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.     

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.     

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.     

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.     

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.     

Critical Path Scheduling under Resource Calendar Constraints

Resource calendars specify nonworking days of driving resources involved in construction projects. As part of the resource availability constraints in critical path method (CPM) scheduling, resource calendars may postpone activity start time, extend activity duration, and hence prolong the total project duration. Ultimately, resource calendars bring about changes to the critical path identification. Research has yet to address how to incorporate the effects of multiple resource calendars on the total float determination. In this research, the popular P3 software is used as a tool for investigating the current practice of CPM scheduling under resource limit and calendar constraints. We assess P3’s advanced resource scheduling functions (including resource leveling and resource calendars) and identify P3’s potential errors in total float determination. Further, we propose a new method based on the forward pass analysis alone for accurately evaluating activity total float subject to resource calendar constraints. The application of the new method is illustrated with an activity-on-node case and a precedence-diagram-method case, with the results compared against those produced from P3. Our research has elucidated on some critical issues of resource-constrained scheduling in the application domain of construction project management. The findings will provide useful input for the vendors and users of the CPM software—which is not limited to P3—to improve the scheduling methodology as well as the accuracy of the resulting project schedules.     

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.     

Fast and Accurate Risk Evaluation for Scheduling Large-Scale Construction Projects

This paper presents the development of a novel probabilistic scheduling model that enables fast and accurate risk evaluation for large-scale construction projects. The model is designed to overcome the limitations of existing probabilistic scheduling methods, including the inaccuracy of the program evaluation and review technique (PERT) and the long computational time of the Monte Carlo simulation method. The model consists of three main modules: PERT model; fast and accurate multivariate normal integral method; and a newly developed approximation method. The new approximation method is designed to focus the risk analysis on the most significant paths in the project network by identifying and removing insignificant paths that are either highly correlated or have high probability of completion time. The performance of the new model is analyzed using an application example. The results of this analysis illustrate that the new model was able to reduce the computational time for a large-scale construction project by more than 94% while keeping the error of its probability estimates to less than 3%, compared with Monte Carlo Simulation methods.     

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.     

Bid Compensation Decision Model for Projects with Costly Bid Preparation

For projects with high bid preparation cost, it is often suggested that the owner should consider paying bid compensation to the most highly ranked unsuccessful bidders to stimulate extra effort or inputs in bid preparation. Whereas the underlying idea of using bid compensation is intuitively sound, there is no theoretical basis or empirical evidence for such suggestion. Because costly bid preparation often implies a larger project scale, the issue of bid compensation strategy is important to practitioners and an interest of study. This paper aims to study the impacts of bid compensation and to develop appropriate bid compensation strategies. Game theory is applied to analyze the behavioral dynamics between competing bidders and project owners. A bid compensation model based on game theoretic analysis is developed in this study. The model provides equilibrium solutions under bid compensation, quantitative formula, and qualitative implications for the formation of bid compensation strategies.     

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.     

Framework of Success Criteria for Design/Build Projects

Success has always been the ultimate goal of every activity, and a construction project is no exception. Due to the ambiguous definition of project success and the different perceptions of participants toward this concept, it may be difficult to tell whether a project is successful as there is a lack of consensus. Time, cost, and quality have long been the success criteria used to evaluate the performance of a construction project. However, such a list has been criticized as not being comprehensive. Even studies of the project success of a particular construction method, such as the design/build procurement system, are lacking in most previous research considering construction projects in general. This paper sets out to establish criteria for project success for a design/build project in construction, first by identifying relevant measures of project success for a construction project in past studies, with particular emphasis on design/build projects, and then by establishing a comprehensive assessment framework for project success for design/build projects. The significant impacts on the construction field of study, in terms of educational value and practical use, are also presented. With little research in the project success of design/build projects, the writers suggest a research focus for the study.     

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.     

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.     

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.     

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.     

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.     

Cost of Risk Transfer: Pricing Agreements in Residential Supply Chains

Theoretical and computational studies of supply chains are confined mainly to buyer-supplier dyads. Evaluation of more tiers in the construction sector specifically is also rare, perhaps in part because short-term partnerships are typical. However, supplier selection in residential construction is often conducted in support of multiple subdivision tracts over a comparatively long time-horizon. This paper describes the lumber supply chain for residential construction, extending from the homebuyer to the lumber company. A particular case for a real builder is examined in which a builder adopted a pricing strategy to control their lumber cost risk. The strategy included minimum time periods of fixed pricing, insulating the builder from price fluctuations during those periods. Consideration of supply-chain lead times allows financial risk modeling for the builder-framer/lumber yard–lumber company portion of the supply chain in order to evaluate the cost-effectiveness of this strategy. Historical records of lumber prices were used to conduct Monte Carlo simulations of three tiers of the supply chain. The pricing strategy is shown to result in a risk premium generally in excess of the true commodity price risk.