fac pub pollalis bot part 1 (1)

CASE STUDIES ON BUILD OPERATE TRANSFER

CASE STUDIES ON BUILD OPERATE TRANSFER

Prof. Drs. Ir. Sebastiaan C.M. Menheere

Prof. Spiro N. Pollalis, Dipl. Eng., SM., MBA, Ph.D.

Edited by:Rick Huijbregts

Contributing authors:Arjan BolRick HuijbregtsMarjan KleinSebastiaan MenheerePriti PaulSpiro N. PollalisLotte Verhoeven

Copy-editor:Penelope HillAfshan Bokhari

Delft University of TechnologyFaculty of ArchitectureProject Management and Real Estate DevelopmentP.O. Box 50432600 GA DelftThe NetherlandsTel. +31-(0)-15-278-4159Fax. +31-(0)-15-278-3171E-mail: [email protected]

Copyright © 1996 Sebastiaan C.M. Menheere and Spiro N. Pollalis.

[email protected]

http://www.gsd.harvard.edu/~pollalis

Project Management and Real Estate Development

Delft University of Technology

All rights reserved.

Reproduction or translation of any part of this work without

permission of the copyright owner is unlawful. Requests for

permission or further information should be addressed to Delft

University of Technology, Faculty of Architecture, Project

Management and Real Estate Development, P.O. Box 5043, 2600 GA

Delft, the Netherlands.

The case studies are prepared as a basis for class discussion and

illustrative rendering rather than to illustrate either effective or

ineffective handling of an administrative situation, a design process or

a design itself.

Menheere, Sebastiaan C.M., and, Spiro N., Pollalis

Case Studies on Build Operate Transfer/ Rick Huijbregts

211 p. 23 cm.

ISBN 90-9010335-X

1. Build Operate Transfer 2. Case Studies 3. International Project

Management.

Printed in the Netherlands.

Printing office Rooij & Van der Velde

Edison 35

3241 LS Middelharnis

Tel: +31-(0)-18-748-2207

Fax: +31-(0)-18-748-6206

TABLE OF CONTENTS

CONTENTS v

LIST OF FIGURES xiLIST OF TABLES xiii

PREFACE xv

PART IFRAMEWORK

0 THE BUILD OPERATE TRANSFER APPROACH 50.1 INTRODUCTION 50.2 BACKGROUND 60.3 DEFINITION 80.4 MAJOR PARTICIPANTS IN BOT PROJECTS 9

Concession contract 12Financial agreements 14Construction contract 14Operation contract 14

0.5 STAGES OF BOT PROJECTS 14Preliminary study 15Selection process 16Project implementation 16Construction 16Operation 16Transfer 16

0.6 FINANCING 180.7 DESIGN AND CONSTRUCTION 210.8 ENVIRONMENTAL FACTORS AFFECTING BOT 210.9 WHEN IS BOT APPROPRIATE? 22

PART IICASE STUDIES: JAILS

1 PLYMOUTH COUNTY CORRECTIONAL FACILITY 271.1 INTRODUCTION 28

CONTENTS v

1.2 BACKGROUND 29Plymouth County Jail and Correction House 30United States Marshals Service 30

1.3 PROGRAM 321.4 ORGANIZATION 331.5 FINANCING 34

Certificates of Participation 36Assignment Agreement and Trust Agreement 37

1.6 CONTRACTUAL RELATIONSHIPS 37Lease contracts 37Intergovernmental Agreement 38Memorandum of Agreement 38Design-Build contract 38Technical representative 40Memorandum of Understanding 40

1.7 DESIGN AND CONSTRUCTION 40Design 41Construction 43

1.8 OPERATIONS 46

2 DONALD W.WYATT DETENTION FACILITY 492.1 INTRODUCTION 502.2 BACKGROUND 51

Detention Center Associates 52New plans 53

2.3 PROGRAM 542.4 ORGANIZATION 54

Cornell Cox and Brown & Root join the team 55Special legislation 57City approval 57

2.5 FINANCING 57Financing problems 58The Port Authority steps in 58Loan and Trust agreement 59

2.6 CONTRACTUAL RELATIONSHIPS 60Intergovernmental Agreement 61The Arthur Andersen report 61Design-Build contract 62Operator’s Agreement 63Consulting Agreement 63

2.7 DESIGN AND CONSTRUCTION 64Design 65

2.8 OPERATIONS 65

CONTENTSvi

PART IIICASE STUDIES: ROADS

3 STATE ROUTE 91 EXPRESS LANES 693.1 INTRODUCTION 703.2 BACKGROUND 70

Assembly Bill 680 71Selection process 71State Route 91 concession 72Previous plans 73Orange County attempts to attract AB 680 projects 74Riverside opposition 74Negotiations with Riverside County 75


Cofiroute joins the team 76CRSS leaves the project 78

3.5 CONTRACTUAL RELATIONSHIPS 78Concession Agreement 78Memorandum of Agreement: “The Peace Treaty” 79Repayment and Cooperation Agreement 80Other agreements 82

3.6 FINANCING 82Financial closing 83

3.7 DESIGN AND CONSTRUCTION 84The August 1990 proposal 85

3.8 OPERATIONS 85

4 DULLES GREENWAY 874.1 INTRODUCTION 884.2 BACKGROUND 89

Commission on Transportation for the 21st century 89Virginia Highway Corporation Act 90Permits and approvals 90Commonwealth Transportation Board 91State Corporation Commission 92Amendments 93Environmental issues 94Day Permit Extension 94

4.3 PROGRAM 954.4 FINANCING 96

Barclays joins the team 97Financial closing 97Final financial structure 98

CONTENTS vii

4.5 ORGANIZATION 101Project restart 101Kiewit leaves the project 102New contractor 104

4.6 DESIGN AND CONSTRUCTION 105Construction 105

4.7 OPERATIONS 106

5 GUANGZHOU-SHENZHEN-ZHUHAI, SUPER HIGHWAY 1095.1 INTRODUCTION 1105.2 BACKGROUND 111

The Super Highway 111The route 112Interchanges 113

5.3 PROGRAM 1145.4 CONTRACTUAL RELATIONSHIPS 1155.5 FINANCING 1165.6 DESIGN AND CONSTRUCTION 1185.7 OPERATIONS 119

PART IVCASE STUDIES:TUNNELS AND BRIDGES

6 WIJKER TUNNEL 1236.1 INTRODUCTION 1246.2 BACKGROUND 125

Private financing uncertainties 125Green light for the Wijker tunnel 126Selection criteria 127Negotiations concession agreement 128Response of the National Audit Office 129Political collision 131Remaining tunnels 131


The contractors consortium 1336.5 CONTRACTUAL RELATIONSHIPS 133

Concession agreement 133Construction contract 135

6.6 FINANCING 1366.7 DESIGN AND CONSTRUCTION 138

Construction 139Tunnel elements 139Sink-procedure 140

CONTENTSviii

6.8 OPERATIONS 141Diverting charge bands 141Management and maintenance 141Fiscal aspects 142

7 NORTHUMBERLAND STRAIT CROSSING BRIDGE 1437.1 INTRODUCTION 1447.2 BACKGROUND 144

Request for Proposal 145Selection process 145First selection round 146Local opposition 146Project on hold 147Environmental Assessment and Review Process 147Environmental and other issues 147The proposal rejected 148Green light 148The final selection process 149Environmental and other challenges 149Conclusion 150


Dutch gain membership 151Engineering design 151Other memberships 153

7.5 CONTRACTUAL RELATIONSHIPS 153Concessionaire and contractor - federal government agreements 153Concessionaire - federal / local government agreements 154Subsidy agreement 154Concession agreement 154

7.6 FINANCING 156Subsidy Agreement and issue of bonds 156Security package 158Corporate guarantees and risks 158

7.7 DESIGN AND CONSTRUCTION 159Design 159Construction 160

7.8 OPERATIONS 163

PART VCASE STUDIES: POWER PLANTS

8 DABHOL POWER COMPANY 1678.1 INTRODUCTION 168

CONTENTS ix

8.2 BACKGROUND 170India: Privatizing the State and opening thetrade door 171Power: The industry shortfalls 173

8.3 PROGRAM 1748.4 ORGANIZATION 1758.5 CONTRACTUAL RELATIONSHIPS 176

Purchase Power Agreement 176Guarantees and penalties 178

8.6 FINANCING 1798.7 CONSTRUCTION 1808.8 OPERATIONS 1818.9 UNEXPECTED CHANGES 181

Project canceled 182Fallout 184Renegotiations 185Leading changes 186

REFERENCES 189LIST OF ABBREVIATIONS 193

CONTENTSx

LIST OF FIGURES

THE BUILD OPERATE TRANSFER APPROACHFig. 0.1: BOT and other project delivery organizational forms. 6Fig. 0.2: Public and private involvement. 7Fig. 0.3: Alternative project delivery schemes. 9Fig. 0.4: Typical BOT organizational structure. 10Fig. 0.5: Parties and their goals. 11Fig. 0.6: Balancing costs and revenues to optimize unit price and

profits (revenues minus costs). Arrows indicate thepreferred directions towards an optimal condition. 12

Fig. 0.7: Contracts and relationships. 13Fig. 0.8: Stages of a BOT project. 15Fig. 0.9: Stages with Selection Process BOT projects. 15Fig. 0.10: Transfer of a BOT facility. 17Fig. 0.11: Cashflow over the concession period. 18Fig. 0.12: Financial BOT structure. 19Fig. 0.13: Payments and revenues for each stage in a BOT project

(duration of stages not in scale). 20

PLYMOUTH COUNTY CORRECTIONAL FACILITYFig. 1.1: Plymouth County, Massachusetts. 28Fig. 1.2: Artist impression Plymouth County Correctional Facility. 32Fig. 1.3: Organization development scheme. 34Fig. 1.4: Financing structure. 36Fig. 1.5: Contractual relationship. 39Fig. 1.6: Construction site Plymouth County Correctional Facility. 41Fig. 1.7: First and second floor plan. 42Fig. 1.8: Third and fourth floor plan. 43Fig. 1.9: Construction with prefabricated units. 44

DONALD W.WYATT DETENTION FACILITYFig. 2.1: Central Falls in Rhode Island. 50Fig. 2.2: Artist impression of the Donald W. Wyatt facility. 55Fig. 2.3: Organization development scheme. 56Fig. 2.4: Financing structure. 60Fig. 2.5: Contractual relationship. 62Fig. 2.6: The Donald W. Wyatt Detention Facility. 64Fig. 2.7: Second floor plan. 65

xiLIST OF FIGURES

STATE ROUTE 91 EXPRESS LANESFig. 3.1: Traffic in California. 70Fig. 3.2: Location map. 72Fig. 3.3: Traffic flow trends. 73Fig. 3.4: Organization development scheme. 77Fig. 3.5: Contractual relationship. 81Fig. 3.6: Financing structure. 84Fig. 3.7: Different lanes proposed by CPTC. 85

DULLES GREENWAYFig. 4.1: Loudoun County, Virginia. 88Fig. 4.2: The extension of the Dulles Toll Road. 95Fig. 4.3: Financing structure. 100Fig. 4.4: Organization development scheme. 103Fig. 4.5: Contractual relationship. 104Fig. 4.6: Construction site. 105Fig. 4.7: Dulles Greenway toll-house. 106

GUANGZHOU-SHENZHEN-ZHUHAI, SUPER HIGHWAYFig. 5.1: Guangzhou-Shenzhen-Zhuhai, south-east China. 110Fig. 5.2: Super Highway. 112Fig. 5.3: Commercial interchange. 113Fig. 5.4: Model Super Highway interchange. 114Fig. 5.5: Contractual relationship. 115Fig. 5.6: Organization development scheme. 116Fig. 5.7: Project expenditure. 117Fig. 5.8: Financing structure. 118Fig. 5.9: Toll-house GSZ Super Highway. 120

WIJKER TUNNELFig. 6.1: Location Wijker tunnel. 124Fig. 6.2: Organization development scheme. 132Fig. 6.3: Contractual relationship. 135Fig. 6.4: Financing structure. 137Fig. 6.5: Tunnel elements. 139Fig. 6.6: Wijker tunnel. 141

NORTHUMBERLAND STRAIT CROSSING BRIDGEFig. 7.1: Location map. 144Fig. 7.2: Bordon, PEI and Cape Tormentine, New Brunswick. 150Fig. 7.3: Organization development scheme. 152Fig. 7.4: Contractual relationship. 155Fig. 7.5: Financing structure. 157Fig. 7.6: Design of the Northumberland Strait Bridge. 159

LIST OF FIGURESxii

Fig. 7.7: Prince Edward Island staging facility. 160Fig. 7.8: Svanen; the heavy-lift floating crane. 161Fig. 7.9: Bridge piers. 162Fig. 7.10: Real cost to the user ferry versus bridge 1997-2032

four passengers return (1992 constant dollar). 163

DABHOL POWER COMPANYFig. 8.1: Location map. 168Fig. 8.2: Dabhol, Maharashtra State. 169Fig. 8.3: Organization development scheme. 175Fig. 8.4: Contractual relationship. 177Fig. 8.5: Financing structure. 180Fig. 8.6: Construction site. 181

LIST OF TABLES

PLYMOUTH COUNTY CORRECTIONAL FACILITYTable 1.1: Population and capacity of state prisons in

Massachusetts and of Plymouth County Jail. 29Table 1.2: Sources and uses of funds. 35Table 1.3: Pods and units. 42Table 1.4: Projected operating budget for Fiscal Year 1995. 45

DONALD W.WYATT DETENTION FACILITYTable 2.1: Sources and uses of funds. 58Table 2.2: Pods and units. 64

STATE ROUTE 91 EXPRESS LANESTable 3.1: CPTC Reimbursement Amount. 80Table 3.2: SR 91 Express Lanes funding. 83

DULLES GREENWAYTable 4.1: Project capitalization. 99

GUANGZHOU-SHENZEN-ZHUHAI, SUPER HIGHWAYTable 5.1: Construction statistics. 118Table 5.2: Major structural items. 119Table 5.3: Primary materials and quantities. 119

WIJKERTUNNELTable 6.1: Daily passing vehicles per alternative through the

Wijker- and Velser tunnel. 128

LIST OF TABLES xiii

Table 6.2: Cost-division. 136Table 6.3: Debt to equity division Wijker tunnel-project. 137Table 6.4: Construction numbers. 140Table 6.5: Charge bands without a second Coen tunnel. 142

DABHOL POWER COMPANYTable 8.1: Electricity, capacity and investment shortfall. 170Table 8.2: Chronology of economic reforms. 172Table 8.3: Penalties for DPC and its contractor. 178Table 8.4: Major issues. 183

LIST OF TABLESxiv

PREFACEThis book is the result of research on the project delivery scheme of Build

Operate Transfer (BOT). Since 1994, research was conducted simultane-ously at the Harvard Design School and the Bouwkunde, TechnicalUniversity of Delft, resulting in a series of case studies developed on severalBOT projects in various parts of the world. The case studies identify thedifferent aspects of the BOT project delivery scheme and draw insights fromthe organizational structures employed and the risks assumed by theparticipants of the studied BOT projects. Eight of these case studies areincluded in this book.

Why study BOT?The motivation for the research and preparation of this manuscript

stemmed from identifying an immediate opportunity for design and buildingprofessionals to actively participate in and be instrumental in developingBOT projects. This underlying premise established the following fiveobjectives within the undertaken research:• to study the BOT project delivery scheme and identify the major

participants and their roles, responsibilities and assumed risks, as wellas their technical and professional expertise.

• to establish a framework in which BOT projects are initiated anddeveloped, and use this to identify the general characteristics of BOTprojects.

• to compare the design and construction processes of BOT projectswith traditional projects of a similar size, and examine the changingroles, if any, of designers, project managers and builders.

• to identify the influence of economic cycles in the development ofBOT projects, and investigate how these might affect the availabilityof public and private funds.

• to identify the benefits and risks of developing BOT projectsoverseas, investigating the role of the local government in setting legaland financial frameworks, and the influence of local culture,expertise and capital.

The case studies established the backbone to gain insights within atheoretical framework. The two main criteria for selecting the eight cases forthis book were firstly, a variety of project types and geographic locations,

PREFACE xv

and secondly, the level of risks assumed by the private sector. In general, aneffort was made to select cases where the government or other publicorganizations did not offer lucrative lease-back options or protective netswith financial guarantees. Undoubtedly, the case studies are conditioned andshaped by the points of view of the designers and building professionals,though, business related issues centered on management, finance and laware fundamental to BOT and they are given proper consideration.

Although the eight cases are not statistically significant for derivinggeneral conclusions, they set the stage for how BOT projects work and, as aresult, allow the reader to formulate hypotheses to be tested using addi-tional data. This book therefore can be used as the basis for further researchand as a handbook for those professionals interested in developing BOTprojects. It also provides original material for teaching the BOT projectdelivery scheme.

Contents of the BookPart I contains a proposed theoretical framework of BOT projects. It

introduces a short historical background, the BOT project delivery schemeand its general characteristics. This is followed by the presentation of themajor participants of a typical BOT project together with the maincontractual relationships based on the case studies. The six distinct stages ofa typical BOT project are presented ranging from preliminary studies to theeventual transfer of the facility. This section also includes the financingscheme and particularities of the design and construction for a BOT projectwith concluding remarks on the circumstances that make a BOT projectdelivery scheme a preferred choice.

The remaining chapters contain eight case studies covering a variety ofBOT projects. Part II includes two case studies of jails, Part III includes threecase studies of highways, Part IV covers the case studies of a tunnel and abridge, and Part V includes a case study of a power plant. The projects arelocated in Canada, China, India, the Netherlands and the United States.Each study provides detailed references to the original sources from bothpublished materials and personal interviews.

A standard format to structure the presentation of the case studies is usedto facilitate comparisons. The contractual relationships and the stages ineach project are presented with standard graphics to allow the reader toreview the similarities and differences of the cases. However, suchstandardizations are not always feasible due to significant differences in thestudied projects.

xvi

Bas MenheereProfessor of Project ManagementArchitecture, Delft University of Technology

Spiro N. PollalisProfessor of Design Technology and ManagementHarvard Design School

PREFACE

PART IFRAMEWORK

0THE BUILD OPERATE TRANSFERAPPROACH

0.1 INTRODUCTION

In recent years, a growing trend emerged among governments in manycountries to solicit investments for public projects from the private sector.The main reasons for this trend are a shortage of public funds and a hands-off approach of government agencies. The Build Operate Transfer approach(BOT) is an option for the government to outsource public projects to theprivate sector. With BOT, the private sector designs, finances, constructs andoperates the facility and eventually, after a specified concession period, theownership is transferred to the government. Therefore, BOT can be seen asa developing technique for infrastructure projects by using private initiativeand funding. Such infrastructure projects include a wide array of publicfacilities with the primary function to serve public needs, to provide socialservices and promote economic activity in the private sector. The mostcommon examples are roads, bridges, water and sewer systems, airports,ports and public buildings (Vaughan and Pollard, 1984).

In addition to government, the private sector may initiate BOT projectswhen there are limited funds available and there are no enough resources toexecute successfully a required building project. Examples can be seen innon-profit hospitals and educational institutions as well as manufacturingfacilities. However, none of those cases are included in this book, whichfocuses on government related projects.

Several project delivery schemes have developed in recent years (Diaz,1994). The traditional design-bid-award was enhanced by the introductionof the project manager as a consultant to the owner, where project manageradvises the owner in formulating a building strategy and supervises theconstruction on the owner’s behalf. As a consulting service, the projectmanager works in parallel with the architect for a flat rate fee, with nofiduciary or construction risk.

Design-build is a one-stop shop for design and construction. Architectsand contractors work under one contract, where total responsibility for allstages of the project is placed with both parties. Design-build projects areoften of limited sophistication, but hold considerable promise for the futureas a partnership process of project delivery. Bridging allows the separationof schematic design from design development, with the latter groupedtogether with the general contractor. Such a project delivery scheme allows

THE BUILD OPERATE TRANSFER APPROACH 5

for more sophistication and for transfer of design across geographical andeconomic boundaries. With turn key contracts, the owner buys a package ofsite, design and finished building, while the developer secures financing,manages the project flow and coordinates the architect and the contractor.Such contracts are usually limited in complexity1. BOT is closer to totalproduct delivery where in addition to financing and development, thesupplier is also responsible for the operation of the facility. Fig. 0.1 presentsvisually the grouping of responsibilities of the alternative project deliveryschemes.

Fig. 0.1: BOT and other project delivery organizational forms (after A. Bol and R. Geraedts).

0.2 BACKGROUND2

The first official private facility development under the name “BuildOperate Transfer” was used in Turkey in 1984, by Prime Minister Ozal, aspart of an enormous privatization program to develop new infrastructure(Beuker, 1988). However, the BOT approach was used as early as 1834 withthe development of the Suez Canal. This revenue-producing canal, financedby European capital with Egyptian financial support, had a concession todesign, construct, and operate assigned to the Egyptian ruler PashaMuhammad Ali (Levy, 1996).

In the second half of the nineteenth century, railways and roads weredeveloped with the help of private financing in the western world (Mobsby,1992) and although the privately operated public facilities became financialsuccesses, they were not devoid of shortcomings. The infrastructure projectshad to be accessible to everybody but optimizing the economic rate of returnconflicted with public interest.

By the mid-twentieth century, the privatization of public facilities hadexperienced a downturn as the development of infrastructure projects byprivate funds gained popularity throughout the world, particularly in theUnited States. The increase in road traffic resulted in an urgent need for

THE BUILD OPERATE TRANSFER APPROACH6

developing highway facilities and this prompted the government toincreasingly use more private funds.

In Europe, however, infrastructure projects remained under governmentaljurisdiction as they were considered public requirements the state had toprovide. Since the 1980s, the attitude of European countries has changed toinclude more privatization in their infrastructure development, especially inFrance and Britain where privatization was extensive, in order to fulfillpublic needs. At the same time, Asia was experiencing an economic boomthat opened the doors for new forms of project delivery, based on theprinciple of privatization.

Ernst and Pham (1994) refer to privatization as a process in which thedelivery of goods and services, usually administered by the government, isshifted to the private sector. Privatization can be divided into primarily threeareas: the selling of governmental holdings (i.e., British Airways and BritishTelecom), the subcontracting of government services to private undertakers(i.e., US Postal Service, park maintenance), and the subcontracting offinancing and developing public facilities (i.e., Channel Tunnel). BOTbelongs to the last category.

Fig. 0.2: Public and private involvement (after M. Klein).

Under a public-private partnership approach, a cooperation betweengovernment 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 partner-ships are difficult to detect, depending on the level of governmentparticipation (Fig. 0.2). Complete privatization has no governmentparticipation. The Build Operate Transfer approach can be viewed as a well-developed public-private partnership, since government participation isa l w a y sexpected in projects of such public scale. This is exemplified in several of the


case studies in this book.0.3 DEFINITION

Build Operate Transfer is a major startup business venture where privateorganizations undertake development and operation of a facility normallydone by the government. The termination of the private sector involvementoccurs at the return of the ownership of the facility to the government aftera fixed concession period, usually 25 to 40 years (Tiong, 1990).

Among the various definitions of BOT, the following definition is adoptedin this book that constitutes the premise for conducting this research.

In the BOT approach, a private party or concessionaire retains a concessionfor a fixed period from a public party, called principal (client), for the developmentand operation of a public facility.The development consists of the financing, designand construction of the facility, managing and maintaining the facility adequately,and making it sufficiently profitable. The concessionaire secures return ofinvestment by operating the facility and, during the concession period, theconcessionaire acts as owner. At the end of the concession period, theconcessionaire transfers the ownership of the facility free of liens to the principalat no cost3.

A key characteristic of BOT is private financing. In BOT, the governmentsubcontracts the entire development process, including the associated risks,to the private entity. One of these risks is financing, which must be obtainedby the concessionaire, who is ultimately responsible for all aspects of theproject. A prerequisite for private financing is a need for the facility to bedeveloped; for example, a highway extension due to increasing traffic jams,more bed space in detention and correctional facilities due to an increase incrime and the number of incarcerated individuals, a tunnel or bridge to solvetraffic problems and facilitate accessibility, or a sewage system or powergeneration to support the growth in population and industry. If there is noobvious requirement for the facility, private parties will refuse to partici-pate and provide financial support. Only after market analysis justifies aneed will private parties be willing to financially participate as well asbecome involved in developing the facility.

BOT is just one of the many different project delivery schemes within thecontext of privatization or public-private-partnerships. The two otherschemes that appear most similar to BOT are Build Own Operate (BOO)and Build Transfer Operate (BTO). In all three cases, the private partyretains revenues from operating the facility. In BTO, the private partytransfers the ownership of the facility directly after the delivery andoperates the facility on behalf of the principal. In BOO, the private partyretains ownership of the facility, makes returns on investment by operatingit for its useful life, and may sell it at any point at market value.

Besides the three most common approaches, BOT, BOO and BTO, othervariations can also occur (Fig. 0.3). All differ from each other in the way thelevel of risk is divided between the private and public parties. Each form is


a kind of a public-private-partnership but all are unique in allocating risksto the individual parties.

Fig. 0.3: Alternative project delivery schemes, illustrating the risks forthe concessionaire (after ENR, 1995).

0.4 MAJOR PARTICIPANTS IN BOT PROJECTS

Five major participants are identified in every BOT project and Fig. 0.4shows the typical structure. Very simply, the principal grants the concessionto the concessionaire. The concessionaire, usually a consortium ofcompanies, undertakes the financing and development of the project.


Financing is obtained from sponsors and lenders. The contractor builds thefacility and the operator runs the facility.

Fig.0.4:Typical BOT organizational structure (after Walker and Smith, as modified by R.Huijbregts).

PrincipalIn 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 isunable to financially support the project. The government agency is thusforced to look for alternative options.

ConcessionaireAfter 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 ofdeveloping (designing, financing and constructing), maintaining andoperating the facility, on behalf of the principal. The concessionaire is theowner of the facility during the concession period and realizes profits on theinitial investment through the usage of the facility.

InvestorsFinancing is supplied by the private sector and the investors include both

shareholders and lenders. The shareholders invest money in exchange forequity, and lenders support the concessionaire during negotiations with theprincipal with promises for loans to be available during the development ofthe project. Lenders may include banks, insurance companies and bondholders.

ContractorThe concessionaire commissions a contractor with the construction of the

facility. In most cases, the contractor is part of the concessionaire’sconsortium and involvement is favored by all concerned parties. During theearly stages of the process the contractor’s involvement assures theconsortium of the most effective and efficient design and execution of theproject. Ultimately, the contractor is responsible for the construction of theproject and for hiring subcontractors, suppliers and consultants.

OperatorThe operator is also in the concessionaire’s service and manages the

operational stage of the facility. Similar to the contractor, the operator isusually part of the concessionaire’s consortium, because of the critical rolein the revenue stream. In addition, the importance of operating knowledgefor programming, financing, design and construction is required. Often theoperator is supported by a government agency or in some cases, is theagency. In the Wijker tunnel case, the facility is entirely operated by thegovernment maintenance department for bridges, dikes and roads, and in

the Plymouth prison project the county Sheriff was part of the con-


cessionaire and operated the facility upon completion. Fig. 0.5: Parties and their goals.Many contracts and agreements are signed for a successful BOT project

to bridge the differences in incentives and goals among the participants. Thisprocess can be very time consuming as some parties may try to cast off risksand responsibilities to another. A balance has to be found between cost andquality, by selecting the proper financial scheme, design, constructionmethods, materials, maintenance costs, and operation costs in order toresult in low usage fees and high profits. A major task, therefore, is to guidethe incentives and goals of the individual parties in favor of the project. Fig.0.5 shows the principal goals of the major participants in a BOT project and

Fig. 0.6 shows graphically the optimization levels to be pursued to make theproject a financial success.

Fig. 0.6: Balancing costs and revenues to optimize unit price and profits(revenues minus costs). Arrows indicate the preferred directions towards an optimal condition.

There may be up to 300 different contracts among all the involvedparties. The main contracts, shown in Fig. 0.7, are presented in thefollowing paragraphs.

Concession contractThe concession contract is signed between the principal and the

concessionaire. This contract runs from the initial design stage through thefinal transfer, and includes the allocation of risks. The main issues addressedwithin the concession contract are:


• The length of the concession period; the starting date and thetransfer date.

• The structure of the project company (concessionaire).• The financial scheme.• The financial guarantees (principal and concessionaire).• The material guarantees (if the concessionaire is not able to deliver

the facility, the principal has the right to “step in” and take over).• The financial ceiling of development costs.• The financial ceiling of usage costs.• The construction process.• The completion time of the construction.

• The method of operating the project.

Fig. 0.7: Contracts and relationships.


Financial agreementsThe financial agreements are private between the concessionaire and the

equity partners (sponsors) and the lenders (i.e., banks, financial institutions).The shareholder’s agreement contains the ratio of debt to equity and adetailed plan for the distribution of the expected revenues during operation.The lender’s agreement, between the debt providers and the concessionaire,specifies the various guarantees and the agreed return-on-investment. Themost significant guarantee is provided by the government to step-in in caseof lower than expected revenue levels. One of the extreme guarantees for alender is the right to take over the facility in case the concessionaire isunable to meet financial obligations.

Construction contractThe contract between the concessionaire and the contractor is usually a

fixed price contract or a design-build contract. The concessionaire wants todelegate risks and, because of the concessionaire’s responsibilities towardsthe principal, the lenders, and the final users of the facility, high fines arewritten into the contract for late delivery.

Operation contractThe operation contract is signed between concessionaire and operator.

The rates for usage of the facility are included in the contract, as agreed bythe principal and concessionaire. A major aspect for the operationagreement is the prognosis of the use of the facility.

All contracts are strictly related to each other and eventually shape thedesign, construction and operation of the facility and describeresponsibilities and risks. It is, therefore, crucial to obtain transparentcontracting where all risk and responsibility-bearing parties’ obligations areclearly defined. An open information structure and well defined contractmanagement with agreed risk division will limit misunderstandings.

0.5 STAGES OF BOT PROJECTS

The length of the concession period is determined in the concessionagreement between concessionaire and principal. Within the concessionperiod, the concessionaire must be able to recover investments for allfunding parties.

Six stages are identified during the concession period (Fig. 0.8). After thepreliminary study, usually conducted by the government, a consortium ischosen following a specific selection procedure. After the selection, theconcessionaire 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. Uponcompletion of construction, the facility opens for use and the repayment ofthe facility is covered by the incoming revenues. After a predetermined

concession period, the facility transfers to the principal and then stateagencies will own and operate the facility.

Fig. 0.8: Stages of a BOT project.

Preliminary studyThe preliminary study usually takes place prior to the involvement of the

concessionaire. This stage is executed by, or on behalf of, the principal (Fig.0.9). Feasibility studies are necessary to prove the forecasted success of theproject, in order to attract private funding. Alternatively, a private partymay identify a need and initiate the BOT project and in such a case, the

preliminary study is conducted by the private entity with limited govern-ment involvement.


Fig. 0.9: Stages with Selection Process BOT project.

Selection processThe 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 receivingapplications, the government selects a few consortia to submit proposals(request for proposals) and from these a concessionaire is chosen. Duringthis process, the consortia will group interested parties as required for theefficient and adequate execution of the project. Alternatively, in a specu-lative selection process, the private sector initiates the project and contactsthe appropriate government agency for approval. The project is grantedafter proper negotiations.

Project implementationAfter the selection stage and the foundation of the concessionaire, the

proposal is finalized. Together with all the involved parties, theconcessionaire develops a detailed program and preliminary design, andapplies for permits. This process can be shortened if a government agency isactively participating. Once permits are issued, the final concessionagreement issigned. During the project implementation stage, in addition to the interestsof the involved parties, the interests of the external parties also requireattention. The influential power of politics, the opposition, andenvironmental agencies are significant factors and, if not taken into account,may hinder or even dissolve the project.

ConstructionOnce the necessary permits are obtained, construction begins. Often BOT

projects are fast track projects where the design is not complete whenconstruction starts. This is feasible because of congruent financial interestswithin the members of the consortium and the pressing need to completeconstruction and start collecting revenues. Less controversial designs allowa quicker construction period with fewer uncertainties.

OperationDuring the operation stage, the facility is operated and maintained by the

operator who is paid by the concessionaire. The concessionaire, as theowner of the facility during the operation period, is obligated to operate thefacility in a manner that adequately services the public user. Theconcessionaire is also responsible for maintaining the facility in workingcondition. Both the concession and operation agreements specify thecondition of the facility at the time of transfer to the principal.

Transfer


The facility is transferred to the principal, usually at no cost (Fig. 0.10).Transfer time is determined in the concession agreement. Should theprincipal chooses to take over the facility earlier than the agreed concessionperiod, the concessionaire will be financially compensated for theinvestment. After transfer, the principal is the sole owner of the facility andcan choose to operate and maintain the facility directly or hire anindependent operator. Although a transfer has not taken place in any of thecases in this book, it can be expected that the principal will continue withthe sameoperator, as in the concession period, due to history of involvement andexperience with the facility. If the principal is the government, it maychoose after transfer not to charge the final users anymore. In essence, thefacility at that time will have become public, and its maintenance andoperation can be funded by indirect taxation. Another issue to be consideredis to what extend the principal wants to receive the facility. After a typicalconcession period of 30 years, the facility may have become obsolete andcould need major rehabilitation or require more resources to operate than anew facility. In prisons for example, the facility may be inadequate, or in apower plant the method of generating energy may be inefficient. Active

participation of the principal during the concession period may keep afacility up to standards or, at transfer, a BOT project could in fact lead to anew BOT project.

Fig. 0.10: Transfer of a BOT facility.

Due to the external and internal particularities of every BOT project, theactual organization and process may be different to the presentation in theprevious paragraphs. The starting and completion period of each stage in aBOT project can change due to a variety of factors, both external andinternal to the project. Among them are the complexity of the development


process, government regulations, political influences, concerns ofenvironmental groups, and neighborhood pressures. Such effects have am a j o rinfluence on the progress of a project, likely to stall or change “theoretical”models. Thus, the development of a precise and detailed frameworkapplicable for every BOT project is not possible and this must be taken intoconsideration for each case study in this book that presents the frameworkof a particular project and its external and internal conditions.

0.6 FINANCING

One of the primary features of BOT is private financing which infers theconcessionaire is fully responsible for acquiring the necessary funds todevelop and operate the facility. The concessionaire will raise the requiredfunding in debt and equity. The return of investment is realized during theoperational stage of the facility (Fig. 0.11).

Fig. 0.11: Cash flow over the concession period.

The concessionaire takes a part of the equity by investing funds andadditional shareholders are usually the parties of the consortium (investors,contractor, operator). At a certain stage of the development, equity may besold to additional shareholders through private and public offerings. Theshareholders require an independent business plan, including predictions ofrevenues, development and operating costs and an estimate for the rate ofreturn. Although no guarantee can be given about dividend payments, otherguarantees must secure investment, such as the financial guarantees that thegovernment grants, and the amount of secured loans. The greatest risk isassumed by shareholders as they are paid last, once all short and long termobligations are met, though, due to the great risk the equity partnersassume, a higher return of investment is expected.

The debt is provided by secondary parties such as banks, financialinstitutions and bond holders, with the government sometimes providing


part of the debt. Most of the financial issues important to shareholders arealso crucial to lenders in order to forecast the financial outcome. Theexpected interest and repayment schedule is established prior to closing thedeals and contracts and gives investors a certain reassurance of security. Inaddition, lenders often ask for guarantees to minimize their risks and thegovernment usually provides the larger and most welcomed guarantees.

The equity to debt ratio is determined by the principal and depends onthe financial capacity of the equity partners and their ability to secure longterm 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 ROI’s in the studied cases were 15-20% forequity and 8-10% for debt. The latter was based on the ROI of state bondsand interest,compensating for the perceived higher risk level.

In most cases, the government retains a financial influence over theproceedings of a BOT project. In cases where no government is involved, it

appears more difficult to achieve a financially successful project. The government can be involved in two ways: through subsidies and as a

tenant.Through subsidies. This type of involvement is based on two factors.


Firstly, the government’s wish not to lose primary control over thedevelopment of the public facility. In the Wijker tunnel project for example,t h egovernment made a 15% subsidy available towards the cost of develop-

Fig. 0.12: Financial BOT structure.

ment. The second reason may be attributed to the government being forcedto allocate public money to make the project more interesting for the privatesector. In the Strait Crossing Bridge project, the government annually paysC$ 41 million to lighten the financial burden. The criteria for selecting theconcessionaire for this project were structured to obtain a minimumrequired subsidy.

As a tenant. A second approach which enables the government to getfinancially involved is to support the off-take, the product, of the facility. Inthe Dabhol Power Company project, the state assumed the responsibility todistribute the produced energy to the final users, charging different regionsdifferent rates for political reasons. In both the prison projects (Plymouthand the Donald Wyatt), the government entered an agreement to take overthe off-take of the facility where the government (state, federal and local)would be charged per personday for the prisoners and detainees.

The revenues for a project are generated during operation from the finalusers. In the direct payment method, like in toll roads, the end-user directlypays the operator. In the indirect payment method, the government pays infavor of the final user, like in the prisons and the Wijker tunnel. Therevenues are allocated to repay the debt plus the interest due within theconcession period as well as the dividends to the shareholders. Fig. 0.12shows a typical financing structure for a BOT project, with both investmentand revenue streams.

Fig. 0.13 shows schematically the payments (development, construction,

maintenance and operations, interest) and the revenues for each stage in a


BOT project. At the time when the present net worth of the accumulatedrevenues is the same as the present net worth of the accumulated payments,the concessionaire will have realized the projected investment return thatincludes the required interest and profits. Of course, that time depends onthe projected return on investment of the equity holders and lenders. Afterthat period, the facility will produce net profits for the equity holders.

Fig. 0.13: Payments and revenues for each stage in a BOT project (duration of stages not in scale).0.7 DESIGN AND CONSTRUCTION

One would expect the participation of many organizations with a widerange of expertise should result in an efficient and effective design. However,the case studies show that, in most of the cases, a conservative design andconstruction was adopted. This is driven by the concessionaire’s attitude toreduce risks and costs. Tested design and construction methods are widelyadopted in BOT projects, with innovative ideas employed only when it willmake the facility more profitable in the long run.

The architect usually works for the contractor under a design-buildcontract between the concessionaire and the contractor. During thepreliminary study, however, the principal has already commissioned aninitial design as a part of the feasibility study and to obtain the necessarypermits. Therefore, the architect hired by the principal will transfer work tothe architect hired by the contractor. In some cases, the architectrepresenting both parties is the same.

One of the major advantages of having so many participants is the factthat the design will satisfy all parties on completion. Consequently, thedisadvantage is that the design will compromise to the tastes of all thoseinvolved and the design process will be more time consuming. Theparticipation of the operator can become very important in design. In thePlymouth County Correctional Facility project, the facility was designedwith the wardens in the center of the building to control the whole facilityfrom that site. Such a design required less guards and resulted to a moreeffective and efficient operation. The active participation of the operator inthe BOT projects is quite innovative and facility operators should be seen aspotential consultants for traditional projects as well.

The participation of many opposition and environmental parties is oftenseen as an inconvenience because of design modifications and eventualdelays. However, in the Strait Crossing Bridge case, due to the specialattention given to the design of the pillars, because of the involvement ofthese groups, the ice flow during the long winters does not interrupt theecology of the area.

The same observations can be made for construction as with the designprocess: selection of conservative, well tested methods and materials thatpose little risk. The participation of the contractor in decision making isimportant for designing and constructing a durable facility with few


unknown factors.

0.8 ENVIRONMENTAL FACTORS AFFECTING BOT

Environmental factors include the role of the government, neighborhoodconcerns, environmental and sustainability issues, and the economic climate.Although in defining the BOT process, the government’s extensiveparticipation should be excluded, government agencies are invariablyinvolved in approving parts of the project or by developing other publicfacilities tosupport the specific BOT facility. A government’s involvement is advan-tageous for the project as success seems to be guaranteed. Getting permitsand licenses, for example, is inevitably facilitated by the government’sinvolvement. However, it is not always beneficial to the project asopposition within the government can create major hurdles. In the DabholPower Company case, the project was stalled at several intervals followinggovernment elections. Arguing within the Dutch Second Chamber broughtout unforeseen obstacles in the development of the Wijker tunnel.

A major aspect to be considered in BOT projects is the environment andthe environmental agencies. We live in an era where preserving theenvironment holds great importance and so development of facilities whichwill endanger the environment face major opposition. In the case of theNorthumberland Strait Crossing Bridge, the melting process of the ice andthe disturbance of flora and fauna were major obstacles in the developmentof the bridge.

Opposition from a unified neighborhood group can be as disrupting asgovernment or environmental agencies in scrutinizing and eventuallydelaying a BOT project. A group called “Friends” opposed the initialNorthumberland Strait Crossing Bridge proposal due to perceived loss oflabor, the endangerment of the fishery and the effects on wildlife. In the SR91 Express Lane case, opposition was expressed by the neighboring county.Involving the neighborhood at an early stage, through public hearings, canimprove the understanding and cooperation of the neighbors and bevaluable for the development of the facility. In the Donald Wyatt DetentionCenter case, many public hearings and elections facilitated the process.

Ultimately, the status of the economy is crucial for a BOT project. Theprimary objective for choosing a BOT approach is to obtain private funding.If there are no private companies interested, a project cannot be developed.Investing money is always in proportion to the risks involved and the return-on-investment; the risks are higher in a weak economy. Under suchcircumstances, negotiations for an equity-debt arrangement with riskaversion can take a long time, making a BOT project more expensive thanthe public option. Thus, when the economy is weak, the government shouldconsider a public option or at least a certain public investment in the BOTproject. When international financing is considered, the government must


carefully consider establishing the usage fees, especially if the local economyis poor and devaluation of the local currency a possibility.

0.9 WHEN IS BOT APPROPRIATE?

In recent years, BOT projects are considered applicable to bothdeveloping countries and developed economies. The greatest advantage ofBOT for the government is the subcontracting of the majority of the risks tothe private sector, with the latter willing to finance and assume risks in thedevelopment of a public facility. At the end of the concession period, thegovernment will inherit a well-operated project without investing publicfunds and with little risks. A consequence of not investing its own money isthat the project can take place even if the government’s budget is limited.The finance is obtained by private organizations and the execution of theproject is independent of the financial planning of the government.Furthermore, because the design, development, and construction are all theresponsibilities of a single party, the concessionaire, the facility should bemore effective and efficient.

However, BOT is a complex process. Because of the numerous and verydifferent contracts, organizations and stages, the process management ismore complex, especially at its early stages. Furthermore, the concessio-naire accepts to take over the risks from the principal expecting a highreturn on investment. For every risk the concessionaire concedes to, the finalcustomer has to pay. Nevertheless, BOT projects need not necessarily bemore expensive than traditional projects because of the savings in aprivately owned process and because of efficient design, construction andoperation.

Another issue is the uncertainty of predicting the revenues during theconcession period which is the most crucial piece of information for theconcessionaire. The length of the concession period will depend on thoseexpected revenues and can be up to 30 years, already a considerableprediction period. Often, the business plan of the concessionaire is based oninaccurate assumptions that can be devastating for the operation of theproject. This was seen in the Channel Tunnel project between Britain andFrance, one of the first European privately financed BOT projects.

Concluding, we would like to quote Mario Cuomo who stated in theNew York Times, on May 1985; “It is not the government’s obligation toprovide services but to see that they’re provided.” As the government’sawareness for subcontracting public facilities to private companies grows,we can readily observe the increase in public-private partnerships and BOTwill be central to this development.

SOURCES

[1] Based upon “New Organizational Forms in the Construction


Industry”, HBS-case, February 20, 1991.[2] Based upon “Build Operate Transfer, Naar een theoretisch model

voor de BOT-benadering”, Arjan Bol, thesis research, University ofTechnology, Delft the Netherlands, March 1995.

[3] Based upon “BOT in Nederland”, Lotte Verhoeven, thesis research,University of Technology, Delft the Netherlands, 1997.

[4] “BOT Projects, New Schemes to Build a Future”, ENR 1995,Sponsored Section.

[5] “Managing Change and Conflict in Architectural Projects: Fourpavilions in Seville’s Expo ‘92”, Alberto Diaz-Hermidas, DoctoralDissertation, Harvard Design School, Cambridge, MA, 1994.

[6] Based upon “De financiering van Build Operate Transfer”, StephanChon, thesis research, University of Technology, Delft theNetherlands, December 1995.

[7] Based upon “Build Operate Transfer (BOT) - een theoretisch model”, Marjan Klein, thesis research, University of Technology, Delft theNetherlands, 1996.

[8] Based upon “Information Technology for Project Management in theBuild Operate Transfer-approach”, Jeffrey Huang and Rick Huijbregts, Harvard Design School, to be officially published


fac pub pollalis bot part 1 (1)

Documents