Assignment
public private partnership 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 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.
public private partnership 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 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.
BOT projects are public
infrastructure projects which employ a particular form of structured financing.
The involvement of the
private sector in the development of infrastructure by way of BOT projects,
alternatively called BOO (build-own-operate) or BOT
(build-own-operate-transfer) is proving to be a challenging exercise. The lead
time of a project is very long, and associated up-front costs are significant.
Further, there are a number of complex issues which have yet to be resolved by
any of the infrastructure projects settled to date.
Such projects are complex
by virtue of the number of parties involved and the corresponding number of
contracts, which must all interlock. Furthermore, each party is dependent upon
the performance of not only its counterpart, but also the performance of all
parties to the project.
BOT projects are generally
structured on a project basis requiring all parties to share the risks of the
project. Project risk sharing is necessary because the sponsor, a joint venture
of one sort or another, will have a limited worth being substantially less than
the aggregate net worth of the equity parties.
The developing countries
see BOT as a way of reducing public sector borrowings, and at the same time
promoting direct foreign investments in their country’s infrastructure or
industrial projects.
The examples of the BOT
projects are power stations, Toll roads, Toll bridges and even pipeline system
for oil and gas. Over the last ten years, there has been an accelerating global
trend towards the execution of major infrastructure projects on a privatized
basis, it using infrastructure in its broadest sense to encompass civil
engineering, energy, telecommunications, process and resources projects. A
number of concession based legal structures have been rediscovered or
redeveloped as part of this trend, among which the BOT model is the best known.
These changes have been
driven by a combination of ideological and economic factors, most prominent
among which are the decline of orthodox socialist economic theories and the
inability of many countries to finance necessary infrastructure development out
of government funds.
The trend towards
privatized infrastructure is now well established across a broad range of
countries from the emerging economies of Asia to the newly reformed systems
within the former soviet bloc and established market economies of Western
Europe and North and South America. Within this broad movement towards the
private procurement of infrastructure, a number of more specific developments
area apparent.
Increasingly, contractors
are being asked to assume greater risk by taking equity in the projects,
arrange finance for owner and even collect toll fees or operate plants to pay
for the project loans. Indeed, it is the commercial and financial
considerations rather than the technical elements that are likely to be
determinants in a successful proposal for a BOT project. The major objectives
of the BOT scheme include:
i.
Development of infrastructure with financing from outside the budget
allocation, thereby promoting economic development without recourse to increase
in sovereign debt to the Government.
ii.
Risk transfer to private sector and better risk management, by exploring
the innovativeness and efficiency of the private sector.
iii.
Creation of new equity, by stimulation of investor interest BOT
infrastructure projects.
iv.
Establishment of comparative benchmark, to enable the government to
measure and hopeful enhance the efficiency of management of similar projects
implemented by government agencies.
Implementation of BOT
projects gives rise to a number of issues, which call for detailed
consideration in order to ensure the success of BOT projects. While all these
issues are important, the overriding consideration should be that a project
selected for implementation under the BOT scheme is should when subjected to an
economic analysis and that the project is ‘bankable’ with adequate potential
returns for the investors. The contractual arrangements should incorporate
innovative approaches to protect the public interest yet capitalizing on the
private sector initiative, resources and energies.
BOT is defined as the granting of a concession by
the government to a private promoter, known as concessionaire, who is
responsible for financing, constructing, operating and maintaining the facility
over the concession period before finally transferring the fully operational
facility to the government at no cost. In general terms, under the BOT model in
common usage worldwide, a government or government entity enters into an
agreement with a private sector company under which the company agrees to
finance, design and build a facility at its own cost, and is given a
concession, usually for a fixed period, to operate that facility and collect
tolls or other revenues from its operation before transferring the facility
back to the government at the end of the concession period. The intension is
that the company is to receive sufficient revenues during the operational phase
to service its debt incurred in designing and building the facility; to cover
its working capital and maintenance costs; to repay its equity investors; and
hopefully, also provide a responsible profit for its investors. In some
situations there may be no eventual transfer back to government, full
privatization.
Therefore, though BOT
projects, a government relocates the risks and rewards in the development of
large infrastructure projects to the private sector. BOT is effectively a means
of financing the construction of infrastructure and has been referred to as
financial engineering.
The five phase of a typical
BOT project are pre-investment, implementation, construction, operation and
transfer. The roles and responsibilities of the project sponsors at each phase
of the project can be as follows:
i.
As consultants to carry out the feasibility study during pre-investment
phase and engineering design during the implementation phase.
ii.
As project sponsors to negotiate favorable concession agreements from
the government and as project promoters to raise equity and borrow loans during
the implementation phase.
iii.
As contractors to built the facility, usually on a fixed price turnkey
basis, during the construction phase.
iv.
As operator and owner of the facility, using the project revenues to
retire the loans during the operation phase.
Thus the project sponsors
usually have to play number of roles in a BOT project. Sometimes this leads to
conflict of interest and place them in a paradoxical position.
CHARACTERISTIC OF BOT
PROJECTS
Compare to other industrial
and commercial developments, there is usually a longer construction period in a
BOT project. A long construction period combined with the need to capitalize
interest until completion results in high financing costs. The end product will
usually have a long usable life, generally measured in tens or even hundreds of
years (e.g. a tunnel) and commonly will have relatively low operation and
maintenance costs.
Often the investors have a
relatively large exposure to project risks. It has been said that a BOT project
may be regarded as a high-risk construction project followed by a low risk
utility project.
As a result of the long
construction period and high financing costs, returns to the investors on the
project are very susceptible to delay in the completion of the project. This
will influence the form of the construction contract used, with emphasis
usually being placed on speed of construction to contain financial incentives
for early completion by the contractor. Special features of BOT projects:
i.
The BOT scheme is a very complex and risky exercise, both for the
government and the private sector.
ii.
It carries high financing costs compared to public sector funding.
iii.
It involves some trade-offs between the society and private profits.
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 sometimes referred to as the "concession"
period.
Traditionally, such
projects provide for the infrastructure to be transferred to the government at
the end of the concession period.
Most project finance
structures are complex. The risks in the project are spread between the various
parties; each risk is usually assumed by the party which can most efficiently
and cost-effectively control or handle it.
BOT is a type of project
financing. The hallmarks of project financing are:
i.
The lenders to the project look
primarily at the earnings of the project as the source from which loan
repayments will be made. Their credit assessment is based on the project, not
on the credit worthiness of the borrowing entity.
ii.
The security taken by the lenders is largely confined to the project
assets. As such, project financing is often referred to as "limited
recourse" financing because lenders are given only a limited recourse
against the borrower.
Once
the project's risks are identified, the likelihood of their occurrence assessed
and their impact on the project determined, the sponsor must allocate those
risks. Briefly, its options are to absorb the risk, lay off the risk with third
parties, such as insurers, or allocate the risk among contractors and lenders.
The sponsor will be acting, more often than not, on behalf of a sponsor at a
time when the equity participants are unknown. Nevertheless, each of the
participants in the project must be satisfied with the risk allocation, the
creditworthiness of the risk taker and the reward that flows to the party
taking the risk. In this respect, each party takes a quasi equity risk in the
project.
CONTRACTUAL
STRUCTURE OF BOT PROJECTS
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.
The
chart below shows the contractual structure of a typical BOT Project or
Concession, including the lending agreements, the shareholder's agreement
between the Project company shareholders and the subcontracts of the operating
contract and the construction contract, which will typically be between the
Project Company and a member of the project company consortium.
Each
project will involve some variation of this contractual structure depending on
its particular requirements: not all BOT projects will require a guaranteed
supply of input, therefore a fuel/ input supply agreement may not be necessary.
The payment stream may be in part or completely through tariffs from the
general public, rather than from an off take purchaser. This model is useful in
considering the parties to a BOT project and their functions, as well as some
of the particular considerations commonly encountered in such projects.
THE
MAIN PARTIES IN THE BOT MODEL AND CERTAIN OF THEIR FUNCTIONS ARE AS FOLLOWS:
1.
GOVERNMENT
A government department or statutory authority is a
pivotal party. It will:
- grant to the sponsor the "concession",
that is the right to build, own and operate the facility,
- grant a long term lease of or sell the site to
the sponsor
- Often acquire most or all of the service provided
by the facility.
The government's co-operation is critical in large
projects. It may be required to assist in obtaining the necessary approvals,
authorizations and consents for the construction and operation of the project.
It may also be required to provide comfort that the agency acquiring services
from the facility will be in a position to honors its financial obligations.
The government agency is normally the primary party.
It will initiate the project, conduct the tendering
process and evaluation of tenderers, and will grant the sponsor the concession,
and where necessary, the off take agreement. The power of a government agency
to enter into the documentation associated with an infrastructure project and
perform its obligations there under, and the capacity in which that body enters
the documents (agent of the Crown or otherwise) is a critical issue. This is
examined in detail below.
Examples of the powers required by the authority in a
typical BOT project are:
- To contract with another person for that person
to carry out one or more of the authority's functions (e.g., the
construction and operation of the relevant infrastructure);
- To make payments to that person in consideration
of the services provided;
- To resume land and then make that land
"available" to that person;
- To lease or sell land to that person together
with providing easements and rights of way for access;
- To provide undertakings, indemnities or
guarantees to financiers and others in relation to its or other persons'
liabilities.
2.
LENDERS
The
lenders usually comprise banks and certain other financial institutions who are
empowered to lend money or extend credit under relevant legislation. Many
considerations will determine the currency of the loans and whether the loans
are made available by onshore of offshore lenders. Project expenditure will be
largely in the local currency, although a sizeable proportion may be in foreign
currencies. For example, many construction materials may be imported and paid
for in foreign currency.
The
lender is the party, usually a consortium of interested groups (typically
including a construction group, an operator, a financing institution, and other
various groups) which, in response to the invitation by the Government
Department, prepares the proposal to construct, operate, and finance, the
particular project.
The
lender may take the form of a company, a partnership, a limited partnership, a
unit trust or an unincorporated joint venture. The investors in the lender are
often referred to as the "equity investors" or the "equity
providers". It is not unusual for equity investment to be approximately
20% of the cost of the project. Equity funds are, however, expensive compared
to the cost of debt. An equity investor may require a return of 20% to 25% in
today's market to compensate it for assuming the major risks inherent in an
infrastructure project. As a result it may be cost-efficient for equity to be
much less than 20% of the project cost.
The
lender may be a company, partnership, a limited partnership, a unit trust, an
unincorporated joint venture or a combination of one or more.
3.
PROJECT COMPANY
The
project company is usually a single purpose company and is the grantee of the
concession. It is responsible for securing finance, procuring the design and
construction of the project, the operation of the project during the concession
period and the eventual transfer back to government. the project company is
also responsible for serving debt incurred in the implementation of the
project.
The
construction company may also be one of the sponsors. It will take construction
and completion risks, that is, the risk of completing the project on time,
within budget and to specifications. These can be sizeable risks and the
lenders will wish to see a construction company with a balance sheet of
sufficient size and strength with access to capital that gives real substance
to its completion guarantee.
Often
the general design of the infrastructure is dictated by the experienced
utility. The construction risk is then taken by the construction company.
Further, depending upon the nature of the infrastructure, the commissioning
risk is often allocated to the construction company. The sponsor will aim to
require the construction company to enter into a fixed price fixed time
construction contract.
4.
INVESTORS
There are generally two types of investor in the
project company. One type is a project sponsor whose participation in the
project is not restricted to their role as investor. Other project sponsor are
long term investor whose only interest in the project is as an investment and
who will often take little role in the management of the project company.
In a large project there is likely to be a syndicate
of banks providing the debt funds to the sponsor. The banks will require a
first security over the infrastructure created. The same or different banks
will often provide a stand-by loan facility for any cost overruns not covered
by the construction contract.
5.
CONSULTANTS
A wide variety of consultants will be involved in BOT
projects including financial consultants, engineers and technical consultants,
insurance advisers and legal advisors. Merchant banks acting as financial
advisers play a large part in structuring BOT projects. The finance advisor
should advisor adviser should of should of course be familiar with the host
country and its capital market and financial institutions as well as having
experience in the area of privatized infrastructure work generally.
BOT project, independent technical consultants are
often employed to monitor the works. Often the independent consultants will be
employed by the project company but will owe primary duties to the government.
Where the operation of the privatized facility is
complex, it is preferable to sub contract the work to an operator with previous
experience in the particular area of operations. The government, lenders and
investors may prefer the operator to be one of the project sponsors and to be
committed as a share holder to the project for a certain minimum period. The
project company itself undertakes the operations of the facility.
Users supply the revenue for the project and in the
case of bridges, tunnels and highways will often be the toll-paying public.
Where the facility has a product, e.g. a power station, the users may be the
host government, utility companies or other product purchasers. In these cases,
off-take agreements are often negotiated as an essential element of the
contractual structure of the overall project. These off-takes agreements will
often be on a “take-and-pay” or “take-or-pay” basis.
No comments:
Post a Comment