New Trends in Project Formulation and Execution: Unit 3

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UNIT 3

NEW TRENDS IN PROJECT FORMULATION AND


EXECUTION

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
TYPES OF PROJECT FORMULATION AND EXECUTION

1. BOT (Build- Operate-Transfer)


2. BOOT (Built-Own-Operate-Transfer)
3. BOO (Build-Own-Operate)
4. BLT (Build-Lease-Transfer)
5. DBFO (Design-Build-Finance-Operate)
6. DCMF (Design-Construct-Manage-Finance)

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Built Operate Transfer

Application:
 Infrastructure Projects
 Public-private Participation

The Public Administration delegates to a Private


sector entity to design and build infrastructure
and to operate and maintain these facilities for a
certain period.

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Built Operate Transfer

Responsibilities of Private Party:


 To raise finance for the project
 Operate and maintain these facilities
 Retain all revenue generated by the project
 Is the owner during the concession agreement
period
 Transfer at the end of the concession
agreement
 No remuneration during transfer

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Build Operate Transfer

Parties involved in BOT projects:

 The Host Government


 The Concessionaire
 Lending Banks
 Other Lenders
 Parties to project contracts

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT-Built Operate Transfer

The Host Government:

 Is the Initiator
 Political and Economic circumstances
 Support to the project in the form of Land and
Law.

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Built Operate Transfer

The Concessionaire/ Consortium:


A project sponsor who act as a concessionaire to
create a special purpose entity which is capitalized
through their financial contributions.

Lending Banks:
Most BOT are funded by commercial debt. The bank
will finance the project on “non-recourse” basis,
meaning that it has recourse to the special purpose
entity and all its assets for the repayment of the debt.

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Built Operate Transfer

Other Lenders:
Lenders such as national or regional development
banks.

Parties to the Project:


 Special purpose entity has only limited workforce
 To subcontract to third party
 To assure it has adequate supply contract for the
raw materials

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Built Operate Transfer

Model:
 To develop a discrete asset rather than a whole
network
 New or Greenfield in nature
 Fee through a fee charged to the utility/
Government rather than tariffs charged to
consumer
 The projects are called concessions

(Example: Toll Roads)

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Built Operate Transfer

Viability:
 Project is financially viable for private entity only
if the revenue generated covers its costs and
provides sufficient Return on investment
 Viability for the Host Government depends on its
efficiency to financing the project with public
funds
 Expertise and efficiency is better with private
entity
 Risk Transfer

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOT- Built Operate Transfer

Risk:
 Political Risk- Dramatic overnight political change
 Technical Risk: Construction difficulties
 Financing Risks:
 Foreign Exchange rate
 Interest rate fluctuations
 Market risk (price of raw material)
 Income risk (Over optimistic cash flow forecasts)
 Cost overrun risk

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOOT-Build Own Operate Transfer

 The Private Entity Owns the works


 Private entity owns and operates the facility
 Prime goal to recover the costs of investment and
maintenance
 To achieve higher margin on project

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOOT-Build Own Operate Transfer

Suitability:
 Infrastructure Projects
 Highways
 Roads mass transit
 Railway transport
 Power Generation

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOOT-Build Own Operate
Transfer
Advantages:
 Encourage private Investment
 Inject new foreign capital to the country
 Transfer of technology and know-how
 Completing the project within time frame and
planned budget
 Providing additional financial source for other
priority projects
 Releasing the burden on public budget for
Infrastructure development
Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July
2016
BOO-Build Own Operate

Ownership of the project remains with the


project Company

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOO-Build Own Operate

Advantages
 The private company gets the benefit of the

residual value
 This frame work is used when the physical life of

the project coincides with the concession period

Risk
 This scheme involves large amounts of finance

 Long payback period

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BOO-Build Own Operate

Example:
 Mobile phone network Operator
 Water treatment plant

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BLT- Build Lease Transfer

A private entity builds a complete project and


lease it to the Government

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BLT- Build Lease Transfer

Operation framework:
 The control over the project is transferred from the

project owner to a lessee.


 Ownership remains with the share holder

 Only operation purposes are leased

 On expiry of the leasing the ownership of the asset

and the operational responsibility are transferred at


a previously agreed price.

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
BLT- Build Lease Transfer

Benefit:
 The ideal framework for Foreign Investors

 The country Risk is taken care.

 The project company maintains the property rights

 Operational risk is with the Government

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DBFO-Design Build Finance Operate

This is similar to BOOT except that there is no actual


ownership transfer

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DBFO-Design Build Finance Operate

Frame work:
 The contractor assumes the risk of financing till
the end of the contract period
 After the contract period the owner assumes the
responsibility for maintenance and operation

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DBFO-Design Build Finance Operate

Operation method:
 The private party is responsible for the design and

construction of the project for the government ,


which is the true owner
 Private entity has the responsibility to raise finance

during the construction and exploitation period.


 The cash flow serve to repay the investment and

reward the shareholders

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DBFO-Design Build Finance Operate

Disadvantages:
 Long term relationships and threats of possible

future political changes

Advantages for the government


 The government has the advantage that it remains

as the owner of the facility


 Avoids direct payment from the users

 Avoids getting into debts

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DBFO-Design Build Finance Operate

Example: Toll roads

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DCMF-Design Construct Manage
Finance

A private entity is built to design, construct, manage


and finance a facility based on the specifications of
the government

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DCMF-Design Construct Manage
Finance

Operation:
 Government has the ownership

 Has the price and quality control

 Rent for the facility paid to the government

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016
DCMF-Design Construct Manage
Finance

Example:
 Prisons
 Public Hospitals

Ar.Stanley, SOAMCE Professional Practice and Ethics II 5th July


2016

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