Concessionaire’s Financial Capability in Developing Build-Operate-Transfer Type Infrastructure Projects

The concessionaire of a build-operate-transfer (BOT) type infrastructure project undertakes many responsibilities, and consequently, assumes a broad scope of risks and potential financial consequences. In addition, appropriate financial engineering skills are required in nonrecourse or limited-recourse financing, which is usually used in BOT-type projects. Therefore, strong financial capability of the concessionaire is an important prerequisite to the successful development of a BOT-type project. A common set of 35 financial criteria has been identified through a systematic research approach, and their relative significances determined based on worldwide expert opinions solicited by a structured questionnaire survey. Statistical analyses of the responses to the survey conclude that (1) the public, private, and academic sectors consider financial criteria rather similarly in the evaluation of the concessionaire’s financial capability, and there is no significant statistical difference in the rating of the significances of the 35 financial criteria across these sectors; (2) almost all of the 35 financial criteria are important in measuring the concessionaire’s financial capability; and (3) the 35 financial criteria can be grouped to measure the concessionaire’s financial capability in four dimensions: “strong financial engineering techniques,” “advantageous finance sources and low service costs,” “sound capital structure and requirement of low-level return to investments,” and “strong risk management capability.” Outputs of this research facilitate the private sector in assessing their financial capability and making corresponding improvements to increase their financial competitiveness, and the public sector in evaluating potential concessionaires’ financial capability for BOT projects in general.     

Build-Operate-Transfer in Infrastructure Projects in the United States

While the infrastructure in the United States is in need of large and immediate investment, the funds provided by public agencies are not nearly sufficient to face such a challenge. Build-operate-transfer (BOT) is a delivery/financing system that can be a solution to this problem. In this system, a private sponsor finances the design, construction, maintenance, and operation of a public project for a specified concession period, at the end of which it transfers ownership to the government agency, hopefully after recouping its costs and achieving profits. A questionnaire survey of large municipalities and state departments of transportation was conducted to determine the extent to which they are using BOT in their large projects, to investigate the implementation of BOT, and the reasons why some government agencies avoid using BOT. The findings indicate that very few agencies use BOT. The reasons why most do not use BOT were reported by the respondents to be the availability of proven alternatives and enough funds, the existence of political barriers, and resistance to change both on the part of government agencies and private sponsors. When government agencies and private sponsors explore the use of BOT, they should avoid the pitfalls perceived by the respondents in this study.     

BOT Viability Model for Large-Scale Infrastructure Projects

The key to a successful implementation of a build-operate-transfer (BOT) infrastructure project is in-depth analysis of all aspects related to economic, environmental, social, political, legal, and financial feasibility of the project. For these reasons, the analysis of the project feasibility decision needs a technique to include the qualitative decision factors that have a strong impact on the project. This paper aims to introduce a decomposed evaluation model developed to assess the most common significant decision factors that strongly affect the feasibility of BOT projects. The paper describes the viability decision factors that were identified and screened with the assistance of a group of industry experts. This analysis yielded 21 significant factors that would have a certain impact on the feasibility of any BOT project. These factors were classified into three relative categories forming the structure of the suggested project viability model. This model presents a new approach, based on the analytical hierarchy process technique, to evaluate the relationships between decision factors related to project feasibility determination. The new approach has been validated by information obtained from three case studies of BOT projects. The proposed approach to project feasibility evaluation aims to increase the decision maker’s ability to determine the factors contributing the most to the viability to the BOT project at hand.     

Alternate Financing Strategies for Build-Operate-Transfer Projects

This paper contains a study of build-operate-transfer (BOT) project financing strategies from the perspective of project sponsors. The financing strategy for a BOT project includes the selection of the appropriate mix of equity and debt financing, and the identification of appropriate financing sources. Project sponsors typically wish to minimize their financing costs to ensure their tenders are competitive. Thirteen transportation and power-generation BOT projects in North America and Asia were analyzed. Important considerations and financing strategies were identified and examined. The findings suggest that project risks, project conditions, and availability of financing are the major considerations in selecting a financing strategy. The project risks that were determined to be most significant in financing strategy selection were political, financial, and market risks. Based on the study findings, a decision model was developed that can be used by BOT project sponsors in selecting appropriate financing strategies.     

Financial Viability Analysis and Capital Structure Optimization in Privatized Public Infrastructure Projects

Numerous public infrastructure projects have been privatized worldwide, where responsibilities, risks, and rewards are substantially reallocated between pubic and private sectors. The financial evaluation of a privatized infrastructure project is complex and challenging because of the risks and uncertainties due to the large size, long contract duration, nonrecourse financing, multiple project participants with different motives and interest, and the complexity of the contractual arrangements. Improved financial engineering techniques are required to overcome the limitations of traditional financial analysis techniques in addressing risks and uncertainties. This paper develops a methodology for capital structure optimization and financial viability analysis that reflects the characteristics of project financing, incorporates simulation and financial engineering techniques, and aims for win–win results for both public and private sectors. This quantitative methodology defines the capital structure of a privatized project in four dimensions, examines different project participants’ perspectives of the capital structure, optimizes the capital structure, and evaluates the project’s financial viability when it is under construction risk, bankruptcy risk and various economic risks (that are dealt with as stochastic variables), and is subject to other constraints imposed by different project participants. This methodology also evaluates the impact of governmental guarantees and supports, and addresses the issue of the equity holders’ commitment to project success by initiating the concepts of equity at project risks, value of governmental loan guarantee, and project bankrupt probability during construction. A framework and a solution algorithm are provided for this proposed methodology. These research outputs will significantly facilitate both public and private sector in evaluating a privatized project’s financial viability and collectively determining an optimal capital structure that safeguards their respective interests.     

Hierarchical Structuring of PPP Risks Using Interpretative Structural Modeling

Project risk management emphasizes the need to rank and prioritize risks in a project to focus the risk management efforts. This risk prioritization is of special significance in public-private partnership (PPP) projects, since project success depends upon the efficient allocation of risks to the party who can best manage it. Previous studies on risk identification and assessment of PPP project risks have only produced an unstructured list of such risks and prioritizing them on the basis of probability and impact. This paper suggests the use of interpretative structural modeling (ISM) to prepare a hierarchical structure as well as the interrelationships of these risks that would enable decision makers to take appropriate steps. MICMAC (matrice d'impacts croises-multiplication appliqué a un classemen) analysis is also done to determine the dependency and driving power of the risks. ISM, along with MICMAC analysis, provides a useful hierarchy of risks whose individual relationships are unambiguous but whose group relationships are too complex to organize intuitively and can help practitioners better understand risk dependencies and prioritize risk-mitigation efforts. This study identified 17 risks encountered during the development phase of PPP projects in Indian road sector and found that fourteen risks were weak drivers and weak dependents. Delay in financial closure, cost overrun risk, and time overrun risk have been found to have the highest dependence on other risks. The analysis can be extended by practitioners for risk analysis in other infrastructures such as railways, seaports, airports etc.     

Optimal Capital Structure Model for BOT Power Projects in Turkey

Interest in the Build/Operate/Transfer (BOT) scheme for infrastructure projects has been growing rapidly, and numerous projects have been implemented around the world. Through BOT projects, a government reallocates the risks and rewards in the development of large infrastructure projects to the private sector. One key aspect to the successful implementation of the BOT concept in any country is the raising of finance by project sponsors. Financial engineering techniques and capital structuring skills are required to find the proper mix of debt and equity and to achieve successful financing for the proposed project. The objective of this paper is to present a simplified model to determine the optimum equity level for decisionmakers at the evaluation stage of a BOT hydroelectric power plant (HEPP) project in Turkey, which takes place immediately after the completion of the feasibility study. The resulting model is the combination of a financial model and a linear programming model that incorporates an objective of maximizing the return of the project from the equity holder’s point of view. To show versatility of the model, a real case study is conducted. Thus, this research is concerned with the determination of an equity funding level in BOT project finance. There are different equity levels found in BOT HEPP projects, and there is a need for such a model to determine optimal capital structure, which would assist the project sponsors to ensure that the equity level necessary for optimal capital structure is available prior to the project implementation stage.     

Interface Management for China’s Build–Operate–Transfer Projects

Stringent pressure on public finances has made China’s infrastructure development a “bottleneck” in its bid to sustain rapid economic growth. As a result, many modalities have been developed to utilize the resources and skills of the private sector to supply essential infrastructure products and services, as well as to improve the efficiency in government procurement of the same. The build–operate–transfer (BOT) approach is an important example of these innovative modalities. The BOT approach in China is still in its infancy; many pitfalls await the unwary and obstacles impede more extensive application of this modality. The pitfalls are attributable to the complexities in the BOT approach, particularly when attempted in China’s transition economy emerging from decades of central planning to become one that is more market driven and globally integrated. This paper proposes two systems concepts to help manage this complexity: (1) a process modeling approach that maps key functions, parameters and interfaces in the project delivery process, and (2) the use of interface management involving specific measures that have contributed towards project success in Chinese BOT projects. The process modeling approach has led to the development of China’s BOT generic process model (CBGPM). Expert opinion was elicited on the criticality of the interfaces identified in CBGPM as well as the effectiveness of selected interface management measures. Finally, an interface management framework consisting of five key steps is suggested for China’s BOT projects.     

Criteria for Selecting the Private-Sector Partner in Public–Private Partnerships

A critical issue in public–private partnerships (PPPs) in international infrastructure development is the selection of the right private-sector partner. This necessitates a best value source selection methodology in which the establishment of a set of appropriate selection criteria is a prerequisite. Various important selection criteria have been identified through a literature review of previous studies on critical success factors; experience drawing and lessons learning from international PPP practices; examination of selection criteria used in worldwide PPP projects; and interviews/correspondence with international PPP experts and practitioners. These identified criteria are classified into four evaluation packages for PPP projects in general: (1) financial, (2) technical, (3) safety, health, and environmental, and (4) managerial. The relative importance of these evaluation packages and the relative significance of the criteria within each package have been statistically analyzed based on a structured questionnaire survey of worldwide PPP expert opinions. These statistical analyses include validity and reliability analysis, Mann Whitney U tests, direct comparisons of mean criterion significance indexes and criterion rankings between respondents across public, private, and academic sectors, and a general rank agreement analysis across sectors for each evaluation package. These research outputs would facilitate the formulation of a multicriteria best value source selection methodology for PPP projects in general and the development of both objective and subjective evaluation criteria to select the right private-sector partner for a particular PPP project.     

Successful Delivery of Public-Private Partnerships for Infrastructure Development

Two common approaches have been used by governments for the implementation of public-private partnerships (PPPs): a finance-based approach that aims to use private financing to satisfy infrastructure needs, and a service-based approach that aims to optimize the time and cost efficiencies in service delivery. The implementation of PPPs, however, may suffer from legal, political, and cultural impediments. In the United States, the federal government enabled a number of acts to ease the impediments and promote PPPs for infrastructure development. Based on a detailed analysis of PPPs in the United Kingdom and British Columbia, Canada, this paper describes principles that would characterize the implementation of PPPs at the program level (e.g., whether the implementation is successful). The principles pertain to the: availability of a PPP legal framework and implementation units; perception of the private finance objectives, risk allocation consequences, and value-for-money objectives; maintenance of PPPs process transparency; standardization of procedures; and use of performance specifications. Guidelines for successful implementation are explained and discussed in the context of the United States PPPs experience and impediments.     

Risk/Reward Compensation Model for Civil Engineering Infrastructure Alliance Projects

A risk/reward model is described as that which aligns project participants’ behaviors toward the achievement of a project’s performance objectives through the use of incentives. A risk/reward model typically includes the following mechanisms: risk/reward shared percentages among nonowner participants, project cost risk/reward, noncost risk/reward, risk cap, and achievability of performance targets. This paper examines the influence of a risk/reward model on the behavior of project participants. Twenty-nine industry practitioners from eight civil infrastructure project alliances were interviewed. The interviews revealed that individual features of a risk/reward model identified had merits, but the achievability of performance targets model appeared to be the most appropriate for promoting positive behaviors within the project team. Additionally, it was found that all incentive aspects of the model examined led to positive and constructive behaviors occurring due to their perceived fairness and equity of payment structure. Participants indicated that having a commercial interest in an alliance’s performance outcomes ensured collaboration and engagement throughout the project’s life cycle. It is concluded that risk/reward sharing is pivotal to obtaining a successful project outcome for the procurement of civil engineering infrastructure projects when using an alliance.     

Probabilistic Approach for Budgeting in Portfolio of Projects

This paper presents a mathematical model for calculating the budgetary impact of increasing the required confidence level in a probabilistic risk assessment for a portfolio of projects. The model provides a rational approach for establishing a probabilistic budget for an individual project in such a way that the budget for a portfolio of projects will meet a required confidence level. The use of probabilistic risk assessment in major infrastructure projects is increasing to cope with major cost overruns and schedule delays. The outcome of the probabilistic risk assessment is often a distribution for project costs. The question is at what level of confidence (i.e., the probability that budget would be sufficient given the cost distribution) should be used for establishing the budget. The proposed method looks at a portfolio of such projects being funded by the same owner. The owner can establish a target probability with respect to its annual budget. The model can help the owner establish confidence level for individual projects and also examine the effect of changing the confidence level of the portfolio budget on the budget and the confidence level of individual projects. The paper is relevant to practitioners because it provides a methodology for establishing confidence levels by the owner agencies in the emerging field of cost risk assessment for infrastructure projects. A numerical example is provided using actual transit project data to demonstrate the model application.     

Perception of Financial Institutions toward Financing PFI Projects in Hong Kong

Private finance initiative (PFI) has emerged to be a viable strategy for governments to transfer financial risks in public projects to the private sector. It does not only help tap the efficiency and finances of the private sector but it also promises to deliver better public services to the community. Despite these obvious incentives, there is still a low PFI diffusion in Hong Kong. Based on this understanding, we have undertaken this exploratory study, which is probably the first of its kind, to investigate the PFI’s financial issues from the perspective of financial suppliers. This study was intended to identify factors that may affect the perception of the supplier side and to explore ways to facilitate their participation in PFI projects. The findings suggest that respondents had low level of understanding and knowledge of the PFI and they perceived that PFI public projects had an average risk and performance. To increase their involvement, several enablers are provided in this paper.     

Financial Risk Analysis of Project Finance in Indonesian Toll Roads

If a project is implemented using a project-finance approach, the debt service payment relies solely on the project cash flows and its assets. This paper identifies, quantifies, and evaluates major financial risks associated with project-financed toll road projects in Indonesia. Ordering payments by priority level, subject to cash availability, enables risk to be evaluated from the different perspectives of multiple parties involved. The paper makes use of Latin Hypercube simulations for risk analysis because they deal with problems involving large and complex systems. To better illustrate the concept, a case study is presented. A sensitivity analysis of the impact of delay-in-adjustment risk and of the adoption of a new regulation related to the toll adjustment is performed and discussed. Simulation results show that the project sponsor fares worse as delay-in-adjustment risk increases but that the creditor can fare better, given that the risk level is low or moderate. Output statistics also reveal that the adoption of the new regulation has negative impact on the project cash flows from both the project sponsor’s and the creditor’s perspectives under different scenarios associated with delay-in-adjustment risk.     

Risk Concession Model for Build/Operate/Transfer Contract Projects

This paper extends the build–operate–transfer (BOT) concession model (BOTCcM) to establishing a risk concession model for BOT contract projects. The decision for a concession period is one of the most important decisions in determining a BOT contract. BOTCcM presents an alternative method to assist in determining a concession period that can protect the basic interests of both the investor and the government concerned. However, there is a major limitation in using the model, namely it gives no consideration to the impacts of risks on the estimation of various economic variables in the model. This study considers the risk impacts to the BOTCcM model and presents an additional risk concession model. This model provides an approach for formulating a concession period to consider the impacts of risks and, at the same time, protect the basic interests of both the investor and the government concerned. A hypothetical case is used to show the procedures of formulating the risk concession period through the assistance of the Monte Carlo simulation method.     

Effects of Tariff Design in Risk Management of Privately Financed Infrastructure Projects

The design of tariff is a key issue in the development of privately financed infrastructure projects. It involves the determination of tariff magnitude, the choice of tariff structure, and the design of adjustment mechanisms. Tariff structures can be an all-in tariff or a compound tariff. Tariff adjustment mechanisms can be used to address different risk factors such as inflation, exchange rate, demand, and fuel prices. An appropriate combination of tariff structure and adjustment mechanism can be effective to manage key risks of privately financed infrastructure projects. Simulation results show that a well-designed tariff can create a “win-win” solution for both project promoter and the host government.     

Determinants of Efficient Risk Allocation in Privately Financed Public Infrastructure Projects in Australia

Risk allocation in privately financed public infrastructure projects, which are mainly referred to as public-private partnership (PPP) projects, is a challenging job due to the nature of incomplete contracting. An investigation into the mechanism that guides the formation of efficient risk allocation strategies is thus desirable. Drawing on the transaction cost economics and resource-based view of organizational capability, this paper has identified five main features of the transactions associated with risk allocation in PPP projects. They include partners’ risk management routine, partners’ risk management mechanism, partners’ cooperation history, risk management environmental uncertainty, and partners’ risk management commitment. For achieving cost efficiency, different risk allocation strategies may suit different conditions of the features. Accordingly, a theoretical framework and five hypotheses were proposed for testing. Data collected in an industrywide survey were analyzed using multiple linear regression technique. It was found that generally, the identified features are determinants in the decision-making process of efficient risk allocation. Therefore, the proposed theoretical framework provides both government and private agencies with not only a logical and holistic understanding of but also a support tool for decision making on risk allocation strategy in PPP projects. Study limitations and future research directions are also set out.     

Neurofuzzy Decision Support System for Efficient Risk Allocation in Public-Private Partnership Infrastructure Projects

The performance of public-private partnership (PPP) infrastructure projects is largely contingent on whether the adopted risk allocation (RA) strategy is efficient. Theoretical frameworks drawing on the transaction cost economics and the resource-based view of organizational capability are able to explain the underlying mechanism but unable to accurately forecast efficient RA strategies. In this paper, a neurofuzzy decision support system (NFDSS) was developed to assist in the RA decision-making process in PPP projects. By combining fuzzy and neural network techniques, a synthesized fuzzy inference system was established and taken as the core component of the NFDSS. Evaluation results show that the NFDSS can forecast efficient RA strategies for PPP infrastructure projects at a highly accurate and effective level. A real PPP infrastructure project is used to demonstrate the NFDSS and its practical significance.     

Drivers of Conflict in Developing Country Infrastructure Projects: Experience from the Water and Pipeline Sectors

Despite the considerable scholarship focused on infrastructure investment in the developing world and the substantial sums of money spent each year on developing-country infrastructure, little attention has been given to understanding the drivers of conflict that shape the trajectory and cost structures of these massive investments. The manifestation of conflict among stakeholders in infrastructure projects ranges from the renegotiation of contract terms by project partners to popular protests among consumers of privatized services. The principal objective of this research is to identify combinations of country, project, and stakeholder factors that are associated with the emergence of legal and political conflict within natural gas and oil pipeline projects and water supply concessions and leases. The analysis includes data from 26 infrastructure projects spanning 31 countries and uses an analytical approach derived from Boolean algebra. Country-level characteristics, such as extent of democracy and rate of international NGO membership, are found to be important elements in the recipes for conflict among water supply projects but not for pipeline projects. Local impacts such as service price increases (water supply) and limited provision of oil and gas to the project host country (pipelines) are also important drivers of conflict for both subsectors. The involvement of one or more international financial institutions is also associated with the emergence of conflict in projects. Contrary to expectations, public consultation is associated with conflict in both subsectors. Overall, the study findings suggest that several factors associated with conflict in infrastructure projects can be minimized with careful project design.     

Analytical Framework for the Choice of Dispute Resolution Methods in International Construction Projects Based on Risk Factors

International construction projects provide opportunities for developing countries to advance in the global economy and for international construction and design firms to increase their profit and market share. Despite the attractive opportunities that international construction offers, international contractors are faced with many challenges and difficulties when moving into international markets. Many risks are associated with international construction, whether external or project-specific risks. Those risks affect how contract clauses are written, including the dispute resolution clause. This paper discusses the different dispute resolution methods employed in international construction contracts and develops an analytical framework (DRM-Risk matrix) suggesting the use of specific dispute resolution methods depending on the risks expected in the project. The matrix may eventually help international contractors in the selection of the appropriate dispute resolution method during contract formation depending on the risks involved in a project.