initial investment through the usage of the facility.
2.6.4.3.
Investors
Financing is supplied by the private sector and the investors include

both shareholders and lenders. The shareholders invest money in
exchange for equity, and lenders support the concessionaire during
negotiations with the principal with promises for loans to be available
during the development of the project. Lenders may include banks,
insurance companies and bond holders.
2.6.4.4.
Contractor
The concessionaire commissions a contractor with the construction of

the facility. In most cases, the contractor is part of the concessionaires
consortium and involvement is favored by all concerned parties. During the
early stages of the process the contractors involvement assures the
consortium of the most effective and efficient design and execution of the
project. Ultimately, the contractor is responsible for the construction of
the project and for hiring subcontractors, suppliers and consultants.
2.6.4.5.
Operator
The operator is also in the concessionaires service and manages the

operational stage of the facility. Similar to the contractor, the operator is
usually part of the concessionaires consortium, because of the critical
role in the revenue stream. In addition, the importance of operating
knowledge for programming, financing, design and construction is required.
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Table 2.3 Participates & their Primary Goal

PARTY
PRIMARY GOAL
Government
Realization (Serving the public need) with preferably no risk.
Concessionaire
Get the concession granted, make profit.
Sponsor/Share holder
Make profits, having a high ROI in relation to the risks taken.
Lender
Having a safe and profitable investment for a long term.
Contractor
Getting the project, realizing the facility according to the

clients need.
Operator
Operating the facility as efficiently and effectively as possible.
Contractor/User
Economically feasible to use the facility.
2.6.5. Main Agreements in BOT Projects:

A BOT project has following agreements
Concession agreement
Loan agreement
Shareholders agreement
Construction contract
Supply contract (Equipment/Material/Fuel supply contract)
Off-take agreement
O & M agreement
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2.6.5.1.
Concession Agreement:
The concession agreement is between the government and the

concessionaire. The concession agreement is regarded as the "heart" of
a BOT project as it determines the commercial viability and
profitability.
A concession agreement includes the following:
o The concession period
o The construction duration
o Toll/tariff structure with toll/tariff revision provisions
o Rights and obligations of both parities
o Government guarantees: The host government offers guarantees to
the project promoters (concessionaire) like supporting loans,
guarantees of minimum operating income etc.
Government
Concession Agreement
Raw Material Supplier
Supply Contract Concession Company Off take Contract
Loan Agreement
Construction Contract
Users of Product
Contractors
Banks
Shareholders Agreement
Operation Contract
Operator
Investors
Figure 2.8: BOT project agreement
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2.6.5.2.
Loan Agreement:
The loan agreement is between the lenders (i.e. Banks) and the
concessionaire. The Banks provide the much necessary debt to the
concessionaire. Bank debt is the primary source of financing for a BOT
infrastructure project.
2.6.5.3.
Shareholder Agreement:
The shareholder agreement is between the equity investors and the

concessionaire.
2.6.5.4.
Construction Contract:
The construction contract is between the contractor and the concessionaire.

The contract is usually let under fixed price turnkey contract.
2.6.5.5.
Supply Contract (Equipment/Material):
An agreement between the supplier and the concessionaire. The supplier in

a supply contract is often government agency that supplies raw material
such as coal to power plant and oil.
2.6.5.6.
Off- take Agreement:
An agreement between the government and the concessionaire to purchase

minimum quantity of services such as electricity, water at fixed price for
fixed term.
2.6.5.7.
Operation and Maintenance Contract (O & M Contract):
An agreement between the concession company and the operator. The

operation phase plays a very important role in the success of BOT
project as is success is tied to its revenue generating ability. The
operation phase of build-operate-transfer projects presents the great
management challenge and demands the highest level of attention.
2.6.6. Advantages & Disadvantages of BOT Project:

2.6.6.1.
Advantages:
1. Key advantages of privatization are as follows.

o The private firms are more efficient, hence project or service can
be delivered at lower cost.
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o Private firms are more innovative in selection of design and

operation phases of a project or service.
2. The private sector invests directly in the development of infrastructure,
thereby reducing public debt, balancing the budget deficit, and reduced role
of public sector.
3. BOT projects create business opportunities for the local private sector,
create employment avenues as well as attract substantial foreign direct
investment.
4. BOT projects help in facilitating transfer of technology by
introducing international contracts in the host countries.
2.6.6.2.
Disadvantages:
1. Transaction costs are high, they amount to 5-10% of total project cost
2. Not suitable for smaller projects. Victorian Government of Australia
has suggested that projects with a value of less than Australian dollar
$15m are unlikely to gain benefits from BOT delivery method.
3. The success of BOT project depends upon successful raising of
necessary finance. Various costs such as cost of construction, equipment,
maintenance should be committed during the life of the project.
4. BOT projects are successful only when substantial revenues are
generated during the operation phase.
2.7.Financing of BOT projects:

One of the primary features of BOT is private financing which infers the
concessionaire is fully responsible for acquiring the necessary funds to develop
and operate the facility. The concessionaire will raise the required funding in debt
and equity. The return of investment is realized during the operational stage of the
facility.
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Cash Flow
Product
Implementation
And Construction
Operation
Concession Period
Figure 2.9: Cash flow over concession period
2.7.1. Project Financing:
Lender
Loan repayment secured by ablity of
Government
(Borrower)
governemnt to repay
Government invests borrowed

funds in project
Project
Figure 2.10: Corporate financing approach

The term project financing refers to the financing of an economic unit in which a
lender looks initially to the cash flows and earning of that economic unit as
the source of funds from which a loan will be repaid and to the assets of the
economic unit as collateral for the loan. Project financing is an old technique. It
was developed in the United States 35 years ago because the borrowers
could only offer underground oil reserves as a security. A new technique was
created for that purpose where the bankers would lend on the future revenues to
be earned from the sale of the oil for only security. The major idea in project
financing is that the bank directly shares the project risks with the company. The
company is not a debtor of the bank; the project is the debtor. The bank is repaid
from the project cash flows and has the project itself as security.
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Sponsor (s)
Lender
Lender has no or limited recourse to other sponsor assets
Project
Figure 2.11: Project financing approach

On the basis of security for the landing, project financing can be divided into two
categories.
1. Non-recourse Financing
2. Limited recourse Financing
Non-recourse Financing:
The financing is said to be non- recourse if the lenders are repaid only from the
cash flow generated by the project or, in the event of complete failure from the
value of the project asset.
Limited recourse Financing:
The financing is said to be limited recourse when the project
sponsors/government provide undertakings that obligate them to supplement the
projects cash flow under certain, limited circumstances.
The ultimate goal in project financing is to arrange a borrowing for a project
which will benefit the sponsor and at the same time be completely non-recourse to
the sponsor, in no way affecting its credit standing or balance sheet. Project
financing is sometimes called off balance sheet financing. Lenders look to
forecasted cash flows as collateral for the loan, extensive feasibility and
engineering studies are necessary so that the cash flow projections can be relied
upon.
2.7.2. Parties Involved in Project Financing:

Mainly five parties are involved with project financing
1. Sponsors & Investors
2. Lenders
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3. Government
4. Contractors (Construction/ Operating Company)
5. Suppliers & Customers
2.7.2.1.
Sponsors & investors:
Single sponsor or group of sponsors take a controlling stake in the equity of

the company. They are generally involved in the construction and
management of the project.
2.7.2.2.
Lenders:
A large fraction of the substantial investment needed is usually raised in the

form of debt from commercial banks, international financing institutions &
bilateral government lenders.
2.7.2.3.
Government:
The host government may be providing a part of financing, either as debt,

equity of on a standby basis. It or one of its agencies may be purchasing the
output of the project or providing the financial guaranties as to revenue.
Equity participation by the host government may be useful and may help
the host government to feel that the project is being negotiated fairly with
the full disclosure.
2.7.2.4.
Contractors (Construction / Operating Company):
The main contractor of the plant will often hold a stake in the equity of the
project company
2.7.2.5.
Suppliers and Customers:
Once the project facility has been built and becomes operational, the project
company will need to purchase the supplies it requires and sell the products
and services it provides. The government is often the sole customer for
some infrastructure projects.
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Contractors
Government
Customers
Suppliers
Other Investors
Project
Company
Project Sponsors
Lenders
Figure 2.12: Parties involved in project financing
2.7.3. Instruments Used in Project Financing:

The choice of financial instruments available to a borrower varies with the
type of project financing involved. In terms of structuring levels of debt
and equity in projects, it is suggested to use as much debt as the project cash
flows permits in order to have high return for the shareholders. There are three
general categories of capital and loans used in a project financing:
1. Equity
2. Subordinated debt
3. Senior debt.
2.7.3.1. Equity:
The equity investment in a project financing represents the risk capital.
Equity investors are the last in priority for repayment; however the upside
potential is significant. Lenders look to the equity investment as providing a
margin of safety. They have two primary motivations for requiring equity
investments in projects which they finance.
1. Lenders do not want the investors to be in a position to walk
away easily from the project.
2. The more burden the debt service puts on the cash flow of the project,
the greater the lenders' risk. The greatest risk is assumed by equity investors
as they are paid last, once all short and long term obligations are met,
though, due to the great risk the equity partners assume, a higher
return of investment is expected.
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2.7.3.2. Subordinated debt

Subordinated loans are senior to equity capital but junior to senior
debt and secured debt. Subordinated debt has the advantage of being
fixed rate, long term, insecure and be considered as equity. A
subordinated loan is often used by a sponsor to provide capital to a
project which will support senior borrowings from third party lenders.
The sponsor may be the owner of the project, or government
interested in getting the project built. Sources for subordinated debt
include finance companies, risk capital companies, and risk portfolio
managers of insurance companies. Subordinated lenders are cash flow
lenders. They are unsecured. Subordinated lenders are sensitive to the
capabilities of the management of the project to production and market
share while servicing debt.
2.7.3.3. Senior debt:

Senior debt constitutes the largest portion of the financing. Most
borrowings from commercial banks for a project financing are in the
form of senior debt. The senior lenders will want a cushion to support
their senior debt, may be in the form of subordinated debt of equity.
Sometimes host government commit to make subordinated loans
available on a standby basis over a certain period of time to provide
for senior debt service when & if the project company cash flow is
insufficient for such purpose. Some of the main sources of debt financing
are multinational agencies, the World Bank, and various regional
development banks.
The equity to debt ratio is determined by the principal and depends on the
financial capacity of the equity partners and their ability to secure long
term loans. The debt to equity ratio is usually established at 1 to 4 (20%
equity, 80% debt). Due to the higher risks assumed by the sponsors
(consortium), a comparably higher return on investments (ROI)
compensates the risks. Average ROIs in the studied cases were 15-20% for
equity and 8-10% for debt.
2.8.Conclusion:
Present Chapter has elaborated about the various development models of
infrastructure projects, the concept of Public- Private Partnership and what are
the various procurement systems for the development of Infrastructure projects
in Public- Private Partnership. Furthermore, difference between BOT and other
develop models has been considered. Chapter also provides a depth analysis of
various stages involved in the development of BOT projects, major participants,
various agreement & various instruments used for financing of Infrastructure
projects.
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3. RISK INVOLVED IN BOT MODEL ROAD PROJECTS

3.1.Introduction:
In any construction project, risks are unavoidable. A risk is defined as any factor,
event or influence that threatens the successful completion of a project in terms of
time, cost or quality. Any project has a number of identifiable risks. Some are
reasonably within the control of one or more of the parties to the project. Others may
not be within any party's reasonable control, but may be insurable, at a cost. Still
others may not be insurable. The conventional wisdom in project financing generally
is that each risk should be assumed by the party within whose control the risk most
lies. When making decisions regarding the choice of procurement approach as we
move towards fully private, more risk is transferred to the private sector and vice
versa.
Risk Review& Monitor
Risk Mitigation
Risk Allocation
Risk Assessments
Risk Identification
Every BOT project carries some risk. The challenge is to identify the risks, allocate
risk to the party best able to handle it & reduce uncertainty/ risk to an acceptable
level. This is called risk management.
Figure 4.1: Steps in Risk management
3.2.Risk Identification in BOT Infrastructure Projects:

In BOT Infrastructure projects project participants are exposed to various kinds of
risks. As a nature it involves dealing with many parties, huge amount of money, and
long period of time, therefore it is said to be very risky.
One main cause that leads to project failure is the inappropriate allocation of risks to
the various parties in the project. Risk management starts by the identification of
various types of risk that could be encountered in a project. In order to identify the
risks it is essential to understand what each risk consists of and the reasons for
project failure.
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Reasons for Project Failure are:
Delay in completion, with consequential increase in the interest expense on

construction financing and delay in the contemplated revenue flow.
Capital cost overrun.
Technical failure.
Financial failure of the contractor
Government interference.
Uninsured casualty losses.
Loss of competitive position in the market place.
Financial insolvency of the host government.
3.3.Type of Risks:
BOT projects undergo significant change in their risk profile as they move from the
High risk precompletion to the low risk post- completion stage. While permitting
risks and risks, associated with timely completion of the project dominate the precompletion period, the primary risk in the post completion period pertains to the
ability of the stretch to attract the necessary amount of traffic, and also for
commuters to pay the requisite amount of tolls.
Pre-Construction
Construction
Operation
Risk
Project development phase / Time

Figure 3.2: Risk profile in various phases
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In BOT project, Project Company is responsible for financing, development, and

operation of project. In highway project, Project Company particularly has to face
with some major risks.
These risks include:
1. Pre-construction risk: Right-of-way acquisition, environmental compliances.
2. Construction: Design changes, unforeseen geological, delays, cost overruns.
3. Traffic and revenue: Low traffic demands, low toll rates.
4. Performance & operating risk: Failure to operate & maintain the project.
5. Inflation risk: Inflation based on WPI.
6. Currency: Exchange rate fluctuations, inconvertibility.
7. Political: Termination of project, breaches of concession agreement and high tax.
8. Force majeure: Floods, earthquakes and war.
3.3.1. Pre- Construction risk:

It mainly includes delay in land acquisition & environmental compliances. The
administrative departments concerned with the project should take the
responsibility for obtaining the land acquisition & various clearances for the
project. Shifting/ removal of utilities such as trees, telephone lines, sewage lines,
etc., are another critical factor. There is a need for simplifying and streamlining
administrative procedures and setting up single window clearances.
Awareness for expeditious approvals by various state and local government
bodies need to percolate to ground level as well.
3.3.2. Construction risk:

There may be unexpected developments during the construction period which can
involve time & cost over runs for the project or even shortfall in the achievement
of the technical standards laid down for the given project. The reputation of
project contractor consultant as well as the history of road construction in the state
is important elements. Normally, the sponsor would sign a fixed price, firm date,
turnkey construction contract with the contractor that includes:
Completion & performance guarantees
Liquidated damages for delays
Bonus for early completion.
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The price of the turnkey project is, of course, increased by a risk factor to
compensate the contractor for taking this risk. Construction risk is assumed
secondarily by the project company, and indirectly by its equity investors, since
their equity will be eroded to the degree that costs are increased due to delays or
cost overruns which are not covered by damages from the contractors.
3.3.3.
Traffic & revenue risk:

In respect to toll roads, the project concessionaire has to deal with individual users
and the traffic volume risks are expected to be borne by him. Risks associated
with toll roads are primarily dependent on the following factors:
The economic utility of the stretch: Projects, which serve a captive demand,
for instance stretches, which connect to ports or city bypasses, which
relieve congestion levels carry relatively lower levels of traffic risks.
The availability of alternate freeways and other competing modes of

transport, to which traffic diversion could take place.
The composition of traffic along the stretch.
Sensitivity of various user segments towards payment of tolls.
Toll road projects are very sensitive to Traffic demand risk. In order to attract
private company to invest, government may assume the risk to some degree by
providing supports to project company.
3.3.4. Performance & operating risk:

Operating risk is the risk that the project will not conform to the required
performance parameters over the period of the concession agreement. Typically,
the performance parameters specified in the concession agreement are driving
quality of the carriage way, safety standards, adherence to maintenance schedule,
and availability standards as mentioned in the concession agreement. Noncompliance with the performance parameters can be an event of default and may
impinge on the developers ability to collect tolls.
The risk that the project will not perform as expected will be covered by
warranties from the consortium of construction contractors and equipment
suppliers and by performance guarantees in an operating and maintenance
contract. In each case, these risks are substantially within the control of the parties
assuming them.
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3.3.5. Inflation risk:

For the risk that arises out of inflation both equity investors & lenders will
normally insist to government on some mechanism to protect themselves against
inflation risk. This protection may be provided by price escalation clauses in the
off-take agreement or by provisions in the concession agreement allowing the
project company to increase tolls. For example toll road projects. Such price
escalation clauses would attempt to take account of increased costs of the project
due to inflation.
3.3.6. Currency risk:

There are two types of Currency risks; one is the Convertibility; i.e. the assurance
that revenues generated in domestic currency can be converted into Foreign
Exchange for making payments abroad or for the transfer of profits in case of
foreign investments. The government would need to provide guarantee for such
convertibility. The other risk is the Variation in the exchange rate. The
government must provide guarantees against such risk.
3.3.7. Political risk:

Political risk is sometimes the most significant risk faced by foreign investors and
lenders in developing countries because of the likelihood sudden political change.
Such changes can jeopardize projects at a critical stage. Political risk is associated
mostly with public sector projects. It includes the possibility that governments
will not allow repatriation of funds, as well as regulatory or legislative changes
that occur during project construction. Usually, political risks are difficult to
control. Many developers involved in public sector transportation projects require
the government to provide strong backing and expectations of high traffic flow.
Providing tax-exempt financing is a commitment that the government can make to
help mitigate this risk in domestic projects. Organizations like the Overseas
Private Investment Corporation (OPIC) provide expropriation insurance to
alleviate foreign political risk. Other organizations also provide insurance against
political risk such as the MIGA (World Bank).
3.3.8. Force majeure:

Force majeure risks represents the losses which are beyond control of the parties
to the project arising from the events such as fire, flood, earthquake, war, riot &
strikes, etc. some of the risks can be mitigated by covering them through
insurance. For the rest they have to deal with as expected. The concession
agreement should provide for extension of the concession of the concession
period for such a situation or even termination if the circumstances so dictate.
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3.4.Allocation of Risks:
From these eight types of risks, major groups that can generate enormous impact to
project success are Traffic and revenue, Currency, Inflation & Political risks. These
are called Country risks. Therefore, government normally provides support to these
types of risks. Support schemes are explicitly written in the concession agreement
between government and Project Company. Risks other than country risks are called
Project specific risks. These are to some extent are controllable by the project
sponsors.
Every BOT project carries some risk. These risk to be managed through proper
appreciation of their impacts on various players and allocation to the parties who are
best able to control them, i.e. deal with them at least cost.
Table 3.1: Country & Project risks
Project specific risks
Country risks:
Risks other than country risks are

called Project specific risks. These are
to some extent are controllable by the
project sponsors
Risks which are associated with the political,

economic and legal environment of the host
country and over which the project sponsors
generally have little or no control.
Construction
Performance
risk
Government normally provides support to these

types of risks.
&
operating
Pre-construction risk
Traffic and revenue
Politic
Currency
Inflation risk
Most of the risks that are present in BOT Road projects can be shared between
Government & the project company. The challenge is to reduce the uncertainty to an
acceptable level and allocate responsibility to the party best able to handle it.
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Table 3.2 Risk allocation between various parties

Risk
Allocation
Company
Government
Pre- construction
Construction
Traffic & Revenue
Performance & Operating
Inflation
Currency
Political
Force Majeure
3.5.Risk Mitigation:
Risk response and mitigation is the action that is required to reduce or eliminate the
potential impact of risk. There are two types of response to risk one is the
immediate change or alteration to the project, which usually results in the
elimination of the risk; the second is contingency plan that will only be implemented
if risks identified should materialize.
.
Seek for risk-mitigating

solutions
Appraise
new or residual
Evaluate
risks
or price
Risk monitoring
risks
and control
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No.
42
Risk
Identification
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Figure 3.3: Risk management process

Risk management process
The options for responding to risk are risk avoidance, risk reduction, risk transfer,
insurance, risk retention, each should be assessed as one or more will apply in every
circumstance.
3.5.1. Risk Avoidance:

This method of mitigation involves the removal of the cause of the risk and
therefore the risk itself. Ideally any approach involving avoidance is best
implemented by the consideration and adoption of an alternative course of action.
Other examples of risk avoidance include the use of exemption clauses in
contracts, either to avoid certain risks or to avoid certain consequences flowing
from the risks. Risk avoidance is most likely to take place where the level of risk
is at a level where the project is potentially viable.
3.5.2. Risk Reduction:

This method adopts an approach whereby potential exposure to risks and their
impact is alleviated. Methods of risks reduction may require some initial
investment which should then reduce the likelihood of the risk occurring. Risk
reduction occurs where the level of risk is unacceptable and alternative action is
available.
Risk reduction exercises will always be worthwhile because they can lead to
greater knowledge about the project and this reduced not only the potential impact
of risks but also the level of uncertainty itself a major source of risk. However,
risk reduction will result in an increase in the base cost (i.e. the estimate of all
certain items) but should offer a significantly greater level of contingency
required. It goes without saying that risk reduction should only be adopted where
the resultant increase in costs is less than the potential loss that could be caused
by the risk being mitigated.
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3.5.3. Risk Retention

Once all the avenues for response and mitigation have been explored a number of
risks will remain. This does not imply that these risks can be ignored; indeed it is
these risks which will in most instances undergo detailed quantitative analysis in
order to assess and calculate the overall contingency levels required. The aim of
the previous responses is to reduce project uncertainty and in doing so increase
the base estimate to reflect the more certain nature of the project. However, it
does not imply that these retained risks can simply be ignored. Indeed, they
should be subject to effective monitoring, control and management to ensure that
they are within the contingency allowances set. It should be noted that this
contingency should be made up of residual risks which are assessed to be of a low
likelihood and low potential impact.
3.5.4. Risk transfer:

Risk transfer is the technique that plays a far greater role in infrastructure
development projects and involves the complete or partial transfer of risks among
the various parties involved in the implementation of the project. This is achieved
through the web of documents that is formulated during the course of
implementation of infrastructure projects. The documentation structure provides
for the flow of risk transfers that are negotiated and agreed to in the course of
development of an infrastructure project. For example, the construction risks
would, typically, be transferred by the government to the private developer under
the concession agreement. The private developer would then transfer all or most
of the construction risks to the construction consortium under the construction
contract. The construction consortium would distribute and transfer the risks
among themselves or to various sub-contractors.
3.6.Risk Mitigation Techniques:

Various Risk Mitigations Techniques are available and can be divided into three
categories which are as follows:
1. Contractual solution for Project Company
2. Government support
3. Insurance
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3.6.1. Contractual Solution for Project Company:

3.6.1.1.
Turnkey Construction contract:
Completion, cost overrun and other risks typical of the construction phase
are usually allocated to the construction contractor or contractors through a
turnkey construction contract, whereby the contractor assumes full
responsibility for the design and construction of the facility at a fixed price,
within a specified completion date and according to particular performance
specifications. The construction contractor is typically liable to pay
liquidated damages or penalties for any late completion.
3.6.1.2.
Performance Guarantee:
In addition, the contractor is also usually required to provide a guarantee of

performance, such as a bank guarantee or a surety bond. Separate
equipment suppliers are also usually required to provide guarantees in
respect of the performance of their equipment. Guarantees of performance
provided by contractors and equipment suppliers are often complemented
by similar guarantees provided by the concessionaire to the benefit of the
contracting authority.
3.6.1.3.
Operation and Maintenance Contract:
Similarly, the project company typically mitigates its exposure to operation

risks by entering into an operation and maintenance contract in which the
operating company undertakes to achieve the required output and assumes
the liability for the consequences of operational failures.
3.6.2. Government Support:

To minimize the above risks in BOT projects government provides some supports
to the project company. There are mainly eight categories of government financial
support given to Project Company:
3.6.2.1.
Equity guarantees:
This kind of guarantee gives Project Company a right to sell the project to
the government with a guaranteed minimum return on equity.
3.6.2.2.
Debt guarantees:
Under this guarantee, government provides a full guarantee or a cash-flow

deficiency guarantee for repayment of debt.
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3.6.2.3.
Exchange rate guarantees:
Fluctuation of currency can create significant impact on project which

involved foreign capital. By the guarantee, government compensates the
Project Company for increases in local cost of debt service due to exchange
rate movements.
3.6.2.4.
Grants and subordinated loans:
Government can help in enhancing project economics by providing nonrepaying grants or subordinated loan. Subordinated loan will be repaid to
government after the senior loan. At such time, project would normally be
in the relieved financial stage.
3.6.2.5.
Shadow tolls:
In this system, government, instead of users, pay a specific annual payment

per vehicle corded on the road to Project Company. The shadow tolls can be
made into several rates depending on demand volume.
3.6.2.6.
Minimum traffic guarantee:
Government will compensate to Project Company in cash if traffic falls

below a specified minimum level. This is the common type of support in
BOT project. In some case, besides the minimum guarantee, the contract
may specify ceiling traffic level too.
3.6.2.7.
Concession extensions:
Government may give right to Project Company to extend the concession

term if revenue falls below a specified level. This type of support give less
financial exposure to government, but also give less efficiency in easing
financial status of Project.
3.6.2.8.
Revenue enhancements:
Government normally enhances project revenue by limiting competition,

facilitating demands, or allowing development of ancillary facilities.
These eight types of government support have different features. Following
figure shows impact in project financing and government financial exposure
of each type of the supports and the government has benefit sharing from
the excess volume too.
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3.6.3. Insurance:
Insurance is a form of risk management primarily used to hedge against the risk of
contingent loss. It is defined as the equitable transfer of the risk of a loss, from
one entity to another, in exchange for a premium, and can be thought of a
guaranteed small loss to prevent a large, possibly devastating loss.
The term 'insurance' does not refer to the various warranties, liquidated damages,
indemnities, etc. which may be offered by contractors, operators, host
governments, or others. Rather, it means the contractual undertakings by thirdparty insurers to indemnify project participants for certain types of risk. Although
insurance cannot create the blanket protection from risk that many project
developers seem to feel it should, it is an essential part of any BOT project.
Some type of insurances used in BOT projects are:
1. Political risk insurance
2. Force majeure risk insurance
3.6.3.1.
Political Risk Insurance:
Multinational enterprises and banks face a number of risks when conducting

business overseas. Some of these risks can be removed or mitigated by
conducting due diligence on the parties involved and on the economic
viability of the proposed business. Other risks are harder for investors or
lenders to predict. These include some commercial risks and,
noncommercial- or political - risks. Political Risk Insurance (PRI) is a tool
for businesses to mitigate and manage risks arising from the adverse actions
- or inactions - of governments.
As a risk mitigation tool, PRI helps provide a more stable environment for
investments into developing countries, and to unlock better access to
finance. Political risk insurance is generally provided by various
multilateral agencies such as MIGA (Multilateral Investment Guarantee
Agency) & OPIC (Overseas private Investment Corporation).
1. MIGA (Multilateral Investment Guarantee Agency):
The Multilateral Investment Guarantee Agency (MIGA) is a member of the
World Bank Group. Its purpose is to promote foreign direct investment by
providing political risk insurance
(Guarantees) to investors and lenders, and by helping emerging economies
attract private investment. MIGA offers political risk insurance for projects
in a broad range of sectors in 147 developing member countries, covering
all regions of the world.
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Political risks covered under MIGA are:

1. Currency inconvertibility & transfer restriction.
2. Expropriation.
3. War and civil disturbance.
4. Breach of contract.
Terms of coverage:
MIGA prices to risk, and premium rates are decided on a per project basis.
MIGA provides coverage for up to 15 years (and possibly 20 years if
justified by the nature of the project).
Amount of coverage:
For equity investments, MIGA may guarantee up to 90 percent of the
investment, plus up to an additional 450 percent of the investment
contribution to cover earnings attributable to and retained in the investment.
For loans and loan guaranties, the agency generally offers up to 95 percent
of the principal (or higher as determined on a case-by-case basis), plus up to
an additional 135 percent of the principal to cover interest that accrues over
the term of the loan.
For technical assistance contracts and other contractual agreements, MIGA
may insure up to 90 percent of the total value of payments due under the
insured agreement (up to 95 percent in exceptional circumstances).
2. OPIC (Overseas private investment corporation):
The Overseas Private Investment Corporation (OPIC) is an agency of the
United States Government established in 1971 that helps U.S. businesses
invest overseas and promotes economic development in new and emerging
markets.
Through OPIC Political risk insurance is available only to U.S. investors,
contractors, exporters and financial institutions involved in international
transactions. Political risk insurance can cover currency inconvertibility,
expropriation and political violence, and is available for investments in new
ventures, expansions of existing enterprises, privatizations and acquisitions
with positive developmental benefits.
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Political risks covered under OPIC are:

1. Currency Inconvertibility
2. Expropriation
3. Political Violence
4. Standalone Terrorism
3.6.3.2.
Force Majeure Risk Insurance:
Force majeure risks represents the losses which are beyond control of the
parties to the project arising from the events such as fire, flood, earthquake,
war, riot & strikes, etc. some of the Force majeure risks can be mitigated by
covering them through insurance.
Some of the firms which provide insurance for Force majeure risks are:
1. New India Assurance
2. SERV (Swiss Export Risk Insurance)
3.7.
Conclusion:
Road projects developed on BOT basis are exposed to various kinds of risks. As a
nature it involves dealing with many parties, huge amount of money, and long period
of time, therefore it is said to be very risky. This present Chapter elaborates the
various risks involved, how these risks are allocated to various parties involved
mainly in between concessionaire & how these risks are mitigated. Following
Chapters contains the details of concession agreement & financial analysis of Road
projects.
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Post Graduate Program in Project Management

Assignment PGPM 14 (Infrastructure Development)

School Of Distance Education

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Stages of BOT Projects:............................................................................. 23

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Major Participants in BOT Projects:...........................................................25

Main Agreements in BOT Projects:.............................................................27

Supply Contract (Equipment/Material):....................................................29

Off- take Agreement:............................................................................. 29

Operation and Maintenance Contract (O & M Contract):............................29

Advantages & Disadvantages of BOT Project:...............................................29

Financing of BOT projects:...........................................................................30

Parties Involved in Project Financing:..........................................................32

Sponsors & investors:............................................................................ 33

Contractors (Construction / Operating Company):......................................33

Suppliers and Customers:.......................................................................33

Instruments Used in Project Financing:........................................................34

3. RISK INVOLVED IN BOT MODEL ROAD PROJECTS...................................36

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Risk Identification in BOT Infrastructure Projects:..............................................36

Pre- Construction risk:................................................................................. 38

Traffic & revenue risk:................................................................................. 39

Performance & operating risk:......................................................................39

Risk Mitigation Techniques:............................................................................. 44

Turnkey Construction contract:..................................................................45

Operation and Maintenance Contract:.........................................................45

Exchange rate guarantees:.........................................................................46

Grants and subordinated loans:..................................................................46

Minimum traffic guarantee:.......................................................................46

Political Risk Insurance:........................................................................... 47

Force Majeure Risk Insurance:...................................................................49

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There is a strong association between the availability of infrastructure

BOT (Build- Operate- Transfer):

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1.2. Need of Study:

1.3. Aim of Present Study:

1.4. Research Objective:

To study the BOT model in Public- Private Partnership mode of development in

To develop standard model for contractual & financial analysis of BOT

Brief introduction of infrastructure projects & its need.

Development of infrastructure projects through BOT & its main differences

To study the evaluation of BOT model in Highway projects

Post Graduate Program in Project Management

To study the financial aspects of BOT Highway projects and how to

Aim & Objectives

Infrastructure, meaning types, characteristics & other aspects.

Develop Contractual & Financial Analysis Model

Figure1.1: Flowchart for Methodology

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1.7. Literature Review

Post Graduate Program in Project Management

infrastructure privatization models. In Asia, the rise of concession projects began

1.8. Contribution of the Current Study to the Existing

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2.2. Types of Infrastructure:

Energy & Utility

Communication Healthcare facilities

Figure 2.1: Types of Infrastructure

Economic infrastructure consists of assets and services such as transport, utilities

Post Graduate Program in Project Management