Project Financing (BOT/PFI/PPP) - ndrctc.org Financing (BOT/PFI/PPP): ... to the government after a specified concession period . • The concept has actually been in use for centuries

Developing Infrastructure via Developing Infrastructure via Developing Infrastructure via Developing Infrastructure via Project Financing (BOT/PFI/PPP):Project Financing (BOT/PFI/PPP):Project Financing (BOT/PFI/PPP):Project Financing (BOT/PFI/PPP):

Concepts, Risks and LessonsConcepts, Risks and LessonsConcepts, Risks and LessonsConcepts, Risks and Lessons

Prof. DProf. DProf. DProf. Drrrr.... W W W WANG,ANG,ANG,ANG, ShouQing ShouQing ShouQing ShouQingDeputy Director, Institute of Int’l Eng’g Project Mgmt, Tsinghua University;

Director, FIDIC-Tsinghua-CNAEC Training Center;Chairman, China National Collaboration Network for MEng(PM) Education

Tel: 62788036, Fax: +86-10-62773661, E-mail: [email protected], Web: http://166.111.44.134 (personal), http://cm.civil.tsinghua.edu.cn (dept),

http://www.pm.tsinghua.edu.cn (institute), http://www.meng-pm.org (network)

Prof. Wang S.Q., Dept of Construction Management, Tsinghua University, Beijing, China

An ExampleAn ExampleAn ExampleAn Example• A tunnel to be built to solve the traffic jam

problem across a river in a city.• The government has not budget for it.• A contractor proposes to the government:

– Be authorized to finance, design, build and operate the tunnel

– Transfer to government after a certain period• Everyone (government/developer/contractordeveloper/contractordeveloper/contractordeveloper/contractor/

lender/operator/user(?)user(?)user(?)user(?) etc) are happy.


Please Consider Please Consider Please Consider Please Consider ……………………• The proposed method/vehicle (BOT) applicable?• Able to finance enough sum and in time?• The right to collect toll?• Project structure and participants’ role?• How to allocate/share risks among participants? e.g.

– Toll adjustable (for inflation etc)? and in which way?– Traffic volume enough?– Competitive bridge/tunnel allowed?– Foreign exchange, e.g. for imported equipment?– The creditworthiness of government & partners?– The capabilities and experience of contractor? ……

The above are key issues in BOT projects


AgendaAgendaAgendaAgenda• BOT/PFI/PPP ConceptsBOT/PFI/PPP ConceptsBOT/PFI/PPP ConceptsBOT/PFI/PPP Concepts

– Definition, Pros and Cons– Application

• Risk ManagementRisk ManagementRisk ManagementRisk Management– Unique/critical risks and mitigating measures– Risk model and risk management frameworks

• Case StudCase StudCase StudCase Studyyyy– Laibin B Power Plant (model project in China)

• Lessons learnt and RemarksLessons learnt and RemarksLessons learnt and RemarksLessons learnt and Remarks


BOT DefinitionBOT DefinitionBOT DefinitionBOT Definition• Build-operate-transfer (BOT) requires the private

sector to finance, design, build, operate and managefinance, design, build, operate and managefinance, design, build, operate and managefinance, design, build, operate and manage the facility and then transfertransfertransfertransfer the asset free of charge to the government after a specified concession periodconcession periodconcession periodconcession period.

• The concept has actually been in use for centuries but:– First coined in 1984 by Turkish PM Turgut Ozal within the

framework of privatizationprivatizationprivatizationprivatization of Turkish's public projectspublic projectspublic projectspublic projects.– Captured the world's attention especially of developing developing developing developing

countriescountriescountriescountries, e.g. Turkey (Power, 1st), Philippine (Power, 1st successful), Malaysia (NS Highway), Thailand (LTR), China (Shajiao, 1st transferred; Laibin), HK (Tunnels), Australia (Tunnel), UK & France (Eurotunnel, the biggest)

• PopularPopularPopularPopular financing method for infrastructureinfrastructureinfrastructureinfrastructure


BOT Basic FormsBOT Basic FormsBOT Basic FormsBOT Basic Forms• BOT is a general term and has 3 basic forms3 basic forms3 basic forms3 basic forms

and dozen of variant formsvariant formsvariant formsvariant forms• The 3 basic forms:

– BOTBOTBOTBOT (Build-Operate-Transfer): no ownershipno ownershipno ownershipno ownership– BOOTBOOTBOOTBOOT (Build-Own-Operate-Transfer): the Project

Company has the ownershipownershipownershipownership & BOT right -> lower price/tariff & longer concession period

– BOOBOOBOOBOO (Build-Own-Operate): no transferno transferno transferno transfer, lowest price/tariff & longest concession period


BOT Variant FormsBOT Variant FormsBOT Variant FormsBOT Variant Forms• BT (Build-Transfer)• BOOST (Build-Own-Operate-Subsidy-Transfer)• ROT (Rehabilitate-Operate-Transfer)• BLT (Build-Lease-Transfer)• ROMT (Rehabilitate-Operate-Maintain-Transfer)• ROO (Rehabilitate-Own-Operate)• TOT (Transfer-Operate-Transfer)• SOT (Supply-Operate-Transfer) • DBOT (Design-Build-Operate-Transfer)• DOT (Develop-Operate-Transfer)• OT (Operate-Transfer)• OMT (Operate-Manage-Transfer)• DBFO (Design-Build-Finance-Operate)• DCMF (Design-Construct-Manage-Finance)


General terms used are:• country specific• not very precise• sometimes even irritatingBut all are types of But all are types of But all are types of But all are types of privatisationprivatisationprivatisationprivatisation....

• PPP = Public Private Partnership

• PFI = Private Finance Initiative

• PSP = Private Sector Participation

• Privatisation • ......

Other General Terms UsedOther General Terms UsedOther General Terms UsedOther General Terms Used


Selling shares to theSelling shares to theSelling shares to theSelling shares to thePrivate SectorPrivate SectorPrivate SectorPrivate SectorPublicPublicPublicPublic

AuthorityAuthorityAuthorityAuthority

privateprivateprivateprivate share share share share

publicpublicpublicpublicshareshareshareshare

Mix SPCMix SPCMix SPCMix SPC

procurement of servicesprocurement of servicesprocurement of servicesprocurement of services

DesignDesignDesignDesign FinancingFinancingFinancingFinancing BuildBuildBuildBuild Facility ManagementFacility ManagementFacility ManagementFacility ManagementDevelopmentDevelopmentDevelopmentDevelopment

Value ChainValue ChainValue ChainValue Chain

PublicPublicPublicPublicAuthorityAuthorityAuthorityAuthority

privateprivateprivateprivateentityentityentityentity

Private SPCPrivate SPCPrivate SPCPrivate SPC

Grant of aGrant of aGrant of aGrant of aconcessionconcessionconcessionconcession

procurement of servicesprocurement of servicesprocurement of servicesprocurement of services

Horizontal PartnershipHorizontal PartnershipHorizontal PartnershipHorizontal Partnership Vertical PartnershipVertical PartnershipVertical PartnershipVertical Partnership

Principle Structures of BOT/PPPPrinciple Structures of BOT/PPPPrinciple Structures of BOT/PPPPrinciple Structures of BOT/PPP


BOT/PFI/PPPBOT/PFI/PPPBOT/PFI/PPPBOT/PFI/PPP NatureNatureNatureNature• BOT is with a kind of ConcessionaryConcessionaryConcessionaryConcessionary (authorization):

– Best applicable to infrastructure/resource projects– Government authorizes the private/foreign developers– Government owns the ultimate ownership– Concession period 10 to 30 years after which the facility

transferred to government usually free of charge• BOT is typical Project FinancingProject FinancingProject FinancingProject Financing (“finance through a

project” instead of “finance for a project”)– Financing a project based on the project’s future income– Limited/little recourse or even no recourse to developers– Project’s income is the only source for debt (P+I) payment

• BOT is a kind of PrivatizationPrivatizationPrivatizationPrivatization


BOT/PFI/PPP Nature (conBOT/PFI/PPP Nature (conBOT/PFI/PPP Nature (conBOT/PFI/PPP Nature (con’’’’t)t)t)t)• Financing based on projectprojectprojectproject’’’’s financial viabilitys financial viabilitys financial viabilitys financial viability

instead of the developer’s credit & asset• Higher debt/equity ratioHigher debt/equity ratioHigher debt/equity ratioHigher debt/equity ratio (usually debt>70%)• Middle to long Middle to long Middle to long Middle to long term debt• ComplexComplexComplexComplex project/contract structure• Huge investment (equity and debt)• Higher financing cost• Project CompanyProject CompanyProject CompanyProject Company instead of the developer isisisis the direct

borrowerborrowerborrowerborrower – separate the proj company from developer• ManyManyManyMany risksrisksrisksrisks involved• Many insurances/guaranteeinsurances/guaranteeinsurances/guaranteeinsurances/guarantees needed


Comparison of Traditional & BOTComparison of Traditional & BOTComparison of Traditional & BOTComparison of Traditional & BOT• Traditional Financing

– Contract awarded based on costcostcostcost

– Contractor’s main risks include completion, completion, completion, completion, political and political and political and political and performance risksperformance risksperformance risksperformance risks

– Financing risk and Financing risk and Financing risk and Financing risk and revenue riskrevenue riskrevenue riskrevenue risk are allocated to governmentgovernmentgovernmentgovernment

– Financing is eventually covered by government bonds

• Project Financing (BOT)– Contract is awarded base on lowest lowest lowest lowest

cost & shortest timecost & shortest timecost & shortest timecost & shortest time of transfer to government

– Contractor/developer’s main risks includes financing, revenue and financing, revenue and financing, revenue and financing, revenue and political risks + operational costpolitical risks + operational costpolitical risks + operational costpolitical risks + operational cost

– Contractor would gain benefit of an additional project that would have not been forthcoming under traditional financing

– It is user-based feeuser-based feeuser-based feeuser-based fee that is more equitable

– Helps government undertake more projects


Privatization: ProsPrivatization: ProsPrivatization: ProsPrivatization: Pros

• Argument for Privatization (Pros):Argument for Privatization (Pros):Argument for Privatization (Pros):Argument for Privatization (Pros):– RationalizationRationalizationRationalizationRationalization of limited financial resources of

government– User-based fee makes it more equitableequitableequitableequitable from social

point of view– Profit-motive makes it more efficientefficientefficientefficient in construction

and operation– Facilitate (hard/soft) technology transfertechnology transfertechnology transfertechnology transfer


Privatization: ConsPrivatization: ConsPrivatization: ConsPrivatization: Cons• Draw Backs (Cons):Draw Backs (Cons):Draw Backs (Cons):Draw Backs (Cons):

– Issue of role of government in providing social over head capital

– Maintenance and up-keep during operational level may not be adequate

– Since investment in infrastructure projects are lumpy, they may require concessions. That in turn may lead to development of monopoly

• Need for Government Oversight:Need for Government Oversight:Need for Government Oversight:Need for Government Oversight:– Price and fees (tariff)– Quality of service– Adequacy of service


Government Sponsors Lenders

ConstructorOperatorSuppliers

Off-takerProject

Company

SupplyAgreements

Off-takeAgreement

CashContributionAgreement

Operating & MaintenanceAgreement

FinancialAgreements

ConstructionContracts

ConcessionAgreement

BOT/BOT/BOT/BOT/PPPPPPPPPPPP Project Structure, Parties Project Structure, Parties Project Structure, Parties Project Structure, Parties and Contracts (and Contracts (and Contracts (and Contracts (detaileddetaileddetaileddetailed))))


BOT/BOT/BOT/BOT/PPPPPPPPPPPP PPPProject roject roject roject SSSStructure tructure tructure tructure (receivables financing)(receivables financing)(receivables financing)(receivables financing)

“Debt finance”

“Equity finance”

“Public sector”

“Service delivery”

“Others”

Government

EPC Contract

Services Agreement

s

Insurance Package

Feedstock Contract

Offtake Contract

Insurers

ServiceProvider 1

ServiceProvider 2

Builder(s)

Purchaser

Supplier

EquitySubscription Agreement

Holding Company

Shareholder Agreement

Sponsor 1 Sponsor 2

Equity

Direct Agreement

InterCreditor

Agreement

Security Assignments & Direct Agreements




Security Assignments& Direct Agreements

Senior Lenders

Bond Holders

Third Party Funders

Concession Agreement/project permit

Project CompanyDebt funding

& security package


Best Suit BOT ProjectsBest Suit BOT ProjectsBest Suit BOT ProjectsBest Suit BOT Projects

Any projects but best suitable for natural resource exploring, infrastructure projectsresource exploring, infrastructure projectsresource exploring, infrastructure projectsresource exploring, infrastructure projects, e.g. (in order of easy financingin order of easy financingin order of easy financingin order of easy financing):– Mining/oil/gas/petrochemicals (product for export)– Power, water, waste treatment (government off-takes)– Telecommunications (high profit & int’l income)– Road, tunnel, bridge (separate facilities)– Mass transit e.g. rail, subway (relative stable)– Airport, seaport (affected by int’l politics/economics)– Mass manufacture, e.g. big ship, airplane……


Projects that EasyProjects that EasyProjects that EasyProjects that Easy to Financeto Financeto Financeto Finance

• Income in hard currency, e.g. US$, Euro, Japanese Yuan• High ratio of equipment cost in total investment (easy to

get Export Credit), e.g. power plant• Critical need for the project• Reliable user/off-taker (e.g. government for power &

water projects)• Proven technology• Relatively mature legal, tax, financial systems of the

project country


Bid Evaluation Bid Evaluation Bid Evaluation Bid Evaluation –––– Points ApproachPoints ApproachPoints ApproachPoints Approach• Evaluation criteria grouped into pricepricepriceprice and

non-pricenon-pricenon-pricenon-price factors• Points scoredPoints scoredPoints scoredPoints scored on each factor and aggregate

score of each bidder across all factors is compared– highest scorehighest scorehighest scorehighest score wins– higher weightingsweightingsweightingsweightings can be assigned to price vs. non-

price factors, depending on public sector priorities (e.g. which is more important: reliability or price?)


Bid Evaluation Bid Evaluation Bid Evaluation Bid Evaluation –––– Hurdle ApproachHurdle ApproachHurdle ApproachHurdle Approach

• Evaluation criteria grouped into pricepricepriceprice and non-price non-price non-price non-price factors

• Bidders evaluated on non-price proposal first• FailureFailureFailureFailure to meet minimum requirement on any non-non-non-non-

price price price price factor results in eliminationeliminationeliminationelimination of bidder• Bidders who passpasspasspass non-price hurdles then

competitively evaluated on basis of pricepricepriceprice• Assumes any bidder passing all non-price hurdles

could develop project to satisfaction of public sector• Then simply a case of identifying best/lowest pricebest/lowest pricebest/lowest pricebest/lowest price


Critical Successful Factors (CSFs)Critical Successful Factors (CSFs)Critical Successful Factors (CSFs)Critical Successful Factors (CSFs)

• Stable politicalpoliticalpoliticalpolitical environment of the project country• Critical needneedneedneed for the project• The project country government allowsallowsallowsallows BOT• Relatively maturematurematuremature legal system and enforcement• Project is financially viablefinancially viablefinancially viablefinancially viable• Developer’s technicaltechnicaltechnicaltechnical proposal is feasiblefeasiblefeasiblefeasible and

developer experienced• Reasonable risk allocationrisk allocationrisk allocationrisk allocation through contract/structure• Meet international environmentalenvironmentalenvironmentalenvironmental standards• Participants with relevant knowledge/experienceknowledge/experienceknowledge/experienceknowledge/experience


CSFs in Developing CountriesCSFs in Developing CountriesCSFs in Developing CountriesCSFs in Developing CountriesIn addition to above, the followings are also important：• GovernmentGovernmentGovernmentGovernment’’’’s supports/incentivess supports/incentivess supports/incentivess supports/incentives, e.g.:

– Tax incentives, e.g. reduced/exempted income/custom taxes– Sovereign guarantee and foreign exchange guarantee– Take or pay off-take contract if applicable– Near-monopoly– Land and facilities– Supportive loan, equity or subordinate loan

• Attractive financial proposalAttractive financial proposalAttractive financial proposalAttractive financial proposal:– Low construction cost– Acceptable debt/equity ratio– Attractive tariff (e.g. low power/water rate or toll)

• Economics developed to a certaincertaincertaincertain levellevellevellevel – match with tariff– Short construction and concession periods– Accurate forecast of demand


Principles for Risk AllocationPrinciples for Risk AllocationPrinciples for Risk AllocationPrinciples for Risk Allocation

For fair allocation of risks:• A party who has the best controlbest controlbest controlbest control over a risk should

usually take the risk;• A party who has the most cost-efficiencymost cost-efficiencymost cost-efficiencymost cost-efficiency control over

a risk should usually take the risk;• The extent of risk taking should be matchedmatchedmatchedmatched with

compensation/reward/profit;• In addition:

– All risks to be properly mitigated/allocated;– Long term objectives/relationship.


Risk Risk Risk Risk AllocationAllocationAllocationAllocation in Generalin Generalin Generalin General

• Project Company usually takes financing, financing, financing, financing, design, design, design, design, construction, procurement, construction, procurement, construction, procurement, construction, procurement, operation operation operation operation and maintenance and maintenance and maintenance and maintenance risksrisksrisksrisks (Project Company will transfer some risks to other participants, e.g. designer/contractor/supplier/operator/user etc)

• Government usually takes political, cpolitical, cpolitical, cpolitical, change in hange in hange in hange in llllawawawaw, foreign exchange risks, foreign exchange risks, foreign exchange risks, foreign exchange risks

• Both share Force Majeure riskForce Majeure riskForce Majeure riskForce Majeure riskssss


Risks in BOT Risks in BOT Risks in BOT Risks in BOT Projects by Projects by Projects by Projects by SectorsSectorsSectorsSectors

T a b le T a b le T a b le T a b le 1111: L ist o f R isk s A sso cia ted w ith B O T P ro jects in D ifferen t S ecto rs: L ist o f R isk s A sso cia ted w ith B O T P ro jects in D ifferen t S ecto rs: L ist o f R isk s A sso cia ted w ith B O T P ro jects in D ifferen t S ecto rs: L ist o f R isk s A sso cia ted w ith B O T P ro jects in D ifferen t S ecto rs

S ecto r S ecto r-S p ecific R iskA ll S ec to rs • F o rce M ajeu re risk

• P o litica l risk s (ch an g e in law & regu la tio n , rev o k e an d ex p ro p ria tio n )• F in an cia l risk s (in fla tio n , in te rest ra te , ex ch an ge ra te & co n v e rtib ility)• C o m p etitio n risk• E n v iro n m en ta l risk (in creasin g co n sc io u sn ess in so c ie ty)• L an d acq u isitio n an d co m p en sa tio n risk• C o n stru c tio n risk s (co st o v erru n , d e la y , q u ality)• O p era tio n risk (o p era to r in ab ility , o u tp u t q u an tity an d q u ality ,

p ro d u ctio n regu larity)• C o n d itio n o f fac ility• S u p p ly risk (sh o rtag e , q u ality)• O fftak e risk (q u an tity an d p a y in tim e)• D o cu m en ta tio n /co n trac tu a l risk (co n flic t an d arb itra tio n , ap p lied law )

P o w er • R ep aym en t o f ex tern a l d eb t• R estric tio n o n im p o rted eq u ip m en t an d raw m ateria ls• F lu ctu a tin g d em an d o f p o w er g en era ted• P ro b lem in b ill co llec tio n• Illeg a l co n n ectio n to th e tran sm issio n system (p o w er th eft)• T ran sm issio n fa ilu re• L o w ered ta riffs d u e to co m p etitio n• S p ecifica tio n n o t b e in g fu lfilled , resu ltin g in th e re fu sa l o f p o w er

p u rch ase b y s ta te u tility• P o w er p lan t lo ca tio n (in ad eq u ate tran sp o rt fac ilities)• E n v iro n m en ta l d isp u te• F lu ctu a te o f co st an d av ailab ility o f fu e l/co a l• C o n stru c tio n d e lay• P ro lo n ged d o w n tim e d u rin g o p era tio n• L iq u id a ted d am ages o r te rm in ate o f P o w er P u rch ase A greem en t

(o u tp u t an d q u ality d o n o t m eet o ff-tak er 's req u irem en t)• G o v ern m en t 's restric tio n s o n th e p ro fitab ility (ra te o f re tu rn ) an d ta riff

lev e lsT ran sp o rt (R o ad ) • In ad eq u ate tra ffic v o lu m e (in ad eq u ate tra ffic fo recasts o r su b seq u en t

d ev ia tio n )• C o m p etin g ro u tes (p articu larly free o r u n d e r-p riced o n es)• R estric tio n s o n to ll lev e l an d in crease• C o st o v erru n s (b ecau se o f th e s ize an d sco p e , p articu larly if th e

p ro jec t c ro sses a h illy reg io n )• C o n stru c tio n d e lays (lan d acq u isitio n , u n ex p ected tech n ica l d ifficu lty)• L o n g lan d acq u isitio n p erio d• R igh t-o f-w a y d isp u tes (e .g . a rch aeo lo g ica l m in es)• N ecessita tin g m easu res to m in im ize th e im p act o f co n stru c tio n o n th e

trav e lin g p u b lic• D ela y in o th er p ro jec ts co n n ectin g to th is ro ad• In co m e stream s are u su ally in lo ca l cu rren c y (E x ch an g e R ate &

C o n v ertib ility risk )


Risks in BOT Risks in BOT Risks in BOT Risks in BOT Projects by Projects by Projects by Projects by Sectors Sectors Sectors Sectors (con't)(con't)(con't)(con't)

Table Table Table Table 1111: L ist of R isks A ssociated w ith BO T Projects in D ifferent Sectors (: L ist of R isks A ssociated w ith BO T Projects in D ifferent Sectors (: L ist of R isks A ssociated w ith BO T Projects in D ifferent Sectors (: L ist of R isks A ssociated w ith BO T Projects in D ifferent Sectors (C on't)C on't)C on't)C on't)

Sector Sector-Specific R iskTransport (Tunnel& Bridge)

• G eological risks for im m ersed tunnel• Safety at w ork and disturbances to surface traffic in m unicipal areas• H ealth risks of com pressed air• Stability of the seabed for subm erged tunnel• Traffic accidents and fire break-outs for tunnels during operation• Restrictions to harbor navigation and air traffic flight path for bridge• H ydrological opposition from ferry w orkers, fisherm en• Bad w eather conditions• Com petition from ferries & airlines

Transport (Rail) • Long land acquisition period• Com plex relocation of existing utilities• U n-coordinated attem pt in various districts• Controlled fare levels• Com plexity of in getting design approvals• Com petition from road transportation• Environm ental dispute• Taxation• Expensive rolling stock and control system s

Transport (A irport& Port)

• Com petition from other airports• Regional or international trade prosperity• Tourism business prosperity• Political stability and spending pattern• Integration w ith other connecting facilities• Inadequate adjoining land for expansion• Throughput capacity affected by the breakdow n of equipm ent, labor

disputes and extrem e w eather conditions for port• Econom ic and trade conditions• Changes in tariff regulations and quotas• Political risk

Process Plant • Take-or-pay agreem ent w ith gas producer• Leakage of pipe• N on-paym ent and pilferage• Controlled tariffs• Fast changing environm ental regulations for w aste treatm ent (rising

concerns and advancing technology m aking im provem ents possible)Telecom m unication • M ost com petitive sector

• H igh Research & D evelopm ent costs• Restrict from the incum bent operator for new entrants to access to

established netw ork• A ddition cost and problem in integrating w ith existing netw ork

including technological incom patibility• Bureaucracy in licensing


Unique/Critical Risks in BOT Power Unique/Critical Risks in BOT Power Unique/Critical Risks in BOT Power Unique/Critical Risks in BOT Power Projects & Their Mitigating MeasuresProjects & Their Mitigating MeasuresProjects & Their Mitigating MeasuresProjects & Their Mitigating Measures

Risk Measure 1 Measure 2 Measure 3 Change in Law

Obtain government’s guarantees, e.g. adjust tariff or extend concession period.

Insurance for political risk. Maintain good relationship with government authorities especially officers at state or provincia l level.

Corruption Maintain good relationship with government authorities especially officers at state or provincial level.

Establish JV with local partners especially the central government agency or state-owned enterprise.

Enter into contract to preven t corruption.

Delay in Approval

Establish JV with local partners especially the central government agencies or state-owned enterprises.

Obtain government’s guarantees to adjust tariff or extend concession.

Maintain good relationship with governments.

Expropriation Establish JV with local partners especially the central government agency or state-owned enterprise.

Rely on a combination of international consortium and insurance policies (political insurance).

Obtain support of sponsor’s government, e.g. ex port credit.

Local Entities' Reliability

Gain accurate financial & other information about local entities and choose the most capable ones.

Maintain good relationship with government officers at state or provincial level.

Appoint independent accountant to audit the local entities.

Force Majeure

Obtain government’s guarantees to adjust tariff or extend concession period.

Insure all insurable Force Majeure risks.

Obtain government’s guarantee to provide finance help if needed.

Exchange Rate & Convertibility

Obtain government’s guarantees of exchange rate & convertibility, e.g. fixed rate or to adjust tariff or extend concession to cover the cost.

Use dual-currency contracts, with certain portions to be paid in RMB and other transactions denominated in foreign currency.

Use hedging tools, e.g. forward, swap.

Financial Closing

Equity financing and cooperation with government partners.

Adopt alternatives to contract payment, e.g. land development rights.

Use Initial Public Offerings on stock to raise funds especially equity finance.

Dispatch, Transmission Constraint

Enter into take-or-pay power purchase arrangements with power purchaser (government).

Enter into dispatch contracts with government authorities to dispatch power plant at full capacity for a minimum number of hours each year.

Government to guarantee that transmission line will be ready for dispatch.

Tariff Adjustment

Have a formula for tariff adjustment that can enable objective calculation of tariffs each year.

Maintain good relations with government and a positive public image of the project.

Separate and re-define tariff, e.g. portions of tariff fixed while portions adjusted, or portions paid in foreign $.


Definition of Unique/Critical RisksDefinition of Unique/Critical RisksDefinition of Unique/Critical RisksDefinition of Unique/Critical Risks (1) (1) (1) (1)

• Change in LawChange in LawChange in LawChange in Law: adoption, promulgation, modification, reinterpretation of laws/policies

• CorruptionCorruptionCorruptionCorruption: officials/representatives solicit/get unlawful money utilizing unlawful influence

• Delay in ApprovalDelay in ApprovalDelay in ApprovalDelay in Approval: central/local government does not approve in time or even cancel former

• ExpropriationExpropriationExpropriationExpropriation: government expropriates without giving reasonable compensation

• Local Local Local Local Entities' ReliabilityEntities' ReliabilityEntities' ReliabilityEntities' Reliability: creditworthiness• Force MajeureForce MajeureForce MajeureForce Majeure: circumstances beyond

developer/government's control, e.g. natural disasters/accidents, war, hostilities, embargo


Definition of Unique/Critical Risks (Definition of Unique/Critical Risks (Definition of Unique/Critical Risks (Definition of Unique/Critical Risks (2222))))

• Exchange Rate & ConvertibilityExchange Rate & ConvertibilityExchange Rate & ConvertibilityExchange Rate & Convertibility: RMB is not freely convertible, exchange rate fluctuates at all time and/or subject to SAEC approval

• Financial ClosingFinancial ClosingFinancial ClosingFinancial Closing: developer inability to close financing in time due to perceived risks

• Dispatch ConstraintsDispatch ConstraintsDispatch ConstraintsDispatch Constraints (for power project only): amount/timing of power dispatch subject to government control as it is the power grid owner

• Tariff AdjustmentTariff AdjustmentTariff AdjustmentTariff Adjustment: adjustment subject to pricing bureau's approval


Risk Criticality of BOT ProjectRisk Criticality of BOT ProjectRisk Criticality of BOT ProjectRisk Criticality of BOT Project

0.00

1.00

2.00

3.00

4.00

5.00

Tariff A

djus tment

Chinese Entiti

es ' Relia

bility

Dispatch C

ons traint

Change in L

aw

Exchange Rate

& C

onvertibilit

y

Force M

ajeure

Financ ial Clos ing

Delay in A

pproval

Expropr ia

tion

Corruptio

n

Ris kRis kRis kRis k

Ris

k C

riti

calit

yR

isk

Cri

tica

lity

Ris

k C

riti

calit

yR

isk

Cri

tica

lity

Surv ey res ult Loc al prof es s ionals ' rating


Effectiveness of Effectiveness of Effectiveness of Effectiveness of Risk Mitigating MeasuresRisk Mitigating MeasuresRisk Mitigating MeasuresRisk Mitigating Measures

0.00

1.00

2.00

3.00

4.00

5.00

Tariff A

djus tment

Chinese Entiti

es ' Relia

bility

Dispatch C

ons traint

Change in L

aw

Exchange Rate

& C

onvertibilit

y

Force M

ajeure

Financ ial Clos ing

Delay in A

pproval

Expropr ia

tion

Corruptio

n

Ris kRis kRis kRis k

Me

asu

re E

ffe

ctiv

en

es

sM

eas

ure

Eff

ect

ive

ne

ss

Me

asu

re E

ffe

ctiv

en

es

sM

eas

ure

Eff

ect

ive

ne

ss

Meas ure 1 Meas ure 2 Meas ure 3


BOT RiskBOT RiskBOT RiskBOT Risk Management Management Management Management FrameworkFrameworkFrameworkFramework

(Full paper)

Concession Identified

Risk Analysis

Identification of Mitigating Measures

Negotiate with Government on the

Unique or Critical Risks

Risk Allocation (refer to Table 5 & Section 6)

Adopt Credit & Security Structures (refer to Fig. 3)

Rank Criticality of Risks (refer to Table 3)

Rank Effectiveness of Mitigating Measures (refer to Fig. 1)

Raise Financing

Improve on Concession Agreement

Incorporate Risk Mitigating Measures (refer Table 1 & Table 4)

Step 1Step 1Step 1Step 1


Step Step Step Step 3333




Typical Risk AllocationTypical Risk AllocationTypical Risk AllocationTypical Risk Allocation

Risk Provincial Government

The Consortium (sponsor/contractor/operator)

Lender Insurer Bond Bank/Insurer

Tariff Adjustment X X X Local Reliability X X Dispatch Constraint X Change in Law X Exchange Rate X (main) X (partial) Force Majeure X X X X Financial Closing X Delay in Approval X (main) X (partial) Expropriation X X X Corruption X X


BOT CriticalBOT CriticalBOT CriticalBOT Critical Success Factors Success Factors Success Factors Success FactorsCritical Success Factors (CSFs) of Critical Success Factors (CSFs) of Critical Success Factors (CSFs) of Critical Success Factors (CSFs) of BOT Projects (by Qiao LBOT Projects (by Qiao LBOT Projects (by Qiao LBOT Projects (by Qiao L,,,, WWWWaaaannnngggg SSSSQQQQ,,,, et al) et al) et al) et al)

Foreign Investors

(N=30)

Local Officials

(N=28)

Project

Phase Critical Success Factors

Mean SD Rank Mean SD Rank

Signi-

ficance

Appropriate project identification 3.40 0.81 1 3.42 0.78 1 0.939

Stable political and economic situation 3.27 0.87 2 3.25 0.85 2 0.944

Favorable legislation regulations 3.17 0.79 3 3.05 0.72 5 0.574

The capability of project promoter 3.14 0.66 4 3.13 0.85 3 0.820

Experience with BOT project by promoter 3.10 1.05 5 2.92 0.83 6 0.482

Preliminary qualification evaluation phase

Lack of funds for infrastructure project 2.89 1.07 6 3.08 0.88 4 0.490

Competitive tendering system 3.21 0.82 1 3.04 0.95 1 0.501

Attractive financial package 3.00 0.85 2 2.96 0.71 2 0.121

Acceptable toll/tariff levels 2.97 0.81 3 2.96 0.81 3 0.970

Technical solution advance 2.93 1.03 4 2.65 1.00 4 0.923

Tendering phase

Selective suitable project agencies 2.83 0.87 5 2.46 0.78 5 0.106


CSFs (conCSFs (conCSFs (conCSFs (con’’’’t)t)t)t)

Critical Success Factors (CSFs) of Critical Success Factors (CSFs) of Critical Success Factors (CSFs) of Critical Success Factors (CSFs) of BOT Projects (con’t)BOT Projects (con’t)BOT Projects (con’t)BOT Projects (con’t) Foreign Investors

(N=30)

Local Officials

(N=28)

Project

Phase Critical Success Factors

Mean SD Rank Mean SD Rank

Signi-

ficance

Concrete and precise concession agre ement 3.20 0.92 1 2.96 0.86 3 0.329

Reasonable risk allocation 3.17 0.79 2 3.13 0.80 1 0.849

Special guarantees by the government 2.87 0.82 3 3.13 0.85 2 0.263 Concession award phase

Multilateral Investment Guarantee Agency insurance

2.82 0.98 4 2.73 0.77 4 0.714

Quality control & supervision 3.59 0.57 1 3.21 0.72 1 0.038*

Select suitable subcontractor 3.55 0.63 2 3.02 0.90 2 0.002*

Standardization of engineering contract 3.20 0.92 3 2.96 0.86 3 0.329

A multidisciplinary & multinational team 2.83 0.97 4 2.63 0.92 5 0.442

Construction phase

Good relationship with government 2.66 1.04 5 2.79 0.93 4 0.621

Management control 3.41 0.73 1 3.33 0.82 1 0.707

Training local staff 3.07 0.87 2 2.83 0.92 2 0.343

Sound environmental impact 2.77 0.77 3 2.80 0.67 3 0.160

Operation phase

Public safety 2.55 0.87 4 2.72 0.72 4 0.546

Technology transfer 2.97 0.93 1 3.00 0.93 1 0.896

Operation in good condition 2.87 0.86 2 2.92 0.78 2 0.825 Transfer phase

Overhauling guarantees 2.53 0.86 3 2.88 0.97 3 0.558

Note: SD = Standard Deviation; * denotes significance at P < 0.05.

Full PaperFull PaperFull PaperFull Paper


Risk Management of International Risk Management of International Risk Management of International Risk Management of International Construction ProjectsConstruction ProjectsConstruction ProjectsConstruction Projects

• Risk’s categories and definitions• Risk’s mitigation measures• Risk’s criticality• Risk’s 3 hierarchy levels• Risk mitigation measures’ effectiveness• Risk’s influence among hierarchy levels• Risk influence matrix (relationship among risks)• Risk mitigation measures’ prioritizing• Risk Model Risk Model Risk Model Risk Model –––– Alien Alien Alien Alien’’’’s Eyess Eyess Eyess Eyes (see next slide)• Risk Management FrameworkRisk Management FrameworkRisk Management FrameworkRisk Management Framework (see next slide)UsageUsageUsageUsage: Applied to financial evaluation/negotiation/contract


Proposed Proposed Proposed Proposed Risk Model: Risk Model: Risk Model: Risk Model: AlienAlienAlienAlien’’’’s Eyes s Eyes s Eyes s Eyes

Note:Note:Note:Note: Arrow represents the influence relationship Refer to Table 1 for risk IDs and definitions

A1,A2,A3,A1,A2,A3,A1,A2,A3,A1,A2,A3, A4,A5,A6,A4,A5,A6,A4,A5,A6,A4,A5,A6,

A7,A8,A9,G1,A7,A8,A9,G1,A7,A8,A9,G1,A7,A8,A9,G1, E1,E2,B1E1,E2,B1E1,E2,B1E1,E2,B1

A2,A3,A4,A5,A2,A3,A4,A5,A2,A3,A4,A5,A2,A3,A4,A5, A6,A7,A8,A9,A6,A7,A8,A9,A6,A7,A8,A9,A6,A7,A8,A9,

G1,E2,B1G1,E2,B1G1,E2,B1G1,E2,B1

C3,F1,C3,F1,C3,F1,C3,F1, D1,D2,D1,D2,D1,D2,D1,D2,

D3 D3 D3 D3 D4,D5D4,D5D4,D5D4,D5

C3,F1,C3,F1,C3,F1,C3,F1, D1,D2,D3 D1,D2,D3 D1,D2,D3 D1,D2,D3

D4,D5D4,D5D4,D5D4,D5

B2,B3B2,B3B2,B3B2,B3,B4,B,B4,B,B4,B,B4,B5,C1,C2,H1,5,C1,C2,H1,5,C1,C2,H1,5,C1,C2,H1,

H2H2H2H2

B2,B3,B2,B3,B2,B3,B2,B3,B4,B5,B4,B5,B4,B5,B4,B5,C1,C2,C1,C2,C1,C2,C1,C2,H1,H2H1,H2H1,H2H1,H2

A2,A3,A4,A5,A6,AA2,A3,A4,A5,A6,AA2,A3,A4,A5,A6,AA2,A3,A4,A5,A6,A7,A8,A9,G1,E2,B17,A8,A9,G1,E2,B17,A8,A9,G1,E2,B17,A8,A9,G1,E2,B1

InfluencingInfluencingInfluencingInfluencing BBBB2,B3,B4,B5,C1,2,B3,B4,B5,C1,2,B3,B4,B5,C1,2,B3,B4,B5,C1,

C2,H1,H2C2,H1,H2C2,H1,H2C2,H1,H2

A1,A2,A3,A4,A5,A6,A7,A8,A1,A2,A3,A4,A5,A6,A7,A8,A1,A2,A3,A4,A5,A6,A7,A8,A1,A2,A3,A4,A5,A6,A7,A8,A9,G1,E1,E2,B1A9,G1,E1,E2,B1A9,G1,E1,E2,B1A9,G1,E1,E2,B1

InfluencingInfluencingInfluencingInfluencing C3,F1,D1,D2,D3,D4C3,F1,D1,D2,D3,D4C3,F1,D1,D2,D3,D4C3,F1,D1,D2,D3,D4 ,D5,D5,D5,D5

B2,B3,B4,B5,C1,C2,H1,H2B2,B3,B4,B5,C1,C2,H1,H2B2,B3,B4,B5,C1,C2,H1,H2B2,B3,B4,B5,C1,C2,H1,H2 InfluencingInfluencingInfluencingInfluencing

C3,F1,D1,D2,D3,D4,D5C3,F1,D1,D2,D3,D4,D5C3,F1,D1,D2,D3,D4,D5C3,F1,D1,D2,D3,D4,D5

Country Country Country Country LevelLevelLevelLevel RisksRisksRisksRisks

ProjectProjectProjectProject Level Level Level Level RisksRisksRisksRisks

Market Market Market Market LLLLevel evel evel evel RisksRisksRisksRisks

Adopted by a PhD study in Griffith, Australia


Risk Risk Risk Risk Management Management Management Management Framework Framework Framework Framework

((((full paperfull paperfull paperfull paper))))

Identification and GroupingIdentification and GroupingIdentification and GroupingIdentification and Grouping RisksRisksRisksRisks in Levels I, II & III in Levels I, II & III in Levels I, II & III in Levels I, II & III Level I is the highest risk hierarchy level while Level III is the lowest one.

Mitigation measures for the most critical risk in each level are implemented first. (Table 1, Table 5 & Table 6)

Identify Risk LevelIdentify Risk LevelIdentify Risk LevelIdentify Risk Level and Mitigation Measure Groups and Mitigation Measure Groups and Mitigation Measure Groups and Mitigation Measure Groups I: Country Level --- Mitigation Measures Group X II: Market Level --- Mitigation Measures Group Y III: Project Level --- Mitigation Measures Group Z

(Table 5 & Table 9)

Whether the Whether the Whether the Whether the risk is in risk is in risk is in risk is in

Level III?Level III?Level III?Level III?

Implement Group X Implement Group X Implement Group X Implement Group X Mitigation Mitigation Mitigation Mitigation Measures Measures Measures Measures Implementation sequence

according to the effectiveness of measures for each risk

(Table 6)

Yes

WhetherWhetherWhetherWhether the the the the risk is inrisk is inrisk is inrisk is in Level II? Level II? Level II? Level II?

No

Implement Group Y Implement Group Y Implement Group Y Implement Group Y Mitigation Mitigation Mitigation Mitigation MeasuresMeasuresMeasuresMeasures (Table 6 & Table 9)

Implement Group Z Implement Group Z Implement Group Z Implement Group Z Mitigation MeasuresMitigation MeasuresMitigation MeasuresMitigation Measures (Table 6 & Table 9)

No

Implement Group X Implement Group X Implement Group X Implement Group X Mitigation MeasuresMitigation MeasuresMitigation MeasuresMitigation Measures

(Table 6)

Implement Implement Implement Implement Group Y Group Y Group Y Group Y

Mitigation Mitigation Mitigation Mitigation MeasuresMeasuresMeasuresMeasures (Table

6 & Table 9)

Implement Implement Implement Implement Group X Group X Group X Group X

Mitigation Mitigation Mitigation Mitigation MeasuresMeasuresMeasuresMeasures (Table

6 & Table 9)

Yes


Laibin B's Major CharacteristicsLaibin B's Major CharacteristicsLaibin B's Major CharacteristicsLaibin B's Major Characteristics• First state-approved & open competitive tendered BOT

project• US$650 million 2x350MW won by Electricite de France

(60%) and GEC Alsthom (40%) consortium on BOT basis in Nov 1996

• Debt/equity ratio is 3.4:1 with US$502 million debt• 18 year concession including 3 year construction• First power project 100% owned by foreign investors• No sovereign guarantee, but letter of support from central

government agencies (SPC, SAFEC, MOP)• Foreign exchange guarantee & off-take & fuel supply

supports• Tariffs pegged to the market price• Model for future BOT projects in China


Laibin B's Development ProcessLaibin B's Development ProcessLaibin B's Development ProcessLaibin B's Development Process

• Initial Planning– Feb 1995: Guangxi entrusted Bridge of Trust– Mar 1995: Bridge of Trust submitted proposal &

feasibility study report to SPC for approval of adopting BOT scheme to develop Laibin B

– May 10, 1995: SPC approved the proposal & Laibin B become the first state-approved BOT project in China


Laibin B's Development Process (con't)Laibin B's Development Process (con't)Laibin B's Development Process (con't)Laibin B's Development Process (con't)

• Pre-Qualification– Aug 1995: Bridge of Trust issued Invitation for Pre-

qualification to foreign developers– Sep 1995: 31313131 foreign developers submitted

applications for pre-qualification– Oct 1995: 12121212 qualified to tender individually

(Group A); 19191919 qualified to tender jointly only with company/companies in Group A



• Tendering– Dec 8, 1995: Bridge of Trust released Invitation to

Bid & Tender Documents to pre-qualified foreign developers

– Dec 1995 - Jan 1996: Bridge of Trust organized on-site inspections for potential tenderers

– Jan 28, 1996: Bridge of Trust conducted pre-tender meeting to clarify foreigners' concerns

– 6666 tenderers submitted bids by deadline– May 8, 1996: tender opening for Laibin B



• Tender Evaluation & Awarding– Jun 18, 1996: 3333 tenderers were shortlisted by the

Evaluation Committee: (1) EdF & GEC Alsthom Consortium, (2) NWI+AEP+ABB Consortium, (3) InterGen(HK)

– Jul - Nov 1996: Bridge of Trust negotiated with the 1st shortlisted tenderer (EdF & GEC)

– Nov 11, 1996: Initialing Project Documents (CA, PPA, FSTA etc) and Bid Award

– Sep 3, 1997: Signing of Project Documents and Financial Close


Evaluation Criteria for Laibin B TenderEvaluation Criteria for Laibin B TenderEvaluation Criteria for Laibin B TenderEvaluation Criteria for Laibin B Tender

• Electricity Tariff (60% weight in evaluation)– levelized tariff, proportion of foreign exchange– EdF&GEC: lowest tarifflowest tarifflowest tarifflowest tariff (US$0.05/kWh, before

tax) & reasonable ROI (17.5%)• Financing, Technical & OMT Proposals (40%)

– financing schedule, cost, ability to finance & equity (60% weight)

– reliability & quality of technology (20%)– feasibility & viability of OMT, training (20%)


Laibin B's Contractual StructureLaibin B's Contractual StructureLaibin B's Contractual StructureLaibin B's Contractual StructureElectricite deFrance (EDF)

Electricite de FranceInternational (EDFI)

GECAlsthom

Contractors EDF

Operator

Guangxi Construction & FuelCompany Ltd (GCFC)

Support Letters from• Ministry of Power Industry (MOP)• State Administration for Exchange

Control (SAEC)• State Planning Commission (SPC)

GuangxiGovernment

Guangxi Power IndustryBureau (GPIB)

DispatchingStation

Lenders

Project CompanyProject CompanyProject CompanyProject Company(The Consortium)(The Consortium)(The Consortium)(The Consortium)

Management andTechnical Services

AgreementGuarantee

O&M Agreement

Fuel Supply &

60% 40%

Shareholders Agreement

Guarantee Guarantee

Power Purchase

Construction Service& Equipment SupplyContracts

Financing Agreements

100%

Dispatch AgreementsConcessionAgreement (CA)

Agreement (PPA)TransportationAgreement (FSTA)


Laibin B's Laibin B's Laibin B's Laibin B's Risk Risk Risk Risk AllocationAllocationAllocationAllocation

RiskGuangxi

GovernmentThe Consortium

(as Sponsor, Contractorand O&M Contractor)

Lender InsurerBond

Bank orInsurer

1. Political Risks1. Political Risks1. Political Risks1. Political Risks• revoke, expropriation, sequestration X• exclusivity, i.e. not second facility X• changes in law X• development approvals X X• adverse Government action or inaction X X• provision of utilities X X• increase in taxes X X• political force majeure events X• termination of concession by Government X• payment failure by Government X X2. Construction Completion Risks2. Construction Completion Risks2. Construction Completion Risks2. Construction Completion Risks• land acquisition and compensation X• restriction on import equipment/materials X• cost overruns X X X• increases in financing costs X X• time and quality risk X X• Contractor default X X• default by Concession Company X X X• time, cost and scope of identified but related

work and variations• environmental damage - subsisting X X• environmental damage - ongoing X• protection of geological & historical object X• force majeure X X X X3. Operating Risks3. Operating Risks3. Operating Risks3. Operating Risks• Government Department default X• Concession Company default X• Operator inability X• termination of concession by the Company X X X X• environmental damage - ongoing X• force majeure event X X X• labor risk X X• technology risk X• prolonged downtime during operation X X• condition of facility (maintenance) X X


Laibin B's Laibin B's Laibin B's Laibin B's Risk Risk Risk Risk Allocation Allocation Allocation Allocation (con't)(con't)(con't)(con't)

RiskGuangxi

GovernmentThe Consortium

(as Sponsor, Contractorand O&M Contractor)

Lender InsurerBond

Bank orInsurer

4. Market and Revenue Risks4. Market and Revenue Risks4. Market and Revenue Risks4. Market and Revenue Risks• insufficient fare income X X• fluctuating demand of power generated X• transmission failure X• problem in bill collection X• insufficient other income X X• power theft X• fluctuate of cost & availability of fuel/coal X X• Government restriction on profit & tariff X X X5. Finance Risks5. Finance Risks5. Finance Risks5. Finance Risks• inflation risk X X X• interest rate X X• foreign currency exchange rate X X• foreign currency convertibility X6. Legal Risks6. Legal Risks6. Legal Risks6. Legal Risks• title/lease property X X• ownership assets X• security structure X• insolvency of Concession Company X X• breach of financing documents X X• enforceability of security X• documentation/contractual risk (conflict &

arbitration, applied laws)X X X

7. Competition risk (before bid award)7. Competition risk (before bid award)7. Competition risk (before bid award)7. Competition risk (before bid award) X


Lessons Learnt:Lessons Learnt:Lessons Learnt:Lessons Learnt:EdFEdFEdFEdF’’’’ssss CSFs in Winning Laibin B CSFs in Winning Laibin B CSFs in Winning Laibin B CSFs in Winning Laibin B

• LLLLow tariff/priceow tariff/priceow tariff/priceow tariff/price (reasonable ROI, 17.5% vs. 18%)• Good reputation, experience & technology• Less guarantees from Chinese government• Support from foreigner's home government, e.g.

credit-export COFACE (France)• Strong local partners• Familiar with Chinese investment environment,

regulations & tendering system etc.• Identify, mitigate & manage well associated risks• Good relationship w. Chinese authorities/partners

Prof. Wang S.Q., Dept of Construction Management, Tsinghua University, Beijing, China 49494949

Lessons LearntLessons LearntLessons LearntLessons Learnt: : : : Laibin BLaibin BLaibin BLaibin B (Official BOT) (Official BOT) (Official BOT) (Official BOT) with WFOEwith WFOEwith WFOEwith WFOE

• Open, international, rule-based competition focusing on consumer pricepricepriceprice levels ensure strong incentives and encourage operational efficiency.

• ProsProsProsPros: cheap, quality product & service; bank governance & transparent, price competition efficient, active management

• ConsConsConsCons: approvals; local resistance


Laibin B is a ModelLaibin B is a ModelLaibin B is a ModelLaibin B is a Model

• Laibin B has become a good modelmodelmodelmodel for foreign invested BOT projects in China.

• Similar contractual structurecontractual structurecontractual structurecontractual structure/terms/terms/terms/terms used in the 1st state-approved BOT water plant in Chengdu, … …

For more details, see my relevant PapersPapersPapersPapers at http://166.111.44.134/Paper/Paper.htm or http://learn.tsinghua.edu.cn:8080/2002990155/Paper/Paper.htm


Lessons Learnt in ChinaLessons Learnt in ChinaLessons Learnt in ChinaLessons Learnt in China• Important to Important to Important to Important to followfollowfollowfollow international custom/ practicesinternational custom/ practicesinternational custom/ practicesinternational custom/ practices

– Fair risk allocation, standardized documentation, appropriate and transparent tendering process, etc

• Important for government to Important for government to Important for government to Important for government to havehavehavehave BOTBOTBOTBOT knowledgeknowledgeknowledgeknowledge & & & & reasonable expectationreasonable expectationreasonable expectationreasonable expectation & to & to & to & to share risksshare risksshare risksshare risks– Obtaining professional advisory services (Agent) is necessary

• Economic Economic Economic Economic eeeenvironmentnvironmentnvironmentnvironment ultimately defines supply and drives demand, with realized and expected economic economic economic economic growthgrowthgrowthgrowth underlying the attractionattractionattractionattraction/success/success/success/success of projects.

• Legal Legal Legal Legal eeeenvironmentnvironmentnvironmentnvironment defines country’s economy boundaries and constrains investors’ alternatives. – In developing countries, enforcement of lawsenforcement of lawsenforcement of lawsenforcement of laws is important


Lessons Learnt (conLessons Learnt (conLessons Learnt (conLessons Learnt (con’’’’t)t)t)t)• ProperProperProperProper risk managementrisk managementrisk managementrisk management is critical is critical is critical is critical, especially

– For government, sharing some risks is important and more cost efficient – don’t sign un-fair contracts;

– For investors, a careful & active approach to clearly align align align align their intereststheir intereststheir intereststheir interests with the government & society with the government & society with the government & society with the government & society is critical to avoid conflicts and reduce risks;

– Clear/strong contractualcontractualcontractualcontractual arrangements and enforcementenforcementenforcementenforcement• The public-private interface is throughout the period of

long termlong termlong termlong term CA. It is importance to maintain a good good good good relationshiprelationshiprelationshiprelationship with partners– Sometimes re-negotiationre-negotiationre-negotiationre-negotiation with partners is more efficient

than mediation/arbitration/lawsuit when there is disputedisputedisputedispute


Lessons Learnt (conLessons Learnt (conLessons Learnt (conLessons Learnt (con’’’’t)t)t)t)• Government’s supports and commitmentsupports and commitmentsupports and commitmentsupports and commitment (& efficient

assistant & friendly attitudes) are important, e.g. – Direct investment, Supportive loan, Foreign exchange

guarantee, Tax holiday, Subsidy, Free/low cost of land use, Policy support, Off-take agreement, Supply agreement, Necessary Infrastructure

• But Government’s over direct involvementover direct involvementover direct involvementover direct involvement would reduce efficiency– Government better to oversight onlyoversight onlyoversight onlyoversight only the Scope &

requirements, Price & fees, Quality & adequacy of service• All parties to have project life cycleproject life cycleproject life cycleproject life cycle objectives• Baring higher/lower rates of returnBaring higher/lower rates of returnBaring higher/lower rates of returnBaring higher/lower rates of return is a good practice


Concluding RemarksConcluding RemarksConcluding RemarksConcluding Remarks• BOT/PPP is an effective wayeffective wayeffective wayeffective way for developing infrastructure

especially in developing countries• All parties to have commoncommoncommoncommon & long termlong termlong termlong term objectives (VFM)• Reasonable risk allocationReasonable risk allocationReasonable risk allocationReasonable risk allocation is important, usually

– The Private takes financing, design, construction, procurement, operation and maintenance risks;

– The Public takes political, change in law, foreign exchange risks;– Both share Force Majeure risks.

• Government’s supports & commitmentssupports & commitmentssupports & commitmentssupports & commitments are important but over direct involvement would reduce efficiencyefficiencyefficiencyefficiency

• The structuring and contractsstructuring and contractsstructuring and contractsstructuring and contracts should take into account the country & project’s characteristicscharacteristicscharacteristicscharacteristics


Key ReferencesKey ReferencesKey ReferencesKey References• Wang SQ, Dulaimi MF & Aguria MY (2004), Risk Management Risk Management Risk Management Risk Management

Framework for Construction Project in Developing CountriesFramework for Construction Project in Developing CountriesFramework for Construction Project in Developing CountriesFramework for Construction Project in Developing Countries, Constr. Mgmt. & Economics, 22(3), 237-252, E & FN Spon, UK

• Wang SQ, Tiong LKR, Ting SK, Chew D & Ashley D (1998), "Evaluation Evaluation Evaluation Evaluation and Competitive Tendering of BOT Power Plant Project in Chinaand Competitive Tendering of BOT Power Plant Project in Chinaand Competitive Tendering of BOT Power Plant Project in Chinaand Competitive Tendering of BOT Power Plant Project in China." J. of Constr. Engrg. & Mgmt., ASCE, 124(4), 333-341

• Wang SQ, Tiong LKR, Ting SK & Ashley D (1999), "Risk Management Risk Management Risk Management Risk Management Framework for BOT Power Projects in ChinaFramework for BOT Power Projects in ChinaFramework for BOT Power Projects in ChinaFramework for BOT Power Projects in China." J. of Project Finance, Institutional Investor, Inc., New York, USA, 4(4), 56-67

• Wang SQ, Tiong LKR, Ting SK & Ashley D (2000), "Evaluation and Evaluation and Evaluation and Evaluation and Management of Political Risks in China's BOT ProjectsManagement of Political Risks in China's BOT ProjectsManagement of Political Risks in China's BOT ProjectsManagement of Political Risks in China's BOT Projects." J. of Constr. Engrg. & Mgmt., ASCE, 126(3), 242-250

• Wang SQ, Tiong LKR, Ting SK & Ashley D (1999), "Political Risks: Political Risks: Political Risks: Political Risks: Analysis of Key Contract Clauses in China's BOT ProjectAnalysis of Key Contract Clauses in China's BOT ProjectAnalysis of Key Contract Clauses in China's BOT ProjectAnalysis of Key Contract Clauses in China's BOT Project." J. of Constr. Engrg. & Mgmt., ASCE, 125(3), 190-197

• Wang SQ, Tiong LKR, Ting SK & Ashley D (2000), "Evaluation and Evaluation and Evaluation and Evaluation and Management of Foreign Exchange and Revenue Risks in China's BOT Management of Foreign Exchange and Revenue Risks in China's BOT Management of Foreign Exchange and Revenue Risks in China's BOT Management of Foreign Exchange and Revenue Risks in China's BOT ProjectsProjectsProjectsProjects." J. of Constr. Mgmt. & Eco., E&FN Spon, UK, 18(2), 197-207


Key Key Key Key References (con't)References (con't)References (con't)References (con't)• Wang SQ, Tiong LKR, Ting SK & Ashley D (2000), "Foreign Exchange and Foreign Exchange and Foreign Exchange and Foreign Exchange and

Revenue Risks: Analysis of Key Contract Clauses in China's BOT ProjectRevenue Risks: Analysis of Key Contract Clauses in China's BOT ProjectRevenue Risks: Analysis of Key Contract Clauses in China's BOT ProjectRevenue Risks: Analysis of Key Contract Clauses in China's BOT Project." J. of Constr. Mgmt. & Eco., E&FN Spon, UK, 18(3), 311-320

• Wang SQ & Tiong LKR (2000), "Case Study of Government Initiatives for Case Study of Government Initiatives for Case Study of Government Initiatives for Case Study of Government Initiatives for PRC's BOT Power Plant Projects.PRC's BOT Power Plant Projects.PRC's BOT Power Plant Projects.PRC's BOT Power Plant Projects." Int'l J. of Proj. Mgmt., Elsevier Science, UK, 18(1), 69-78

• Wang, SQ (2000), "Features of China's New Tendering LawFeatures of China's New Tendering LawFeatures of China's New Tendering LawFeatures of China's New Tendering Law", China Mail, 13(1), 28-33, China Information Centre, Singapore.

• Zhang WR, Wang SQ, Tiong LKR, Ting SK & Ashley D (1998), "Risk Risk Risk Risk Management of Shanghai's Privately-Financed Management of Shanghai's Privately-Financed Management of Shanghai's Privately-Financed Management of Shanghai's Privately-Financed Yan'anYan'anYan'anYan'an DongluDongluDongluDonglu Tunnels Tunnels Tunnels Tunnels." J. of Engrg., Constr. & Archi. Mgmt., Blackwell Science, UK, 5(4), 399-409

• Qiao L, Wang SQ, Tiong LKR & Chan TS (2001), “Framework for Critical Framework for Critical Framework for Critical Framework for Critical Success Factors of BOT Projects in ChinaSuccess Factors of BOT Projects in ChinaSuccess Factors of BOT Projects in ChinaSuccess Factors of BOT Projects in China”, J. of Structured & Project Finance, Institutional Investor, 7(1), 53-61 (listed as "The best of our original, market-leading articles for Practitioners")

• Qiao L, Wang SQ, Tiong LKR & Chan TS (2002), “Critical Success Factors Critical Success Factors Critical Success Factors Critical Success Factors for Tendering BOT Infrastructure Projects in Chinafor Tendering BOT Infrastructure Projects in Chinafor Tendering BOT Infrastructure Projects in Chinafor Tendering BOT Infrastructure Projects in China”, J of Structured & Project Finance), Institutional Investor, 8(1), 40-52

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Welcome to Prof. Dr. WANG, ShouQing's HomepageWelcome to Prof. Dr. WANG, ShouQing's HomepageWelcome to Prof. Dr. WANG, ShouQing's HomepageWelcome to Prof. Dr. WANG, ShouQing's Homepage

I am an academic staff with multidisciplinary backgrounds (B.Sc. in Structural Engineering, M.Sc. in Construction Management & Economics, Ph.D. in Construction Productivity, Post-Doctor in Project Financing, and amateur in IT Application) in the Institute for International Engineering Project Management and Department of Construction Management, Tsinghua University, Beijing, China.In my homepage, you will find plenty of information about myself ( Brief BiographyBrief BiographyBrief BiographyBrief Biography, Full ResumeFull ResumeFull ResumeFull Resume and AlbumAlbumAlbumAlbum), the ResearchesResearchesResearchesResearches I involved in (Risk Management of Build-Operate-Transfer and Public-Private Partnership Projects, Performance of Ready Mixed Concrete Industry and IT Application in Construction Engineering & Management), a dozen of booksa dozen of booksa dozen of booksa dozen of books, three videos and more than 200 papers200 papers200 papers200 papers I published. There are also Course MaterialsCourse MaterialsCourse MaterialsCourse Materials and TimetableTimetableTimetableTimetable for the modules I am teaching at Tsinghua University (the top one university in China), Useful LinksUseful LinksUseful LinksUseful Links for building, construction and real estate, etc.

http://166.111.44.134/Paper/Paper.htmhttp://learn.tsinghua.edu.cn:8080/2002990155/Paper/Paper.htm