Selecting BOT/PPP Infrastructure Projects for Government Guarantee Portfolio under Conditions of Budget and Risk in the Indonesian Context

Guarantee provision in privately financed infrastructure projects implemented as build-operate-transfer/public-private-partnership (BOT/PPP) arrangements is not uncommon in many countries, and Indonesia is no exception. But, given that the government budget is, in most if not all cases, not unlimited, there must be a selection of BOT/PPP projects posing proposals for seeking government guarantees. This paper presents a project selection methodology under the chance-constrained goal-programming framework in the context of the Indonesian BOT/PPP infrastructure industry. The ultimate objective of the selection is to result in a portfolio of guaranteed projects that brings maximum welfare gain to the economy as a whole, maximum total net change in financial net present value but, at the same time, puts the government at the lowest fiscal risk for a given budget constraint. The proposed methodology allows the government to examine relationships among the expected total payment, budget-at-risk allocated, and a desired confidence interval of actual payment not exceeding the budget-at-risk. The government can also compare two or more alternative scenarios and choose the optimal one that delivers the highest value for the money. To illustrate the model application, without sacrificing the generality of the proposed methodology, a much-simplified hypothetical case is presented, examined, and discussed.     

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.     

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.     

Win–Win Concession Period Determination Methodology

In infrastructure development through public-private partnerships (PPPs), governments worldwide often preset the concession period to a fixed length and then invite the private sector to bid on other aspects of the project. This practice has potential economic, financial, and social problems as shown in a case study of Hong Kong tunnel projects. To overcome these problems, this paper has proposed a win–win concession period determination methodology, in which PPPs are addressed as a principal-agent maximization problem. Both deterministic and simulation-based methods are provided to determine the concession period, with detailed step-by-step procedures. These methods take into consideration the financial characteristics of PPPs and the construction and operation requirements. In particular, the simulation-based approach combines the critical path method and Monte Carlo simulation technique in an effort to quantify construction and market risks for informed decision making. Furthermore, some issues related to the proposed methodology also have been discussed. These issues include (1) factors in determining a reasonable rate of return to the concessionaire’s equity investment; (2) advantages and disadvantages of rate of return regulation; (3) concession period as a tender evaluation criterion; (4) efficiency check of the concessionaire’s cost performance; (5) workable pricing mechanism; and (6) a practical approach to establishing statistical construction cost/duration distributions.     

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.     

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.     

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.     

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.     

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.     

First Public-Private-Partnership Application in Taiwan’s Wastewater Treatment Sector: Case Study of the Nanzih BOT Wastewater Treatment Project

Taiwan has been promoting public-private-partnership (PPP) projects in the wastewater treatment sector with the aim of improving its sustainable environment and increasing its wastewater treatment rate. The Nanzih Wastewater Treatment Project is the first PPP application in Taiwan’s wastewater treatment sector. It provides important experiences and lessons for both the public and private sectors. This paper presents a detailed study of its tender process, concession agreement, financial structure, payment mechanism, and risk management. It explains the key features of the project and provides conclusive findings on the lessons learned. These observations should be useful for practitioners and academia who are interested in the development of future PPP wastewater treatment projects in Taiwan.     

Concessionaire Selection: Methods and Criteria

Various innovative public private partnerships (PPPs) have been explored in worldwide infrastructure development in which BOT (build-operate-transfer) is the underlying concept. Selection of the right concessionaire, which is critical to the success of such BOT-type PPPs, depends on the quality of identifying and defining suitable project-specific criteria and the quality of formulating an efficient tender evaluation methodology. A systematic research approach (including literature review, case studies, interview/correspondence, and a structured questionnaire survey) has been adopted to draw experience and learn lessons from international PPP practices and to unearth and refine experiential and expert knowledge from worldwide experts and practitioners. Tender evaluation criteria and methods currently used in diverse types of PPP projects in both developed and developing countries are identified, compared, analyzed, and then generalized.     

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.     

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.     

Case Study: Izmit Domestic and Industrial Water Supply Build–Operate–Transfer Project

The “build, operate, and transfer model” (BOT) is a financing model, which is used in many developing countries to finance new infrastructure projects with private sector participation. The BOT method foresees the financing, designing, building, operating, and managing of the facility by the private sector and then its transfer free of charge, to the owner after a predetermined concession period. For interested parties, the history of BOT laws and projects in Turkey is presented as an Appendix. In this study, the Izmit Domestic and Industrial Water Supply Project, the biggest privately financed water supply project procured under the BOT model in the world at the time and the first in Turkey will be introduced and the problems that arose during the implementation of the project, namely, the scope of the project, equity debt ratio, return on equity, principles of accounting, coordination of State departments, land access, determination of the optimum operation period, and the sale price of the water, will be presented and suggestions will be given on how to deal with these problems.     

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.     

Modeling Cost Escalation in Large Infrastructure Projects

Cost overruns in large infrastructure projects have been commonplace in the past decades. Budgeting for cost escalation is a major issue in the planning phase of these projects. In this paper, we first review various methods of forecasting escalation factor and study the changes in construction costs in the past 25 years by analyzing movements of a cost index. We then introduce a system for modeling the escalation uncertainty in large multiyear construction projects. The system uses a Monte Carlo simulation approach and considers variability of project component durations and the uncertainty of escalation factor during the project lifetime and calculates the distribution for the cost. System application is demonstrated using a numerical example. The system can be used by planners and cost estimators for budgeting the effect of cost escalation in large projects with multiyear schedules.     

Development of Direct Integration Algorithms for Structural Dynamics Using Discrete Control Theory

In structural dynamics, integration algorithms are often used to obtain the solution of temporally discretized equations of motion at selected time steps. Various time integration algorithms have been developed in the time domain using different methods. In order for an integration algorithm to be reliable it must be stable and accurate. A discrete transfer function is used to study the properties of integration algorithms. A pole mapping rule from control theory in conjunction with a discrete transfer function is used to develop new integration algorithms for obtaining solutions to structural dynamics problems. A new explicit integration algorithm, called the CR (Chen and Ricles) algorithm, is subsequently developed based on the proposed method. The properties of the algorithm are investigated and compared with other well established algorithms such as the Newmark family of integration algorithms. By assigning proper stable poles to the discrete transfer function the newly developed CR explicit algorithm is unconditionally stable and has the same accuracy as the Newmark method with constant acceleration. In addition, the CR algorithm is based on expressions for displacement and velocity that are both explicit in form, making it an appealing integration algorithm for solving structural dynamics problems.     

Computer Modeling for the Complex Response Analysis of Nonstandard Structural Dynamics Problems

Over the past several decades, two intriguing classes of problems, having a wide range of applications in engineering, have been of interest to many researchers: (1) coupled dynamics of a distributed parameter system traversed by one or more moving oscillators; and (2) transient dynamic analysis of axially moving media (and associated phenomena of parametric resonances). Bridge vehicle interaction falls into the first class of problems, and the analysis of flexible appendages deployed from a satellite or a spacecraft is typical of the second class. Mathematically, these two problems are dual to each other, and they often are highly nonlinear in nature and typically involve large overall motion in space with complex effects of convective inertia terms in their governing equations of dynamic equilibrium. The “nonstandard” analytical nature of these problems stems from the fact that we are dealing with one or more of the following peculiarities: (1) variable problem domain; (2) varying spatial distribution of forces over the time duration of the analysis; and/or (3) changing location and type of constraints. Many researchers are trying to formulate the response of these problems, each having a different approach, but applicable only to certain specific details. Moreover, few researchers have concluded that these problems are beyond the scope of the present commercial finite-element (FE) software packages. However, we believe that if the nature and details of these problems are studied properly and carefully, it is immediately possible to simulate these problems in available commercial FE programs. An added advantage would also be the avoidance of many unrealistic simplifying assumptions that are often introduced to reduce the mathematical complexity; e.g., neglecting possible separation (after periods of prior contacts) in beam-moving vehicle problems, assuming linear behavior of suspension systems, and restriction to beam configuration only, among many others. For demonstration, we use ABAQUS in a large number of test cases to be presented. The results are compared with those presented in literatures.     

Concept for Type-Local Instance–Global Instance Object Modeling and Application to Structural Design of Buildings

Rational data modeling is prerequisite to the computerization of design, and the use of design information in the subsequent work, in areas such as cost estimation and construction. In particular, the structural design of buildings consists of a long series of unit steps and is nonprocedural and data intensive compared with structural analysis problems that are procedural and computation intensive. Hence, there is a need to investigate the characteristics of the problem and to structure design information properly to effectively manage it in the structural design process. This paper discusses modeling concepts for managing design information efficiently and supporting the design process effectively. Type-local instance–global instance object modeling is the conceptual backbone of the model in this study and provides consistent modeling of structural components including not only primitive members such as beams and columns, but also composite elements such as floors, frames, and even whole buildings. This paper also provides core and extended object concepts for classifying structural design information into an overall design and for processing dependent temporary stages in the design. Foundational and application object concepts are introduced for extending the model to various types of structures. An integrated structural design system for buildings is developed based on these modeling concepts, and finally a brief discussion of the application of the object model throughout the entire structural design process in the integrated structural design system is given. It is expected that the modeling concepts proposed in this research can be applied to a range of other engineering applications.     

Modeling of Cadmium Removal from Domestic Wastewater in Constructed Wetlands Using STELLA Simulation Program

A mathematical model was developed to simulate cadmium removal from wastewater in free water surface (FWS) and subsurface flow (SF) constructed wetlands using STELLA simulation program. The model simulated the accumulation of cadmium in soil (Cds), uptake by plants (Cdp), and residual concentration in effluent (Cdww_eff). The model was calibrated using one-half of the experimental data for the adjustment of the coefficients and the remaining data for model verification. The comparison of simulated and experimental values of Cds, Cdp, and Cdww_eff showed good agreement. The results indicated that the developed mathematical model could be useful for predicting the fate of cadmium when treating domestic effluents in constructed wetlands.