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.     

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.     

Concessionaire Selection for Build-Operate-Transfer Tunnel Projects in Hong Kong

A significant realignment of risks between project participants is a fundamental facet of the new procurement paradigm of BOT (build-operate-transfer). A BOT concessionaire assumes far more and deeper risks than a contractor. One critical contributor to the success of a BOT project is the selection of an appropriate concessionaire who has the necessary capacity to provide the best overall deal throughout the build-operate-transfer process. However, various BOT-type procurement protocols are not yet proven and are still being tried and tested. Many countries are at the lower ends of their learning curves. Therefore, there is a need to benchmark the best practices that have been emerging. The Hong Kong government has developed a well-structured concessionaire selection framework supported by the Kepner-Tregoe decision analysis technique. This paper analyzes and draws experiences and lessons from this concessionaire selection practice. Current concessionaire selection practices worldwide are also discussed with a view to improve the procurement process of regions lacking in such experiences or expertise.     

Prototype Model for Build-Operate-Transfer Risk Assessment

The build-operate-transfer (BOT) approach for project delivery, where the private sector has to finance, design, build, operate, and maintain the facility and then transfer it to the government after a specified concession period, is now gaining widespread popularity in developing countries. Compared with conventional project delivery methods, BOT sponsors expose themselves to a high risk, so that special attention must be paid to analyzing and managing risks. The identification, analysis, and allocation of various types of risks are an important aspect for the validation of privately promoted infrastructure projects. The BOT risk model presented in this paper is a prototype evaluation model that provides a logical, reliable, and consistent procedure for assessing the BOT project risk. The proposed model introduced the BOT risk index (F), which relied on the actual performance of eight main BOT risk areas. Two different modeling approaches were used in constructing this index: a new developed and an adapted Dias and Ioannou model. Not only can this index be used for BOT projects’ risk evaluation, but also for ranking them to select the lowest risk project as well.     

Build-Operate-Transfer-Type Procurement in Asian Megaprojects

Lessons are drawn from the recent resurgence in public-private partnerships for the procurement of large scale infrastructure, with a focus on Asian megaprojects. BOT (build-operate-transfer)-type win-win cooperation aligns well with the paradigm shift that has repeatedly been called for in addressing construction industry shortfalls. However, the many volatile variables involved and the limited experience in dealing with the special risks encountered highlights the need for decision support frameworks to evaluate and select the optimal from among: (1) potential BOT-type projects; (2) prospective franchisees; and (3) innovative project financing packages. Such frameworks should include appropriate success criteria and indicators for their evaluation. Benchmarking of good practices would establish reasonable ranges of values for such indicators. Identification of critical success factors, classifications of common risks, and comparisons of recent experiences on BOT-type projects lead to recommendations for the development of a “BOT body of knowledge” with related guidelines and toolkits. These would assist both public and private sector decision makers considering BOT-type modalities to attain multiple win-win-win targets that benefit their respective interests, as well as those of the general public end users.     

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.     

Alternative Concession Model for Build Operate Transfer Contract Projects

This paper develops an alternative concession model for build operate transfer (BOT) infrastructure projects. The concession period is a measure for deciding when the project ownership will be transferred from the investor back to the government concerned; it also demarcates the benefits, authorities, and responsibilities between the government and private investors. Previous studies have developed various techniques and methods, mainly suggesting proper organization structure, contracting procedures, methods of project financing, and risk allocation strategies when BOT-contract projects are implemented. These works have provided effective methodologies for the development of BOT contracts. Nevertheless, it appears that little has been undertaken in studying the way to determine the concession period in a BOT contract. This paper critically reviews the principles of establishing the concession period in a BOT contract. Such a review leads to developing a quantitative model for determining a proper concession period that can protect the interests of both the government concerned and private investors. An example is given that indicates how the alternative model can be applied to determine the concession periods of BOT infrastructure projects.     

Problems Facing Parties Involved in Build, Operate, and Transport Projects in Egypt

One of the newest financial schemes for environmental projects is the Build, Operate, and Transfer (BOT) concept, which is being used increasingly worldwide as a project delivery system by which governments obtain the infrastructure projects by private sector after a concession period free of charge. In the Egyptian environment up to now, promoters and investors have had many fears toward declared projects. This study aims to investigate the potential for implementing the BOT system in the Egyptian environment. This can be achieved by giving a clear view of BOT and of its problems, risk areas, and features, pertaining to the Egyptian environment, in order to maximize the benefits and minimize the risks as much as possible. The collected data was analyzed based on actual implementation in Egypt. This involved the following: (1) An overview of the critical success factors in order to achieve a BOT project; (2) an analysis of results obtained from questionnaires seeking to determine the possibility of occurrence of the different risk factors in the Egyptian environment, and their ranking; (3) a comparison between the questionnaire results and the actual risks from requests for the proposal of locally advertised projects; and (4) a determination of the missed critical success factors in the Egyptian environment. The main conclusion of this study is that three critical success factors are essential for the success of BOT projects in Egypt: (1) Picking the right project; (2) competitive financial proposal; and (3) special features of bid.     

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.     

Relational Selection for Collaborative Working Arrangements

Procurement arrangements for collaborative working arrangements (CWAs) should arguably provide suitable protocols under which different project partners can interact effectively and maintain harmonious relationships and mobilize their collective efforts towards common project objectives. Technical abilities of different project partners for carrying out the works are important. Also critical are their “soft” or “relational” qualities to work jointly and synergistically in the project team. The aims of the reported study are to examine the importance of a single set of different factors for selecting consultants, contractors, subcontractors, suppliers, and clients for CWAs; and to assess the relative importance of various factors and strategies for building CWAs. Data were collected internationally from 17 countries through a questionnaire survey and statistical analyses were conducted. Results attribute varying degrees of importance to various factors for selecting different project partners and suggest an interrelated and consolidated selection approach in general, except for “selecting” clients. The study confirms that trust and business ethics related factors and strategies are more helpful for CWAs than some others. Outcomes of this study are expected to benefit both industry practitioners and researchers, in exploring, designing, and implementing suitable CWAs and selecting appropriate project partners.     

Modeling Interfirm Dependency: Game Theoretic Simulation to Examine the Holdup Problem in Project Networks

Subcontractor selection strategies used by contractors can significantly affect short-term project and long-term organizational success. Existing research on subcontractor selection strategy implicitly assumes that the evaluation of subcontractors depends on current conditions. We extend this perspective by integrating an agent-based simulation model with game theory to examine whether precontract partner selection strategies that do not consider subcontractor selection as a repeated game may lead to a version of the holdup problem. The holdup problem we investigate focuses on relationship-specific investments in learning after the introduction of an innovation or organizational change across a project network. A minimum total cost strategy may decelerate the rate of adaptation to an innovation or organizational change, thereby proving that the holdup problem can exist in project networks. The findings contribute to subcontractor selection strategy literature by simulating the impact of the holdup problem in project networks, distinguishing task interdependence as a moderating variable, and identifying that the minimum total cost strategy can be a suboptimal strategy for project networks adapting to systemic changes.     

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.     

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.     

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.     

Owner’s Risks versus Control in Transit Projects

This paper studies the characteristics of different project delivery methods in public transit projects with respect to the owner’s project control and its share in project risks. The most appropriate project delivery method is selected early in the project life cycle based on a number of objectives and criteria set forth by the owner. The ability to manage risk effectively and owner’s control over the project are among the most important factors for selecting the delivery method. These two factors are highly interrelated. This paper discusses the interaction of risk and control in the context of the project delivery method. Results of several interviews with transit authorities are used to ensure the validity of findings. This paper shows that higher control over the project is achieved only if the owner is willing to accept more risks. In other words, there is no delivery method that allows the owner to enjoy high levels of control and minimum risk simultaneously.     

Virtual Project Delivery System Adviser

The selection of an appropriate project delivery system (PDS) is of paramount importance to an infrastructure project, as it could affect the success of the plan in terms of time, cost, and quality. Researchers have advocated that the development and application of a systematic approach to the selection of PDS is needed. To achieve that, not only is a reliable analytical framework necessary, but a platform that would allow users to freely access and share their experience on various PDSs would also be indispensable. The World Wide Web, a powerful tool for collecting and disseminating knowledge and information, is a suitable platform for developing the PDS selection model. The purpose of this paper is, therefore, to examine the suitability of applying internet technologies to selecting appropriate project delivery approaches for infrastructure projects. The paper begins by describing the conceptual framework of the virtual project delivery system adviser for infrastructure facilities (VPDSA-IF), and the design considerations and features of the VPDSA-IF are then detailed. The paper concludes by examining the results of an initial validation of the model.     

采用BOT模式实施烧结烟气脱硫项目的探讨

引入先进的投资运营机制,利用BOT模式,由专业脱硫公司负责烧结烟气脱硫项目的投资建设、运营,一段时间后转让给企业。这可在降低技术风险的基础上实现融资,有效缓解建设单位的资金压力,也可保证项目的建设工期、质量及运营效果,且为承建单位提供一定的利润空间,是一种双赢的运作模式。     

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.     

Risk Management in the Chinese Construction Industry

There has been an increase in research on risk management practice in the construction industry. However, little research has been conducted to systematically investigate the overall aspects of risk management on the perspectives of various project participants. This paper reports the findings of an empirical Chinese industry survey on the importance of project risks, application of risk management techniques, status of the risk management system, and the barriers to risk management, which were perceived by the main project participants. The risk management strategies adopted in the Three Gorges Project were also studied. The study reveals that: Most project risks are commonly of concern to project participants; the industry has shifted from risk transfer to risk reduction; current risk management systems are inadequate to manage project risks; and lack of joint risk management mechanisms is the key barrier to adequate risk management. Future studies should be conducted to systematically improve the risk management in construction by different approaches that facilitate equitable sharing of rewards through effective risk management among participants. Such studies should also consider the establishment of an open communication risk management process to permit the corporate experience of all participants, as well as their personal knowledge and judgment, to be effectively utilized.     

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.