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BOT-Projects in Asia

Impact Study of an Efficient Risk Management during Build-Operate-Transfer Projects in the Infrastructure Sector

Diplomarbeit 2006 107 Seiten

BWL - Beschaffung, Produktion, Logistik


Table of Contents


Table of Acronyms and Abbreviations

Table of Figures

1. Introduction
1.1 Motivation of the Thesis
1.2 Methodology and Containment of the Study

2. Private Participation in Infrastructure
2.1 Private Participation in Asia
2.2 Public Infrastructure
2.2.1 Transport Sector in Asia
2.2.2 Railways Segment in Asia
2.3 Forms of Private Participation

3. BOT Projects
3.1 General Definitions of BOT
3.2 Parties Involved in a BOT Project
3.2.1 Government Agency
3.2.2 Sponsors
3.2.3 Lenders
3.2.4 Multilateral, Bilateral and Export Credit Agencies
3.2.5 Project Company
3.2.6 Construction Contractor
3.2.7 Operation and Maintenance Contractor
3.2.8 Offtake Purchaser
3.2.9 Input Supplier
3.3 The Contractual Framework
3.3.1 Concession Agreement
3.3.2 Shareholders’ Agreement
3.3.3 Lending agreements
3.3.4 Construction Contract
3.3.5 Operation and Maintenance Agreement
3.3.6 Offtake Purchase Agreement
3.3.7 Input Supply Agreement
3.4 Phases of a BOT Project

4. Tendering Procedures
4.1 One-Stage Bidding Processes
4.2 Two-Stage Bidding Processes
4.3 Bid approaches
4.4 Issues Specific to Tender Procedures
4.4.1 Bid Bonds
4.4.2 Confidentiality of Intellectual Property
4.4.3 Competition during the Bid
4.4.4 Lack of Information

5. Project Finance
5.1 Typical Characteristics and Features
5.1.1 Cash Flow Related Lending
5.1.2 Risk Sharing
5.1.3 Limitation of Liability
5.1.4 Off Balance Sheet Financing
5.2 Financing Instruments
5.2.1 Project Finance-Based Debt Commercial Bank Loan Bond Finance Mezzanine Finance
5.2.2 Equity
5.2.3 Other Sources Value Capture Project Leasing
5.3 Finance Structure

6. Risk Management
6.1 Risk Identification
6.1.1 Technology Risk
6.1.2 Completion Risk
6.1.3 Sales Risk
6.1.4 Financing Risks
6.1.5 Input Supply Risk
6.1.6 Operational and Management Risks
6.1.7 Political Risk
6.1.8 Legal Risks
6.1.9 Environmental Risk
6.1.10 Force-Majeure Risks
6.2 Risk Quantification
6.2.1 Static Risk Quantification Techniques
6.2.2 Dynamic Risk Quantification Techniques
6.3 Risk Reduction
6.4 Risk Spreading
6.5 Further Risk Allocation
6.5.1 Guarantees
6.5.2 Liquidated Damages and Indemnity Obligations
6.5.3 Insurances
6.5.4 Derivative Instruments
6.6 Risk Management Process
6.7 Risk Efficiency

7. Summary

8. Conclusion

Table of Enclosures


List of References

Declaration of Non-Plagiarism / Ehrenwörtliche Erklärung

Table of Acronyms and Abbreviations

illustration not visible in this excerpt

Table of Figures

Figure 1 Annual Investment in Infrastructure Projects with Private Participation in Developing Countries

Figure 2 Annual Investment in Infrastructure Projects with Private Participation in East Asia and Pacific, and South Asia

Figure 3 Sectors and Segments of Infrastructure

Figure 4 Investment in Infrastructure Projects with Private Participation in Developing Countries by Sector 1990 -

Figure 5 Cumulative Investment in Transport Projects by Sector in East Asia and Pacific and in South Asia, 1990 -

Figure 6 Cumulative Investment in Transport Projects in East Asia and Pacific and in South Asia by Type, 1990 -

Figure 7 Contractual Structure for a BOT Project

Figure 8 Phases of a BOT Project

Figure 9 Simplified Cashflow Calculation Formula

Figure 10 Schema of Project Risks

Figure 11 Cashflow Ratios

Figure 12 Cashflow Scenarios

Figure 13 Risk Management Process


I would – at this point – like to include my acknowledgments. First and foremost, I would like to thank Mr. H.K. Wang, the Vice President of Transportation Systems Taiwan, for his support and the opportunity to write this thesis.

I would also like to thank the whole Transportation Systems team for providing me with information for this interesting topic. My special thanks go to Paul Shih, Arthur Truman, Thomas Leu and, last but not least, Ms. Menni Ho.

Spending a period studying and living overseas is a great challenge. I would like to thank my friends back home, and especially my boyfriend Florian Meilinger for being by my side even though there were 10.000 miles between us.

1. Introduction

1.1 Motivation of the Thesis

The rapidly developing economies in Asia are undergoing unprecedented growth. This explosive development has placed incomparable demands on the existing infrastructure in many countries. Governments struggle with the challenge of providing modern, efficient, and affordable infrastructure services for their people; finding it difficult to finance what are often multimillion dollar projects on their own. Involving the private sector in the financing and operation of infrastructure promises several benefits for both parties.[1]

“With a share of over eleven percent in German foreign trade, exports to Asia are – in terms of volume – now two percent higher than those to the USA. >…< “Many German companies have taken on public private partnerships as a form of cooperation and thus play a part in the sustainable development of the Asian economies.”[2] To date the most common sub-type of private participation in infrastructure is the BOT (Build-Operate-Transfer) model, where a project company finances and constructs new infrastructure and operates that infrastructure over a long-term period, before it is transferred back to the government. But despite the long history of projects of this type, only a few are very successful and usually mean more costs than income to the companies.[3]

Eurotrain, a joint venture between rail giants Alstom and Siemens, proved in May 1998 it was ready to build Taiwan’s US$ 14 billion high-speed rail (BOT) project, with a successful test-run of its integrated train system in Germany. The only problem was that after at least a two-year effort, the Taiwan High Speed Rail Corporation (THSRC) suddenly decided to give the core contracts to the Japanese Shinkansen Consortium. THSRC has yet to explain why Eurotrain was not given a chance to match Shinkansen’s offer. De facto ambassadors from Germany, France and even the CEO’s of the companies met with THSRC’s chairwoman Nita Ing, who failed to provide any explanation whatsoever for this change of plan.[4]

BOT projects are extensive in nature, with the companies therefore always finding themselves in international competition and/or having to forge global partnerships to get the project done. They have to be aware of every single potential local and global risk which could threaten the whole project; not only to ensure that the project is won, but also to successfully complete it.

For huge companies, there is often the difficulty that risks are misjudged, meaning that projects are either canceled completely or, in case of overestimated risks, the bidding price is much higher than the competitors, which ultimately both lead to a loss of image and references.

On the other hand, there are more than enough examples of risks being severely underestimated, with the project turning out to be absolutely unprofitable and companies often have to face long and cost-intensive legal disputes[5]. This turns especially fatal when construction companies like Siemens are also under the sponsors/investors of the project.

Within most companies, there are clearly differences in the perception of the risks. The goal of this thesis is to provide a better understanding of the most important risks during Build–Operate–Transfer Projects in Asia.

1.2 Methodology and Containment of the Study

Due to the specific station of the authoress in Taiwan and the wide range of the umbrella term “infrastructure”, this study will concentrate on specific examples and statistics in Asia with specific reference to the subsector “transport” and the segment “railways” therein, while at the same time providing enough information to also offer a general overview of the other sectors.

This dissertation looks first at private participation in infrastructure. Chapter 2 introduces the idea of private participation and the development in Asia as well as the different forms of participation and the sectors of infrastructure. The researched form of private participation in this dissertation is the Build-Operate-Transfer model. This and the relationship between the parties to a BOT project and the relevant documents are discussed in Chapter 3. Tendering procedures are reviewed in Chapter 4 and Chapter 5 discusses issues specific to financing a project and its instruments. The emphasis of this dissertation on risk management is discussed in Chapter 6, with a focus on identification, quantification, reduction and allocation of risks.

2. Private Participation in Infrastructure

The coverage and quality of a country’s infrastructure plays a vital part in economic growth. From the 1950s until the 1990s, most developing countries relied on public sector monopolies to deliver electricity, telecommunications, transport infrastructure, and water and sewerage services. Progress in expanding service coverage has been slow. An estimated 1.2 billion people in the developing world have no access to electricity more than 1 billion lack access to clean water, and nearly 1.2 billion are without adequate sanitation. Moreover, inefficiency has been high. Technical inefficiencies in roads, railways, power and water alone caused losses estimated at US$ 55 billion a year in the early 1990s – equivalent to 1% of the GDP of all developing countries, a quarter of their annual investment in infrastructure, and twice the annual development finance for infrastructure in the developing world.[6]

Disenchantment with past approaches to providing infrastructure services, coupled with tightening budget constraints, led governments to explore how to best harness the benefits of private participation. In doing so, governments also reexamined their own role and are seeking to transform it – moving away from being the exclusive financiers, managers, and operators of infrastructure to becoming facilitators and regulators of services provided by private firms.

All of this launched a trend of liberalizing and privatizing infrastructure, beginning in a few countries in the 1980s. According to the World Bank’s Private Participation in Infrastructure (PPI) Project Database[7], 26 developing countries awarded 72 infrastructure projects with private participation in 1984 – 89, attracting almost US$ 19 billion in investment commitments. In 1990 – 2001 developing countries transferred the operation risk for almost 2,500 infrastructure projects to the private sector, attracting investment commitments of more than US$ 750 billion. Annual allocation is shown below in Figure 1. Investment commitments for
infrastructure declined in the wake of the East Asian financial crisis[8] and subsequent crises in the developing world, starting in September 1997.

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Figure 1 Annual Investment in Infrastructure Projects with Private Participation in Developing Countries [9]

Those projects were implemented under schemes ranging from management contracts to divestitures to greenfield[10] facilities under build-operate-own (BOO) contracts, BOT contracts, or merchant facilities.[11]

In 2004 developing countries saw investment flows to infrastructure projects with private participation grow for the first time since 2000. Growth was driven by just one sector: telecommunications. Investment flows to other infrastructure sectors fell by 20 percent.[12]

2.1 Private Participation in Asia

East Asia and Pacific, and South Asia together attracted more than US$ 250 billion in investment commitments for infrastructure projects with private participation. The annual allocation is shown below in Figure 2.

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Figure 2 Annual Investment in Infrastructure Projects with Private Participation in East Asia and Pacific, and South Asia [13]

Private activity in the region began early with major programs in Malaysia and the Philippines in the second half of the 1980s, and grew rapidly in the 1990s. In 1997, investment declined sharply as a result of the before-mentioned financial crisis in the region. The largest economies in the area – China, Malaysia, Thailand, Korea, the Philippines, Indonesia and India – drew the most investment in PPI projects. The region focused on creating new assets through greenfield projects that served or complemented investments by public sector providers.

In both regions, 978 infrastructure projects with private participation reached final closure between 1990 and 2004. Energy and Telecom were the most active sectors and greenfield projects were the most frequent form of private participation in these countries. In East Asia, some of those deals turned sour. 40 projects representing 12% of investment were either cancelled or running into problems by 2004.[14]

Much of Asia continues to grow rapidly, driven to a considerable extent by China. Urbanization is proceeding at a rapid pace. Demand for infrastructure services is increasing massively, particularly in cities. Much of the demand comes from the newly-urbanized poor. Infrastructure has to meet the needs of this population.

2.2 Public Infrastructure

“The availability of infrastructure facilities is imperative for the overall development of any country. Infrastructure is but one part of the development challenge, but its impacts are among the most important.”[15]

Yet a general definition for the term “infrastructure” is still missing. This interpretation should transcribe the fact, that the benefits of infrastructure are the key to the economic incentives of a national economy[16]: to promote economic growth, to share the benefits of growth with poorer groups and communities, and to connect countries within the region and with the rest of the world[17].

The term “infrastructure” first appeared in the 1960s and had economic-political reference. It is actually a military term of the NATO, which described fixed military and transport facilities.

Today, infrastructure facilities can be divided into the following main sectors and segments as shown in Figure 3 below:

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Figure 3 Sectors and Segments of Infrastructure [18]

But private participation has also been seen in developing single buildings, for example, the 101 Tower in Taipei. Currently the tallest building in the world, it was financed with a BOT model and is a very successful project.[19]

Figure 4 below shows investment amounts by sector in the past years.

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Figure 4 Investment in Infrastructure Projects with Private Participation in Developing Countries by Sector 1990 - 2004 [20]

Telecommunications led the growth of private infrastructure in developing countries, which is confirmed also in 2004. The sector accounted for 70% of annual investment flows. This outcome is not surprising; around the world, mobile phone firms outperform other utilities in financial returns, service provision, and cost-recovering tariffs[21].

Energy attracted the second largest share of investment. Most of the investment occurred between 1994 and 1997, during the boom in greenfield projects for independent power producers implemented through BOO or BOT contracts.

Private activity has lagged in transport and in water and sewerage, where technological change has been less pronounced, political barriers to reform can be strong. Transport accounted for 18% of the cumulative investment from 1990 to 2004. Much of this share went to toll roads. Countries introducing private participation in transport have focused on transferring existing assets through concessions and constructing toll roads through greenfield projects.[22]

2.2.1 Transport Sector in Asia

Transportation projects, including airports, seaports, roads, railways, tunnels and bridges, have traditionally been financed by a combination of private and public funding. Below in Figure 5, the cumulative investment in the four main segments is shown.

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Figure 5 Cumulative Investment in Transport Projects by Sector in East Asia and Pacific and in South Asia, 1990 - 2004 [23]

Private activity in transport started in the 1980s with mainly tollroad projects in Malaysia, Indonesia and Thailand[24].

The trend, of governments to privatize new and already existing transportation schemes, has developed largely as a result of the tremendous expense the public sector has incurred in subsidizing transportation operations. Cost concern in the public sector is aggravated by the need to increase capacity in the near future. Developing economies have a particular need for increased capacity in their transportation services, yet the costs of such increases are prohibitive.[25]

2.2.2 Railways Segment in Asia

Private investment in and financing of railways has had a long and illustrious history and a number of different structures and models are available for private sector involvement in rail projects. Historically the most common type has been concessions, but this is giving way to greenfield models.[26]

One of the primary differences between a BOT railway project and, for example, a BOT power project is the absence of a universal offtake agreement (discussed in Chapter 3.3.6). Although commercial carriers may make contracts with the railway operator for long-term rail access, such contracts will generally not cover the entire period of the concession.

Further, just as with roadway and bridge projects, there is no guarantee that once the project has been completed private passengers will use the service. Even with market testing and traffic forecasts, the project company can be left bearing the majority of the project’s market risk. The traffic forecast in particular is one of the major weaknesses of transport projects. Such forecasts have proven to be unreliable in the past, often failing to take account of demographic changes, shift in demand, competition, cost increase and willingness to pay.[27]

This also happened to be the main failure on the Bangkok Transit System (BTS) in Thailand. The Skytrain is among the best technical local traffic solutions practiced today in the world, but the revenue from ticket fares is to date still not enough to repay the debts. To attract the BTS the government even granted cheaper fares, making the situation worse.

Looking at a number of countries in this region to assess where the most likely new rail projects will occur in the next few years suggests that a return to the heady days of rail investment in the 1980s and 1990s is unlikely. But there is no doubt that rail, particularly urban rail, will continue to play an important role again, especially in China.

Malaysia has seen major investment in both mainline and urban rail systems during the past 12 to 15 years, but this may not continue in the foreseeable future because the government will concentrate on expanding the highways, and will place less emphasis on large infrastructure projects.

The picture in Thailand, where national and urban rail developments are at the planning stage, if not actually underway, is more encouraging. The State Railway of Thailand (SRT) will participate in some exciting developments of the Bangkok suburban network, the first being the airport railway to serve the Second Bangkok International Airport Suvarnabhumi[28] located about 30km east of the city. Design of the railway has been undertaken by Japanese consultants and bids for the construction contract were opened late 2004, with the Sino-Thai/Siemens group winning the contract even though the contentious issue of track gauge almost led to a Japanese victory. Of even more interest is the planning which is underway for extending both urban rail systems.

Singapore has been at the heart of rail development in Asia for more than 20 years, but given the slowdown of the economy in Singapore since 1997 - again due to the Asian crisis, the government consciously took a more relaxed view to the early completion of major projects.

To date, the Philippines have completed a couple of projects under the so-called Line 1 extension to Cavite which was the subject of a pre-emptive BOT bid by SNC Lavalin, Canada. This bid is now being subjected to the “Swiss Challenge” aspect of the Philippines BOT law under which other bidders have an opportunity to offer the government an alternative proposal.

The largest of the south-east Asian rail systems, Indonesia, fulfills a significant transport role. Despite limited funding, the Indonesian rail system has quietly, but effectively, undertaken considerable infrastructure upgrading over the past few years and is poised to build on that with further major investments.[29]

2.3 Forms of Private Participation

The term Public-Private Partnership (PPP) has no precise meaning but is used to describe many forms of arrangement between the public and private sectors for providing public services.

The most important are:

Management and Lease Contracts:

A private entity takes over the management of a state-owned enterprise for a fixed period while ownership and investment decisions remain with the state.

1) Management contract:

The government pays a private operator to manage the facility. The operating risk remains with the government.

2) Lease contract:

The government leases the asset to a private operator for a fee. The private operator takes on the operational risk.


A private entity takes over the management of a state-owned enterprise for a given period during which it also assumes a significant investment risk. Every type described below has in common that the private sponsor operates and maintains the facility at its own risk for the contract period.

1) ROT (Rehabilitate, operate, and transfer)

A private sponsor rehabilitates an existing facility.

2) RLT (Rehabilitate, lease or rent, and transfer)

A private sponsor rehabilitates an existing facility at its own risk and leases or rents the facility from the government owner.

3) BROT (Build, rehabilitate, operate and transfer)

A private developer builds an add-on to an existing facility or completes a partially-built facility and rehabilitates existing assets.

Greenfield Projects:

A private entity or a public-private joint venture builds and operates a new facility for the period specified in the project contract. The facility may return to the public sector at the end of the concession period. Every type described below (except for merchant) has in common that the government usually provides revenue guarantees through long-term take-or-pay contracts for bulk supply facilities or minimum traffic revenue guarantees.

1) BLO, BLOT (Build, lease and own or Build, lease, own and transfer)

A private sponsor builds a new facility largely at its own risk, transfers ownership to the government, leases the facility from the government and operates it at its own risk, then receives full ownership of the facility at the end of the concession period.

2) BOT, BOOT (Build, operate, transfer or Build, own, operate, transfer)

A private sponsor builds a new facility at its own risk, owns and operates the facility at its own risk, then transfers ownership of the facility to the government at the end of the concession period.

3) BOO (Build, own and operate)

A private sponsor builds a new facility at its own risk, then owns and operates the facility at its own risk.

4) Merchant

A private sponsor builds a new facility in a liberalized market in which the government provides no revenue guarantees. The private developer assumes construction, operating, and market risks for the project (for example, a merchant power plant).

In addition to these common greenfield projects, there are some more uncommon versions like BOD (Build, operate, deliver), BOL (Build, operate, lease), BOOST (Build, own, operate, subsidise, transfer), BRT (Build, rent, transfer), DBOM (Design, build, operate, maintain), DBOT (Design, build operate, transfer) and FBOOT (Finance, build, own, operate, transfer)[30]. But all of these versions are only possible variations of the four main greenfield projects mentioned above.


A private entity buys an equity stake in a state-owned enterprise through an asset sale, public offering, or mass privatization program.

1) Full

The government transfers 100% of the equity in the state-owned company to private entities (operator, institutional investors and the like).

2) Partial

The government transfers part of the equity in the state-owned company to private entities (operator, institutional investors and the like). The private stake may or may not imply private management of the facility.[31]

The boundaries between all these categories are not always clear, and some projects have features of more than one category.

In the 1990s the most common type of private participation varied across sectors and regions. But in the past few years, greenfield projects (specifically sub-types BOT and BOOT) have become the most common type across infrastructure sectors[32].

Figure 6 below shows investment by type.

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Figure 6 Cumulative Investment in Transport Projects in East Asia and Pacific and in South Asia by Type, 1990 - 2004 [33]

3. BOT Projects

BOT projects are public infrastructure projects which employ a particular form of structured financing. In fact, BOT is nothing other than a special form of financing for very complex and huge projects.

The involvement of the private sector in the development of infrastructure in Asia by way of BOT projects is proving to be a challenging exercise. The lead time for a project is very long, and associated upfront costs are significant. 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 of the performance of all parties to the project.[34]

3.1 General Definitions of BOT

BOT models are very varied and although nearly every project is unique (with respect to payments, financial accounting, property relations and other contractual arrangements), they have significant elements in common.

“In a BOT arrangement, the private sector designs and builds the infrastructure, finances its construction and operates and maintains it over a period, often as long as 20 or 30 years. This period is mostly 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.”[35]

The theory of BOT can be described as follows:

In a typical BOT project the public sector grantor grants a concession to a private company to develop and operate what would traditionally be a public sector project. This private company, or project company, obtains financing for the project, and procures the design and construction of the works and operates the facility during the concession period.[36]

Project company shareholders will often include companies with construction and/or operation experience, and with input supply and offtake purchase capabilities. It is also essential to include shareholders with experience in managing the appropriate type of projects, such as working with diverse and multicultural partners, given the particular risks specific to these aspects of a BOT project. The project company will then co-ordinate the construction and operation of the project in accordance with the requirements of the concession agreement.

The operation of the facility will generate revenues either from end-users or an offtake purchaser who compensates the project company for delivery of the project output or provision of the project service. The revenues generated from the operation phase are intended to cover operating costs, maintenance, repayment of debt principal (which represents a significant portion of development and construction costs), financing costs (including interest and fees), and a return for the shareholders.

A BOT structure is, in itself, a structure that involves non-recourse or limited financing, and will, therefore, bear any residual risk along with the project company and its shareholders. That is, financing where lenders are repaid solely from the cash flow generated by the project and whose only security is in that revenue and in the assets of the projects.

Accordingly, most international project financings, especially in the emerging markets of Asia, tend to be financed on a basis whereby the lender’s risks are mitigated by incorporating a number of back-up or secondary means of credit support provided by the host government, sponsors, purchasers or other interested third parties, while still relying primarily on the project company’s cash flow to service the debt.[37]

3.2 Parties Involved in a BOT Project

A number of parties will be involved in a BOT project. Each may have different interests, levels of sophistication and available resources.

The major parties will usually include:

3.2.1 Government Agency

The government agency (also known as grantor or host government) 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 (the right to build and operate the facility), and where necessary, the offtake agreement.[38]

The government’s co-operation is critical in large projects. It may be required to assist on 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 honour its financial obligations.

A critical issue to consider here is whether the government authority has the appropriate statutory power to enter into each of the project documents to which it is a party and to perform its obligations thereunder. If the authority does not have the requisite powers, its actions will be ultra vires[39] and, therefore, void. To determine whether a government authority’s actions are intra vires or ultra vires, it is necessary to examine the legislation under which the authority is constituted. If the legislation does not give the authority the power to enter into and carry out the project, the legislation will need to be amended by the government so that the project can be carried out.

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
- to make payments to that person in consideration of the services provided
- to provide undertakings, indemnities or guarantees to financiers and others in relation to its or other persons’ liabilities.[40]

Many of the projects proposed in Asia, for example in China, involve government authorities committing assets, such as land (important points are to resume land and then to make that land “available”; to lease or sell land together with providing easements and rights of way for access), to the project company as opposed to actually subscribing for shares. Care must be taken, especially in controlled economies, to ensure that the authority involved actually has title to the assets being transferred to the project company. If not, the appropriated government authorities will have to be approached.[41]

3.2.2 Sponsors

The sponsor (or shareholders) is usually a consortium of interested groups (typically including a construction group, an operator, a financing institution, and other various groups) and is the party which, in response to the invitation by the government, prepares the proposal to construct, operate, and finance, the particular project.

They are invariably investors in the equity of the project company, and they may be debt providers or guarantors of aspects of the project company’s performance. It is not unusual for equity investment to cover about 20% of the project’s costs. Equity funds are 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 to an infrastructure project. As a result, it may be cost efficient for equity to be much less than 20% of the project cost.[42]

The support provided by project sponsors varies from project to project and includes comfort letters (which is not particularly common in projects in Asia), cash injection undertakings, both pre- and post-completion, as well as providing completion support through letters of credit. Investors often wish to perform their own due diligence before providing financing.[43]

3.2.3 Lenders

Due to the sheer scale of the project, financing a BOT will usually involve a syndicate of banks and, from within that syndicate, an arranging bank or banks which will take the lead role in negotiating the project and finance documents. The profile of a lender group can range from one project to the next.[44] The syndicate will most likely include banks from the host country, particularly if there are restrictions on foreign banks taking security for project assets.

As the financing of BOT structure projects is a form of project finance, the syndicate will need to review of all core project documents to assess risks allocation and any consequences this might have on its credit approval. These will often be evaluated in conjunction with independent experts who are not directly involved with the project. The most prudent approach would seem to draw up documentation in consultation with the lending institutions, if at all possible, particularly since issues such as their assignability and the underlying rights of termination will be of importance to the lenders. Apart from satisfying itself with regard to the general risk apportionment, one of the key concerns the lender might have will be to ensure that it can take effective security over all or the principal assets of the project.

There has been some difficulty in attracting debt financiers to infrastructure projects, mainly because of the long term nature of the repayment of the bank debt, which may have a repayment term of up to 20 years[45].

3.2.4 Multilateral, Bilateral and Export Credit Agencies

These international, largely political, entities are often involved in BOT projects and can have an important impact on the risk allocation and financing used in a project. Experience has shown that for projects in which certain development finance institutions and bilateral institutions are participants, particularly the World Bank and its associate the International Finance Corporation, there is less likelihood of payment default, whether for commercial or political reasons.[46]

When involved in such projects, these agencies will place strict requirements on the project structure and lending arrangements. Lenders anxious to benefit from such involvement will make it a priority to ensure that these requirements are satisfied. An example would be the procurement process required by the World Bank group and adopted by a number of other organizations. The World Bank group requires public tender, prefers the use of a pre-qualification mechanism and publishes a series of guidance documents outlining in relative detail its requirements for project bidding.[47]

Numerous projects in the emerging markets of Asia are co-financed by the World Bank or its private sector lending arm, the International Finance Corporation (IFC), or by regional development agencies, for instance, the Asian Development Bank (ADB)[48].

Multilateral Agencies (MLAs):

MLAs represent a grouping of nations, and are owned and funded by their members. Some MLAs are mandated to finance projects in specific geographical regions, such as the ADB only for Asia. MLAs can participate in projects through equity investment (usually quite small), by providing guarantees or insurance or by providing loans. An MLA can provide financing from its own funds or act as a conduit for funding from commercial banks.

As a representative of several countries, the MLA will want to encourage equal treatment, transparency and free trade between its member countries. Therefore, MLAs will often require that tenders for the project contracts are on an internationally competitive basis.

Some of the more active MLAs in international project finance are the IFC, the ADB, the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB).

Certain international organizations specialize in providing political risk coverage for projects, such as the Multilateral Investment Guarantee Agency (MIGA) of the World Bank. Unlike the above-mentioned MLAs, these organizations will not provide funding for a project.[49]

Bilateral Agencies (BLAs):

BLAs are similar to MLAs in purpose and approach, but are funded by only one nation. They are generally mandated to provide support to specific developing countries, in the form of debt or equity investment.

Export Credit Agencies (ECAs):

ECAs also play a very important role in the financing of infrastructure projects in Asia. An ECA is an agency attached to a given country and can be an arm or a department of the government of that country. Its basic role is to encourage and assist foreign investment and the export of goods and services by its nationals. The ECA can provide financing, insurance or guarantees for the goods and services exported by its source-country nationals. This financing is often extensive: up to 85% of the total price of the export.

ECAs may provide direct lending, or guarantee or insure repayment of commercial lender financing in case of political risk and/or commercial risk. The political risk borne by ECAs will generally include political violence, war, hostilities, expropriation and currency transfer risk. In certain cases, ECAs provide extended risk cover such as change in law, changes in taxation or breach of a government guarantee.[50]

The more active ECAs in BOT projects include the Export-Import Bank of the United States, the Export Credits Guarantee Department (ECGD) of the United Kingdom, the Compagnie Francaise d’Assurance pour le Commerce Exterieur (COFACE) of France, Hermes of Germany, the Servici Assicurativi per il Commercio Estero (SACE) of Italy and the Japan Bank for International Cooperation (JBIC).

3.2.5 Project Company

The sponsors will put together a bid in an effort to win the project. Once selected, they will create a Special Purpose Vehicle (SPV) which is an entity that will contract with the government to design, construct, operate, maintain and transfer the project.

The SPV may take the form of a company, a partnership, a limited partnership, a unit trust, an unincorporated joint venture or a combination of one or more. This will be influenced by the legal and regulatory framework of the host government. For example, foreign participation in large scale projects in China is usually through a joint venture arrangement with the government or the state-owned enterprise responsible for the development of the particular industry. The tax regimes and foreign exchange rules may also affect the ownership structure. Using an SPV is likely to enable the sponsors to finance the project on a limited recourse basis.[51]

The project company will generally include shareholder companies which specializing in one or several of the tasks set out in the concession agreement. It should also include a party with experience in managing major international infrastructure development projects. The government may require that the project company includes local investors in order to improve transfer of technology, and provide employment and training to local people.

The SPV will need to decide how to distribute revenues to its members. The shareholders will want to distribute revenues as early as possible, while the lenders will want to delay revenue sharing to ensure that the shareholders remain committed to operating the project for the longest possible time and to retain control over amounts otherwise available for distribution.[52]

3.2.6 Construction Contractor

The construction company will usually assume responsibility for designing the facility and taking it through all stages of construction until it is mechanically complete.

The project company will enter into a construction contract with the construction contractor in order to divest its obligation to the government to design, build, test and commission the project. This task is generally undertaken on a turnkey basis. The construction contract will be, as far as possible, back-to-back with the concession agreement, and therefore any construction risk placed on the project company by the concession agreement will, through the construction contract, flow through to the construction contractor. The construction contractor will generally subcontract certain or all of its construction obligations to other entities in order to share risk and revenues, subject to any restrictions imposed by the concession agreement or the construction contract.[53]

The construction company may also be one of the sponsors (investors).

3.2.7 Operation and Maintenance Contractor

The operator will operate and maintain the project over an extended period, often from completion of construction, or the first completed section, until the end of the concession period. It will need to manage the input supply and offtake purchase, monitor testing of the project and ensure proper operation and maintenance. But usually the operator outsources the maintenance part to the construction company or any other. The operator will be expected to sign a long-term contract with the SPV for the operation and maintenance of the facility.

Critical points for the operator are when the project is handed over from the construction company after completion and also with the government at the moment of transfer, confirming performance levels, proper maintenance and works testing at the end of the concession period.[54] A further point of interest for the operator will be payment. The project company will want to tie the operator’s payment to the operator’s performance of the project. The operator may not want to bear the risk of operation cost or actual output, and may prefer to be reimbursed for its costs and paid a fee for its services. In any case, the payment scheme should include penalty fees and incentive bonuses to encourage efficient operation of the project.

There has been no shortage of private operators for proposed infrastructure projects. This probably has a lot to do with the fact that operators tend to accept little risk in the form of up-front capital or expenditure. A private operator simply anticipates making a profit from operating the infrastructure more efficiently than an equivalent government operator.[55]

Again, the operator may also inject equity into the project.

3.2.8 Offtake Purchaser

In order to divert market risk away from the project company and the lenders, an agreement may be made with a purchaser for the use of the project or the purchase of any output produced. This offtake purchase agreement will require the offtake purchaser to pay for a minimum amount of the project output, and thereby create a secure payment stream which will be an important basis for financing. The offtake purchaser may be the grantor, or a government entity such as a public utility, in which case the offtake purchase agreement and the concession agreement may be one and the same document.

The offtake purchaser will want to obtain a certain minimum output at a given level of quality and at a reasonable price. Therefore, the offtake purchaser will maintain a strict testing schedule, imposing sanctions where output or quality is insufficient.[56]

3.2.9 Input Supplier

The input supplier is responsible for an input (fuel or raw materials) necessary for operation of the project. He ensures a minimum quantity of input is delivered, at a minimum standard of quality and at a set price. Only certain types of projects will require a form of input supply. Others will rely on market availability of input or may need no input at all.[57]

Other parties such as equity providers, insurers, equipment suppliers and engineering and design consultants will be also involved. Most of the parties too will involve their lawyers and financial and tax advisers.

The presence of a multitude of parties and their differing interests will lead to an increase in the complexity of the project. And all parties want to legally secure their interests.

3.3 The Contractual Framework

A BOT is a very complex structure with a large number of elements which need to be combined and integrated. It requires an extensive network of inter-related and often inter-conditional contracts.

Figure 7 below shows the contractual structure of a typical BOT project.

illustration not visible in this excerpt

Figure 7 Contractual Structure for a BOT Project [58]

The contracts entered into by the project company provide support for the project finance, particularly by transferring risks from the SPV to the other parties to the project contracts, and form part of the lenders’ security package.[59]

3.3.1 Concession Agreement

This is the cornerstone of the structure as it effectively gives the SPV the right to carry out the project. Under the concession agreement, the government grants a concession (a series of rights) to the project company to build and operate infrastructure for a predetermined period, i.e. the concession period. The concession agreement may also set out the legal and tax regimes applicable to the project, including the environmental obligations of the project company.

Concession agreements in Asia vary enormously. In some cases, the right to carry out the project is sourced in special legislation enacted by the relevant government. For example, Hong Kong has passed such legislation, examples of which include the Tate’s Cairns Tunnel Ordinance, July 1st 1988 and the Eastern Harbour Crossing Ordinance, August 1st 1986. In other countries the concession agreement will be a very loosely drafted document where parties will rely more on the goodwill of the host government (and its need to develop projects in the future) than on the contractual terms of the concession agreement. Consequently, sponsors and lenders are often faced with concession documentation which is not as comprehensive as they might like. Even where the sponsors and/or lenders are of the view that a concession agreement requires amendment, they should bear in mind that there are often sensitive political matters which need to be considered when requesting changes.[60]

3.3.2 Shareholders’ Agreement

The shareholders’ agreement is an agreement between the sponsors which sets out the respective rights and obligations of the sponsors with respect to each other and the project company. It may involve several documents, for example a sponsor’s agreement for the pre-financial close phase of the project, a joint venture agreement and articles of association or incorporation or whatever constitutional documents exist for the SPV.

The agreement will cover topics such as the business of the project company, conditions precedent to its creation, the issue of new shares, the transfer of shares, the allocation of project costs and the management of the project company including decision-making and voting. Such a contract will often also include a non-competition clause, stipulating that the shareholders may not enter into activities directly in competition with the project company.[61]


[1] Cp. World Bank, (1996), p. 1

[2] Pierer, (2004), p. 7f

[3] Cp. Duff, (2002), pp. 2-5

[4] Cp. Feliciano, (2000), p. 1ff

[5] On Friday November 26th 2004, THSRC agreed to pay US$ 65 million to the Eurotrain consortium to settle the four-year dispute. The settlement sum was US$ 24 million less than what the International Chamber of Commerce (ICC) had demanded in a ruling made in March. (Cp. China Post, (2004), p. 5). For satisfaction of the Europeans the Japanese Consortium is currently one year behind schedule with its planned revenue service date.

[6] Cp. World Bank PPI Database

[7] For further information on this database please refer to the explanations in the bibliography

[8] The Asian crisis started on July 2nd 1997 when the Thai Central Bank floated the exchange rate of the local currency. The Thai currency promptly plummeted 20% against the US Dollar. Starting in Thailand the Asian crisis reached Indonesia, Malaysia and the Philippines in July and August, and South Korea in November. The year 1998 saw the crisis heighten, with it encroaching upon Russia and other emerging markets like Brazil and Mexico in August.

[9] compiled by the authoress in dependence on the World Bank PPI Project Database

[10] Means, by which users are provided with a new facility where none previously existed

[11] Cp. World Bank, (2003), p. 1ff

[12] Cp. Izaguirre, (2005), p.1

[13] compiled by the authoress in dependence on the World Bank PPI Project Database

[14] Cp. World Bank, (2004) p. 1

[15] Asian Development Bank, (2005), p. xxi

[16] Cp. Tytko (1999), p. 183

[17] Cp. Asian Development Bank, (2005), p. xiii

[18] compiled by the authoress in dependence on the World Bank PPI Project Database

[19] Cp. Mei-Chun, (2005), p. 22

[20] compiled by the authoress in dependence on the World Bank PPI Project Database

[21] Cp. Izaguirre, (2005), p. 2

[22] Cp. World Bank, (2003), p. 3-4

[23] compiled by the authoress in dependence on the World Bank PPI Project Database

[24] Cp. Gomez-Ibanez, (1993), p. 146

[25] Cp. Delmon, (2005), p. 369

[26] Cp. Tynan, (1999), p. 7

[27] Cp. Delmon, (2005), p.372-375

[28] SRT used the BOT-model for financing this project

[29] Cp. Powell, (2005), p. 1ff

[30] Cp. Tytko (1999), p. 177

[31] Cp. World Bank PPI Project Database

[32] Cp. Izaguirre, (2005), p. 3

[33] compiled by the authoress in dependence on the World Bank PPI Project Database

[34] Cp. Walker, (1999), p. 1ff

[35] McMullan, (2005), p. 1

[36] Cp. Delmon, (2005), p. 62

[37] Cp. Delmon, (2005), p. 62

[38] Cp. Delmon, (2005), p. 67

[39] Ultra vires means “beyond power” It refers to conduct by a corporation or its officers that exceeds the powers granted by law. The doctrine of ultra vires is largely irrelevant to companies, as Corporation Law provides that they have the powers of a natural person, subject to any express exclusion in a company’s constituent documents. However, this is not so for statutory authorities. It is settled law that a statutory authority constituted under legislation has only the powers for which its constituent legislation provides.

[40] Cp. McMullan, (2005), p. 3

[41] Cp. McNair, (2005), p. 6

[42] Cp. McMullan, (2005), p. 3

[43] Cp. McNair, (2005), p. 6

[44] Cp. Delmon, (2005), p. 66

[45] Cp. McMullan, (2005), p. 4

[46] Cp. Sapte, (1997), p. 87

[47] Cp. Clifford Chance, (1991), p. 32f

[48] Cp. McNair, (2005), p. 7

[49] Cp. Delmon, (2005), p. 71

[50] Cp. Delmon, (2005), p. 72

[51] Cp. McNair, (2005), p. 6

[52] Cp. Delmon, (2005), p. 72

[53] Cp. Delmon, (2005), p. 73

[54] Cp. Delmon, (2005), p. 73

[55] Cp. McNair, (2005), p. 8

[56] Cp. Delmon, (2005), p. 74

[57] Ibid.

[58] compiled by the authoress. Should a project require so, an input supplier and agreement could be added to the chart.

[59] Cp. Yescombe, (2002), p. 8-9

[60] Cp. McNair, (2005), p. 3

[61] Cp. Delmon, (2005), p. 64


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Hochschule für Wirtschaft und Umwelt Nürtingen-Geislingen; Standort Nürtingen – Wirtschaftsrecht
build-operate-transfer taiwan transport privatfinanzierung infrastruktur



Titel: BOT-Projects in Asia