guideline bot

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for InfrastructureDevelopment

throughB u i ld-O perate-Tra n sfer

(BOT) Proiects

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UNITED NATIONS INDUSTRIAL EEVELOPMENT ORGANTZATIONVienna, 1996

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Copgright @ United Nat{on-s Indus trtal Deuelbpment Organlzatton, 1996

TheGuidelinesforInfrastructureDevelopmentthroughBuild-Operate-Transfer (BOT) ProJects wo.s prepared bg tte Investmentand"'lechnotogA Promotion Divislpn of UNIDO.

The designati,ons emploged. and *,e presentation oJmaterioltn thtspubtication do not itttplg the expression oJ ang oplnion on tle part oJthe Secretari.qt oJUNIDO concerning tle legal stahrs oJ uLA countrg,territory, city or ctrea. or oJits atrthortties, or @ncemfu the delimlta'tion oJ its Jrontbrs or boundaries. The mentlon oJ compang ncunes orcgmmercial pradrrcts does not impta that ang such compantA or pro-duct is endorsed or recomtrended by UNDO.

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UNIDO PUBLICATIONSales No.' UNIDO.9S:6.E

rsBN 92-r-r06304-3

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Preface

Ttle butb-operate-transJer (BOI) approach has itl recent Aears plaged. agrowttg role in tle implementatton oJ infuts/:rial and. i4ftastructure proj ectssuch os oil and. gas SelSs, pouser plants, toll roads and. watet stryptg andtreatrnent Jacllittes in both ttdrtstialfzed and deuetoplrtg cottnffies. Ou:'

W to tte strateglc lmportarwe oJ BOT proJects Jor developlttg-counffies,UNIDO is increasingtA beW askedbg member couttries to prouide inJor'mation, aduice and guidance on the elaboratton oJ tltese proJects, In re'slronse to this tleed, X hrrs taken the rntltnttue oJ preparing these Guide-lines for Infrastructure Development through Build-Operate-Transfer(BOT) PtoJects, whirh are tntended to proutde both a general oueruiew oJthe corlcephnl legal and frnancinl lssues associated tuith BOT projectsand practtcat guidarce Jor proJect deuelopment, negotTotion and imple'rientation. i

The shuchre md. contert oJ t}e Guidelines Jotlow tte usual path ofBOT proJects, Jrom ident!fica(wn oJ proiect opporhnitbs ttvoughfeasibtl-itU studies, .f"r "t* "J "

*rrs.rf:"*. AWlroc"a*"". contro{.'tualtura@W p""Xq"u, to the opelatron,-@e and transJer oJo rcI&ig,. ?he Guideltnes also IWWht the wag s in which BOT proj ectscanpromote tectvtologg transfer andcapadty buMing. The mainSoals oJUNIDO in prepartg the Gutdelines are to help deueloping countrtes totake advattage oJtte potentlalbenefits oJrrsfu aBOT strategg to implE'ment blftas/lructwe proJects and. make useV-:reasoned decisions based onttetr partlctiar obJectilses and requlrements, and" to elucldate ttou proJectscan be madE to attractfinanrcW.from tle prtuate sector.

Thcre ls no perJect BOT modetJor dI t{rastnrcture proJects, and. tttehost cotutffies themselues hanse to stupe tle approach to suit thetr na'tional requlrements, Those cowtffies tlta.t haue had the most strccess inimplenentttg BOT proJects generallg atffibute it to.creaW awin-tuin sihr1ation: the BOT approach allotus them to pursLe tleir national interestswhile at the same time it encourages priuate sector inuesht:rlnl-

T,E Guidellnes should. not be regarded. ss nsid and unchangeable.Irlftrtslrrrclttrr: dcttc'lolnrtr'rtl {.s n r\ptrrrttk'frr'(x'{'.s.s, ttt.rl l lv' Il(/l 'rtl4rtxu'ltIrrrs euolued to su{l tlw rrceds oJ'prograntmes ln truliuidual cowtries. T'teg

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UNID0 B0T Guidelines iii

sltould, lwtueuer, serue as a contprehenstue reJbrerue uork, based oft ex;perience unrldwlde, Jor ofictols, managers and. practilloners dealtq wtthBOTisstres. Ftesh experience acqued by Gutdelines users and.tte tech-nical assistance work oJ ITNIDO tn the field oJ BOT wilt eu enhnlly prouidetlwJeedback needed to u$aIe and qxnand the Gutdeltnes.

?lre Guidelines are based. on the bng-standtg etcperierrce oJ UNIDOin matters such as contactrtsl anangements, procwement, pollcg and.ln'stifutton bulldttg, techrwlqg transter negotlatlors, capab{I[tg btild@,

Jeaslhllffu studles, engtneerlng and. enuironmental protxttor\ as usell ason conffibutions;from turnerous otttslde experts and. sources. Fbr theseGuidellnes, UMDO tlr's ffiedto contittuouslg r.pdate tte moterinl inkeep-tng u:tththe rapld. on-gotttg development oJtlefreW,

Ttre Guidellnes urere prepared bg tle UMDO Inuestnent and Tectuwbqg Promotion Dluisirco Teclvtologg *rulce, utder the superufslon oJJos€de CaMas Hma and coordlnated bg Rtcardo *Idl da Fonseca- Ot]vrLINIDO stqff provtdtng inputs or detai]ed comments trchtde Z. Csizer,S. A. Hasnairu B. O. Karlsson L, Kurouskl J. Naurattl and A. A. Yusuf,.Ttvee IINIDO consultants, Mark Atryenblich Fang Chuttg Mirl and AbSteen-Olsen, dro&ed and reuiewed tle m$or portion oJ tte brt and tlweeotler UNIDO consultants, Ruth Flgrau GeoSreg N orman H aleg and. Br ankoVulrynir, also conHb ded tetr-

A rumber oJ ot:dside eAe* prouided. aduire, comments artd. sugges-ttons for improvemenL Thelr tuanres are listed here, along with their offiIi-otrbns, althattgtt tfuir contibut'ars were made on an indiaidtr.l bastsona an rwt necessarllg reflrct the opitttotts oJ thelr instifut&rns: Jos€ D.yishrlo de Abreu President, G'abtnete de Ttatessio. do TeJo em ljrsboa;Aletarder Aufuck, Europeart B ank Jor Rearrstnrct&cn and Deuelopment;RotJ B ohing er, Europ e art lnternotionol Contr actor s ; Giarmi C arb onaro,Ewopean Invesbnent Bank; P{erre Glttstafn, World Bank; Ftancts Koh,Suga In{rastnrcfilre Management; Rc4/it MattvanL Vangtnrd Capttal;Sayin YusBf Bozhurt Oezal Tbklsh Parltament; JeIf Ruster, Barnmex:Robert Tlong, Nangang Technbloglcal Untuerstty (Singapore); UriWtnterstebu thVe Barlk andJut&id?afdt" Pakistan Counc{IJor *ierrceand.Tectuwlngg,

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tv UNIDO B0T Guidelines

GOIITETITS

PreJace , . . . . , . . . . . . : . . . . . . . . . . . . . . . . . . . . . . . . . . . . : . . . . . . . . : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i i i

1. Intradtrctlon to tte BOT concept .................................... 1

2. Phases oJaBOTproject........ ...... 19

3, Economic Jrantework Jor BAT schemes .............. .......... 29

4, The Gouentm.ent's role in prouidirtg iorsuccess..;f tr l BOT prc,jects... . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

5. Tlansfer oJteetnologA and eapabilitg .........73butldtttg through BOT projects

6. Proarement issues and selectinno3[sponsors

7. ftnarrcral and, ecorwmic Wwaisal oJB f proigts .. . . . . . . . . . . .127

8. RiskidenQficafwnand.managem.ent ..........151g. Financist stnrchning oJ BOT projects ....................,...:.. 177

10. me contract packaqe,,.. . . , . . . . . .1,.. . . . . . . . . . . . , . . . . .207

11. Thc proJect agreement ,. . . . . , . . . . . . . . . . , . . , . . . . . . . . . . .221

12, The constntct lon agreement .. . . . . . . . . . . . . . : . . . . . . . . . . . . . . . . . . . . . . . .243

13, Operation and. mointenance eontract .........257

7 4, TfansJer oJ otunershp ...,...,......

15. Some criteri.a.Jor c successlful apptlcalwnoJtte BAT concept .. . . . . , . . . . . . . . . . . . .279

Glossarg

Index

UNID0 B0T Guidelines

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45

Potential advantages to the host government of usingthe B0T approach for infrastructure development .. . . . . . . . ' . . . ."" ' """""""""""""7

Types of private sector involvement in inlrastructure development " "" """' """ 34

Some standard security anangements found in B0T proiects ' ' "' 48

Typical provisions found in "narrow agreement" legislation """""""""""""" 51

Example of a contract clause using four principles t0 ensuredomestic part icipation ... . . . . . . . . ' . . . ' . . ' . . . ' . . . . . . . ,", . . . . . . : . . . . ' """""" 'Bz

Exampte of a provision lor dealing with improvements and innovations :during the concession period ... .", . . . . . . . , , ; . . . . . .". . . . . . . . . . ' ,""""""""""""""":" ' 89

Some maior causes of high development costs for B0T proiects """""""""" 97

check-list for the financial and.economic appraisal of B0T proiects ..........,, 138

IililtIVVVIvll

oStructure of a B0T proiect . . . . , . " . . ' """"""""""" s

Phases ofa B0T project.. . . "."" '22

Summary of stages in a B0T procurement procedure ..,.,.,'.."'.""""""""""' 103 !,

FlowchartforB0Ttenderproceedings'.. . . . ' . . .". . . ' . . . . . . . """"" '104B0T structure for the LaVenta-Colegio Militar Highway """"" 168

B0T f inancial f lows ... . . . . . . . . . . .

Security package ... . . . . . : . . . . . . . . . . . . . . .". ' ."""""" ' 203

1 sensitivity of appraisal indicators t0 variati0ns from the base case ................ 143

2 Switching values (NPV : 0) ...........;..

3 Worksheetlorr iskidenti l icationandriskallocation.... . . . . ' , ' . . . ' . . ." ' :"""""""" 155

4 Sequencing otthe BOTfinancial package """ 200

vl UNl00 B0T Guidetlnes

I]{TRODUGTIOI{ TO THEBOT GOIICEPT

Wtut ts BOT? . . . . . . . . . . . . . " . . . ' . . . . . . 3

F|ananctng tecfuiques and legal urstruments .............. 4

Aduantages and. ctwllenges oJ the

BOT approach. . . . . . . . . . . . . . . . . . . . . . .5

Chnracter'tst:r; s oJ a BOT proJ e ct ..................... '......... .. I

Hre. What is B0T?;

BOT is the terminologl for a model or structure that uses private invest-

ment to undertake the lnfrastructure development that has historicallybeen the preserve of the publlc sector. "ProJ'ect flnance" ls the corner-

stone of the BOT approach. It means essentially that lenders look to theproJect's assets and revenue stream for repayment rather than to other

sources of security guch as government guarantees or the assets of theproJect sponsors.

In a BOT proJect, a private company is given a coneession to buildand operate a facility that would normally be built and operated by thegovernmbnt. The factllty mfght be a power plant, airport, toll road, tun-nel or water treatment plant, The prtvate company ls also responslblefor flnanctng and designtng the proJect. At the end of the concesslonpertod, the prlvate company returns ownershlp of the proJect to the gov-

ernment, although thls need not always be the case, as will be dtscussedbelow. The concesston perlod is determtned prtmarlly by the length oftime needed for the facillty's revenue stream to pqy off the company'sdebt and provide a reasonable rate of return for lts effort and risk.

The acronymfstands for "@r" or "bu!!5!,n andftansfer" (the terms are used interchangeably)' Variahts lnclude

finance and operateh and

@construct, and

andte, own and . For the purpose of these

Guidelines the acronym BOT will include all these variations.Some commentators have written that the BOT concept has its histori-

cal roots tn the concession systems of the nineteenth and early twentiethcenturles. Others belleve that BOT proJects dlffer so signillcantly from theold concession approach that their roots are much more recent. The oldconcessions normally entitled the private sector to thd virtually free use -

some authors have called it "exploitation" - of the proJect, with very littleparticipation and control by the host governments.

In contrast, in a properly structured BOT proJect today, the host gov-ernment decides on the need for the proJect and its scope, requires that

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UNID0 B0T Guidelines 3

the destgn, performance and malntenance of the proJect be tallored tothe obJecttves of the country and selects the prtvate sponsors by meansof an appropriate bidding or evaluation process in order to arrive at apriee that is fair to both the host government and the sponsors.

Unlike the old concessions, modern BOT arrangements are designedand implemented as publtc/private partnershtps, wlth prlvate sector fl-nance and efficiency truly serwing the public interest.

BOT projects offer siginificant potenttal for technolog/ transfer andlocal capability building and for helptng to develop national capital mar-

,kgts, as well as a varlety of other benefits, all of which will be covered in'ttte Guldeltnes, A properly negotiated and drafted BOT proJect agree-

ment limits the prlvate sponsors to a reasonable rate of return and en-sures that the proJect sewes the host country's natlonal interests, eco-nomic and otherwise.

Most BOT proJects are flrst identjfied by the host $overnment. Througha published request for proposals tl:e host government asks for bids tohave a particular project delivered on a BOT basis. Chapter 6 of the Guide'Hnes describ.s pto"rrt"ment options tn detatl. It is also possible, however,for a proJect opportunity to first be identiffed by a private entrepreneur,who will propose it to the host government. A number of successful BOTproJects have been realized in this fashion.

Many developing countrles have begun to promote infrastructureproJeets on a BoTbasls. Such proJects are financed on a limited recoursebasis and built and operated as a private venture under a proJect agree-ment with the host government or one of its agencie+:'A*,the end of theoperation perlod, the proJect is transferred to the host govemment' usu-a{y qt:po cost or only nominal cost. A number of BOT proJpcts have nowbeen sii'ccessful$ compleaed qnd put lnto operation, and many others areon the wayil

. Fin'ancing techniques andlegal instruments

The BOT concept, it is worth noting at the outset, does not lnvolve a newor novel mechanlsm for obtaining financing for a proJect or for structur-ing it. It uses the well-established approach and legal instruments of ateehnique known as "proJect finance"., As seen by the lenders, a BOTproJect involves a private sector borrower who seeks flnancing on eithera limlted recourse basis or a non-recourse basis. In theory, the lender lna non-recourse flnanclng arrangement wtll look only to the proJect's as-sets and revenuel stream for repayment, not to addittonal sources ofsecurlty, such as the total assets or balance sheet of the proJect spon-

UNl00 B0T Guldelines

sors. In practice, as will be discussed below, almost all BOT projects areftnanced on a limited recourse basis, as opposed to a purely non-re-course basis.

FroJect flnance techniques were applied in the United States of Americato the development of commerclal real estate and were further developedln the 1970s tn the North Sea in connection with oil 4nd gas projects.They are being used for numerous prlvate infrastructure projects in-volving power plants, roads, railways, bridges, telecommunication fa-.ctlities and water treatment plants.

Infrastructure financing is different, of course, from financing an alr-craft or a shopptng centre. In equipment or real estate financin$, thelender's primary security is the capltal value of the asset, Toll roads orpower plants, on the other hand, have uncertain capital value and avery limited potential for resale. The lender's primary security, there-fore, ls the contracts supporting the project and, most importanfly, thecertatnty of the revenue stre?m set forth in the project'agreement.

Dlfferent types of infrastructure have different rtsk proflles. The rev-enue from a power plant proJect ls relatively secure and predictable' Thehost government or publlc uttllty may enter a well-defined agreementwlth the proJect company to purchase the power output of the plant.Compare, however, the source of revenue from a power plant to thatfrom a toll road: slnce the revenue from a toll road depends on the indi-vidual travelling decislons of tens of thousands of potential users' theterms of a proJect agreement for a toll road are based primarily on travelforecasts by experts, Such forecasts are obvious$ less certain and theagreement less secure than a well-drafted, long-term power purchaseagreement with a creditworthy utility.

Nohrlthstandlng that different proJects involve different risks, finan-iial markets have become increasingly sophisticated in devising pack-ages to flnance almost any type of reasonably predietable revenue stream.

r Aduantages and challengesof the B0T apploach

The BOT approach to flnanctrg lnfrastructure proJeets has many poten-ttal advantages (see box l) and is a viable alternative in most countriesto the more tradittonal approach ustng sovereign borrowings or budget-ary resources. Unlike in a fully privatized approach, the governmentretains strategic control over the proJect, which is transferred back tothe public sector at the end of the concession period.

UNIDO B0T Guidelines

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, Use of private sector financing to provide new sources of capital, which reduces publicborrowing and direct spending and which may improve the host government's creditrating.

,Abil i tytoacceleratethedevelopmentofprojectsthatwouldotherwisehavetowaitfor,and compete fot, scarce sovereign tesources.

, Use of private sector capital, initiative and know-how fo reduce project constructioncosts, shorten schedules and improve operating efficiency.

, Allocation lo the private sector of proiect risk and burden thatwould otherwise have tobe borne by the public sector. The private sector is responsible for the operation,maintenance and output ol the proiect for an extended period (normally the governmentwould receive protection only lor the normal construction and equipment warrantyperiod).

. The involvement of private sponsors and experienced commercial lenders, whichensures an in-depth reviewand is an addit ionalsign of projecl leasibi l i ty.

. Technology transfer, the training of local personnel and the development of nationalcapital markets .

'

. In conlrast to full privatizalion, goveinment retention of skategic control over the project,which is transferred to the public at the end ofthe contract period.

. The opportunity to establish a private benchmark against which the elficiency of similarpublic sector proiects can be measured and the associated opportunity to enhancepublic management of inlrastructure facilities.

A eritical challenge for developin$ countrles is to identiS the factorsthat make proJects financeable in the private sector.'Il:e Guidelines aimsat helping governments to identiff those factors, specifically as they re-late to infrastructure ProJects.

Since BOT entails the financing of infrastructure proJects by the pri-vate sector, there is a common mlsconception that the "public" nature ofthe proJect can be largely ignored, and the host $overnment often as-


sumes that it has minlmal lnvolvement ln BOT proJects. It wil| be seen

why this assumption is not well-founded and why governments must

lead as well as provide support in most proJects.Fortunately, the experlence of the last decade makes clear the bastc

structure needed to make a BOT projectviable. Standard solutions have

been worked out for the problems that earlter seemed to present lnsupera-

ble dtflicultles. Even if a government agency knows little about BOT' the

knowledge odsts and is available from private advisors as well as or-ganizations, such as UNIDO, that have expertlse and experience.

The advantages and challenges of BOT proJects will be discussed in

more depth throughout the Gutdeltnes.

r Gharactetistics of a B0T proiect

BOT proJects irrvolve a number of elements, all of whtch must come

together for a successful project. Fi$ure I illustrates a typical BOT proJect

structure and the interrelationshtps between the various parties. The

rematning subsecttons of chapter I dlscuss the prtmary characterlsticsof a BoT proJect. In chapter 2, tlre development phases of a_ typical BoT

proJect are traced, Together, these chapters are deslgned to glve the

reader an overview and a context for the more detailed chapters that

follow.

Role of the host gouetnment :

The BOT approach reguires varying degrees of government'support de-pending on the type, size and eomplexity of proJect and the host coun-try's economic and regulatory conditions. It is easier for a govemment toattract private investment for a proJect in the industrial, oil and gas, or

mining sectors. The goods, raw materials or services produced by an

industrial proJect can be sold, usually into established markets, and

often abroad or to foreign users for foreign currency. The challenge isgreater in the case of infrastructure, where the revenue stream maydepend entirely on purchase agr€ements with the host government' asin the case of a power plant (contract-based revenues), or on the uncer-tainties of local consumer demand, as in the case of a toll road or urbantransit seheme (market-based revenues).

The absence of freely convertible currency adds a further complica-tion. Political and economic uncertainties pose additional obstacles tothe BOT approach.


Theoretically, an important attraction of a BOT proJect is that it will

be privately financed, without any financial commitment from the host

government, and that goverrlment lrrvolvement will be minimal because

it i" . private sector proJect. In practice, however, host government di-

rection and support - legislative, regulatory, administrative and some-

times even financial - are essential irn most developingl countries.

,First, the extent to which the.host cbuntry's laws encourage foreign

irrriestment must be examined. The government may need to provide vari-

ous types of support to the project, lncludlng special legislation or exemp-

flons in the areas of taxatlon, labour law, immtgratlpn, customs, culTency

convertibility, profit repatriation and foreign investment protection' Thus,

the first subJect for government review is the general legal and regulatory

framework that $uides the BOT proJeet from stArt to finish.

FinancialAdvisors

Loan Agreements


The host government then has to autlrorize the project at issue, aprocess that can reguire speeial leglslation and governmental approv-als. Next, it selects and admi:nisters a procurement process. It may alsohave to conduct a prellminary feasibllity study to demonstrate the eeo-nomic viability of the proJect to prospective bidders. Most eountries havefound it essential to draft a clear requeet for proposals and to adopt atransparent, well-defined bid and selection process. Usually, the gov-ernment will start the bidding process with a prequaltflcation phase,deftning clearly the evaluation crlterla for this phase as well as for themain tender phase.

Often the host government remalns the ultlmate client or purchaserof a BOT project. It must therefore truly want the'proJect and should,from the outset, appoint a focal point or a specific body for the BOTproject and give it sufficient authority and political inlluence to shep-herd the project through the various administrative, regulatory and leg-islative challenges. These challenges may lnelude opposition from gov-ernment authorities or agencies that would have been responsible forthe project if it were not being done on a BOT, privately sponsored basis.Successful approaches have ranged from appointing a high-level, inter-governmental committee to appointing a project manager with clear-cutauthority to coordinate all authorization procedures. Challenges mayalso arise from public opposition to a proJect where, for example, theenvironmental or social impacts are questionable.

Qnce a proJect sponsor has been selected, the host government or oneof lts agencies enters lnto a concesslon or proJect agreement wtth theprojeet company. This agreement will detatl the host government's elpec-tatlons, as well as the rights a4d obligations of the proJect company.

It ls crucial for a govemment's flnanclal, technical and legal repre-sentatlves to have enough expenence (or to retain experienced advisors)to protect and enhance the national interest during project development.Private sector sponsors are entitled to a fair return on their investmentand risk. similarly, the host government is entitled to a project that isproperly designed, constructed and maintained, on terms and condi-tions that are fair. Both parties must be flexible and prepared to accom-modate their respective interests in a balanced way.

The project company

The private project company is the concessionaire of the Bor proJect; itsrights and obligations are defined in the eoncession or project agree-' ment with the host government. A consortium (or consortiai of prrvatesector sponsors {public/private partnerships are also possible) is formedearly in the Bor process, before the establishment of the project com-

1 0 UNID0 B0T Guidellnes

pany, to revlew the request for proposals, prepare a feastbtlity study andsubmit a bid. The selected sponsor or sponsors usually create a special-purpose, limited liability company known as the "proJect company': orthe Joint venture company". The project company will be capitalizedwith a limited equity contribution from each sponsor'

The project company is the vehicle for borrowin$ the funds to finance

the projeci above and beyond the equity contributions ofthe sponsors.

It is also the entity that will enter into the necessary contractual ar-

rangements with the host government, the construction contractor, the

operatbr (often a specialized operating company), equipment and raw

material suppliers, and so on.'

A sponsor consortium includes parties that are interested in entering

into one or more of the contracts, such as a large international engineer'

ing and constructioq firm, one or more large equiprnent suppliers. and a.

firm with expertise in operating and maintainin$ the particular type ofproJect. These parties are willing to contribute equity to the project inthe form of cash, manpower, time and effort and/or to give back of aportion of the fees they would normally earrr on their contracts in orderto have the opportunity to be the principal contractor, supplier or opera-tor for the project.

The proJect company may include other equity investors, such as anlnvestment banking flrm or merchant bank that acts as flnanctal advi-sor to the proJect, an intemational lending institution, or other institu-tional or even public investors. In special cases, equity participation ofthe host govemment is Possible.

There are potential conflicts of interest between the sponsors as own-ers of the proJect company and the sponsors as suppliers of goods andservices to the projeet company. However, these conJlicts can be rniti-gated by the board of the project company, which does not want to see aparticular qponsor obtain unduly favourable terms that would operateto the disadvantage ofthe overall project.

The bid selection process also serves to brake the tendency ofa projectcompany to agree to. pay inflated prices under contracts with its spon-sors. The presence of equity investors in the project company, who haveno interest in any individual contract, or a minority equity participationin the proJect company by the host government also mitigates these po-tential conllicts of interest.

nr"rffy, the loan underwriting process of the commercial lending insti-tutions provides further assur€rnce that the project economics have beenthoroughly analysed, that costs and expenses have been identified andwill be controlled, that revenue and proflt expectations are reasonableand that financlal management of the project will be properly handled'

It ts normally advisable to lnclude among the sponsors a strong, well-connected and well-respected private sector participant from the host

UNIDO B0T Guidelines 1 1

country. This might be a civil works contractor or an industrial, com-

mercial or financial group. A local partner can help the sponsors under-

stand the local environment, deal with the host government and resolve

local issues as they arise. It can provide logistical support during the

development stage of the project and play an important role in raising

local equity or debt flnancing if the local economy is sufficiently devel-

oped for this purpose. The local partner may also be one of the conduits

for the transfer of technologr and training from the proJect sponsors to

the local ecqnomy.

The Proiect agreement:

The proJect agreement (called a concesslon agreement tn some countries)is at thi heart of atl BOT projects. It defines the rights and obligations of

the proJect company and the host government for the development and

operation of the proJect. It gives the proJect sponsors the right and obltga-

tlon to llnance, construct and operate the proJect for a specifled perlod. It

allocates project risks tnitially between the private sponsors and the gov-

ernment. The proJect agreement is at the centre of the web of contractual

arr-angements which, taken together, deffne the BOT proJeet.

The obligations and risks of the sponsors are further spelled out

in agreements for construction, for operation and maintenance {O&M)and for supply. These agreements with the primary contractor, the op-

erator and various suppliers of equipment, fuel and other goods and

services to the proJect must be harmonized and in accord with the basic

economics of the proJect.

Proiect finance

;The BOT approach is a speclal form of proJect finance for infrastructuredevelopment. The rate of return of a BOT proJect must be sufllclent notonly to repay the lenders but also to reward the sponsors for committingtheir equity and know-how and for assuming the risks lnvolved in suchproJects. The challenge of structuring the project finance ts to establisha mix of debt, equity and mez.zanine financlng that optimlzes the use ofllnancial sources as it ensures a sound securit5r base.

The project company raises the necessaqr debt financing or lendingfor the proJect from prlvate sector lenders and from orport credlt agen-cies and bilateral and multllateral financial institutions. The lending issometimes on a non-recourse basis, because the lenders do not haveany dlrect flnanctal iecourse to the sponsors who own the proJect com-pany or to the host government that guarantees the enttre debt.

12 UNID0 B0T Guidelines

More often, however, BOT proJect financing is on a limited-recoursebasis: recourse is available agatnst the proJect comParry and its assets,including real estate, plant and equipment, contractual rights' perform-ance bonds, lnsurance, goverrrment guarantees and other commitmentsthe proJect comPany has obtained.

ftt. most important asset, and the one on which the financing isprincipally based, is normally the project company's contractual right toa revenue stream judged sufficient to pay for the financing. For a powerplant, this asset may be in the form of a separate long-term take-or-paypower purchase agreement. For a toll facility, it may be the right, speci-fied in a concession agreement with the host government, to operate thefacility for a numb.er of years. The latter asset is partly market-based,because the revenues depend on future traffic and not on a firm rev-enue-producing contract. There are also cases where other "contractual

assets' are the foundation of a proJect: for example, a contract providingsupplies of an essential commodity at below-market prices (of, say' oil toa pciwer station) might be the most important single 'assef for the project.In either case, the lenders must be convinced that the revenue streamwtll be large enough to ensure timely repayment of the debt.

Equity capital for BOT proJects is basically provided by the sironsors,but also by institutional investors, local or intemational capital marketsand specialized funds.

Financial requitemcnts for a B0T iroiect '

The financial viability of a BOT project must be ci.arty demonstrable topotenttal eiluity investors and lenders. Verification is usually requfredin the form of lndependent feasibility studles, ground and geologicalstudies, demand studies, demographic projections and so forth.

The project must have a dependable source of revenue that will besufficient to service principal and interest payments on the proJect debtover the term of the various loans and to provide a retur.n'on equitycommensurate wlth whatever development and long-term project riskthe equity investors are being aslted to take. In the case of a powerplant, the revenue will normally be contract-based: that is, based on along-term off-take contract with a government power authority. In thecase of roads, tunnels and bridgbs, the revenue will normally be market-based: that is, based on the tolls to be gener4ted, with the traffic riskborne excluslvely by the proJect company.

There is.no reason, however, to think of eithef, of these categories asinviolable. In both situations, a mixture of contract.based and market-based revenue is often seen. Thus, power off-take contracts often com-bine a minimum flxed capacity fee with a vadable fee for electricity

UNID0 B0T Guidelines 1 3

actually purchased. The capacrtyfee is paid to the project company merelyfor having the capacity available.. This is a purely contract-based fee. Itguarantees the project a eertaln minimum revenue regardless of theamount of power actually produced. The variable fee, on the other hand,is often market-driven, based on the kilowatt hours of electricity actu-ally purchased to satisff customer demand. For this part of the fee, theproject company would be taking a market risk and would normallyexpect to reap substantial rewards. Other options can be developed ac-cording to the specific country experience, the regulatory framework andthe interest of the negotiating parties.

Similarly, revenues for toll roads, brldges and tunnels could be basedpartly on a government commitment to pay either a minimum capacityfee or additional fees if a minimum level of traffic is not achieved. Thisapproach would take some of the market risk out of a primarily market-based proJect, l,ong-term contracts with prospective users (for example,the contracts with the national railroads of France and the United King-dom of Great Britain and Northern Ireland in the case of the Channeltunnel) would serye a stmilar function.

Since the lenders will be relyhg on the proJect to servlce thelr loans,they will insist that the total cost of the project be determined at theoutset. knders as well as investors musthave confidence thatthe projectcan actually be built and operated ryith the funds being committed. BOTproJects transfer the construction risk to the project company and aretherefore normally designed and constructed on a fixed-cost, turnkeybasis. Proven technologr is normally required. Experimental or state-ol'-the-art technologt would add to the risks of the proJect and make lim-ited-recourse financing more difficult to obtain.

The less predictable the total costs, the more the lenders will insiston stand-by commitments from the sponsors or the host government.The riskier the proJect is perceived to be, the more recourse they willhave to have from other parties. In summary, to be able to secure fi-nancing, sponsors of BOT projects will need a very clear and detaileddescription of the concession scope and limits.

Equity inuestment

Most BOT projects involve a combination of equity provided by the spon-sors and debt provided by commercial banks, international flnancialinstitutions and bilateral government lenders. The percentage of equityseems to fall most often between 20 and 30 per cent of the total proJectcost, although in some proJects it has been outside this range.

The returns earned by equity lnvestors h BOT proJects are difflcultto estimate. The reasonableness of the retum obvlously depends upon

1 4 UNID0 B0T Guidelines

the degree of risk taken by the investor and the additional benefits theproJect brlngs to the host govemment (such as timeliness, efficienciesand.new technologr). The projected rate of return for the base case as-su?nptions is often set forth in government requests for proposals and inoffering memoranda circulated by investment banking firms

If the proJect performs at better than base case, the rate of return tothe equlty investors can improve substantially. This is an area where ahost government needs to be particularly vigilant so as not to "pay" toomuch for the project. On the other hand, incentives can be structured toreward results and performance that exceed the base case, so that thebenefit is shared between the proJect company and the host govern-.menti without allowing the equity investors to earn exorbitant windtallprofits. In some cases, the length of the concession could vary with re-turn, decreasing if the revenues are greater than had been contemplatedtn the financial proJections of the base case. A buccessfully structuredBOT project that achieves such benefit sharing will produce a win-winresult for both the host country and the sponsors.

Lenders to a BOT project will insist on a variety of security measures.These measures are collectively referred to as the security package. Theygo far beyond a simple mortgage or deed of trust covering the projectassets. Since the lenders recognize that if the project company defaults,there will be no ready market for a partly built toll road or a power plantthat does not work, various devices to protect the lenders are usuallyfound in BOT proJects. These are discussed in detail later. To the degreethat these securitlz measures ensure that the project remalns financiallyviable and performs as intended, they are also in the overall interest ofthe host government

Risk identification and management

Crittcal to the success of every BOT proJect is the identification, alloca-tion and management of proJect risks. The subject of risk allocation isdiscussed throughout ttrre Guidetines and addressed in detail in chapter8. Two examples, inflation and currency risk, wili suffice to introducethe subject.

, Both lenders and equity investors normally insist on some mecha-ni6m to protect themselves against inflation risk. This protection may bqprovided by price escalation clauses in the off-take agreement (in thecase of a power project) or by clauses in the project agreement allowing

UNID0 B0T Guidelines 1 q

the proJect company to increase tolls {tn a toll road proJect}. Such priceescalatlon clauses are intended to take account of lncreased costs dueto inflation. They may also be drafted wlth the intent of malntalnfng thepurchastng power of the proJect's net lncome and equtty in general.

A typical BOT infrastructure proJeet that sells its output into thelocal economy receives lts earnings in local curency. Yet a substantlalamount of the flnanclng, both debt and equtty, usually comes from aforeign source or sources. Both lpnders and equity investors want a firmassurance that they will be able to recoup their original investment,together with interest or dMdends, in foreign currency at a reasonableexchange rate. The host government, therefore, must be prepared toprovide some mechanism to assure foreign investors and lenders that(a) they will be authorizecl to convert local currency earnings into foreigncurTency; (b) there will be enough foreign currency available when thetime comes for the host country or its banldng system to make the con-version; (c) the exchange rate will not be highly unfavourable; and (d) it

; will be possible to remit the foreign currency abroad.

Government guarantees and special agreements

Although host govemments do not normally provide a direct governmentguarantee for loans made to a BOT proJect company, they may be askedto provide such guarantees, er similar assurances, for some aspects ofthe project. For instance, lf a government-owned corporation has con-tracted with the project company (as when a government utility entersinto a long-tern off take contract or undertakes the long-term supply offuel or energ/ to thb proJect), the government itself may be requtred toguarantee the utility's performance. Similarly, the host government willusually be ealled upon to give certain guarantees on the availability offoreign exchange and exchange rate fluctuations, elther directly to theproJect company or lndirectly to foreign export credit guarantee agenciqs.Essential pieconditions (access roads or transmission lines, for example)or Jorce mqjewe on clauses contemplating ftnancing readJustments inclear circumstances may also require government guarantees. The basicagreement with the project companywill normally contain numerous otherobligations of the host government or agency involved.

Role of outslde aduiscls

Host govemments, like the other partles, will normally find it useful,depending on their experience. to retain technieal, financlal and legaladvlsers who are familiar with proJeet finance structuring and the types


of private sector arrangements involved in BoT projects. The projectsponsors will themselves have substantial technical expertise and willhave experienced tnvestment bankers and international legal counselon their side. The addttion of comparable advtserg and counsel to thegovernment team can help the host government structure the initialbOt proposal in the most favourable way, can lend considerable cred-ibility and creativtty to the host governmenfs posttion during the devel-opment phase and can help to ensure that the drafting of the complexcontractual documents proceeds a$ efficiently as possible to the execu-

tion of definitive agreements.The complerty otuottr the procedures and the documentation required

to bring a BOI project to financial closin$ should not be underestimated.Few government offices will have enough staff to do the work within theallotted time and will need temporary support from outside advisors andlegal counsel, brought in to implement a particular.project. Although thccost of employing such advisers may be considerable, the resulting ben-efits - bringing the project to a successful completion, allocating risksand responsibility appropriately, and otherwise ensuring that the hostgovernment's interests are fully protected - will more than offset it'

Complexity of the B0T Process

The process of developing a BOT project may be complieated, time-con-surning and, r'rom the point of view of the sponsors, very expensive. Forlarge proJects, several years can elapse before signature of the proJectagreement or closing of the financing. In that time, the sponsors mayspend considerable amounts for feasibility studies, professional fees toadvlsers and consultants, and other out-of-pocket expenses, to say noth-ing of the cost of their own management time. It is therefore critical thal.the host government should do everything possible to ensure an orderly,fair and efficient process, from bid solicitation, selection, contractingand permitting, through to proJect implementation.

Host governments, in other words, must understand the complexityof the process and be willing to provide the timely support required forsuccess. Fortunately, valuable experience has been gained over the lastdecade hr a number ol' countries l-ly contntcrcial llanks, cxport r:reclitagencles and multilateral financial instltutions. All have come to under-stand the BOT process better, and standard solutions to recurring prob'lems have been developed.


r33f0ud r0g u {0 slsuHd

Chapter 2 discusses the phases in a typical BOT proJect: project identi-fication, government preparation for bidding, sponsor's preparation of abid, selection, proJect development, proJect implementation, operationand transfer. These phases are shown in figure II. Each phase involves anumber of contractual documents, whlch together will form the contractpackage for the proJect. Atypical contract package is discussed in greaterdetail in chapter 10.

r Proiect identification

At the outset, the need for a particular project mirst be identified andthe possibility and advantage. of having it carried out on a BOT basismust be.recognized. Usually, this is done by the host government andits planning process. The planning authorities estimate demand for elec-tricity, transportation, water and other public services and define priori-ties. The agency(ies) involved then identiff the need for additional powerplants over a particular pertod, or for a road,. a bridge, an urban transitsystgm, a port facility or some other infrastructure important to thecountry's economy. The host government will then focus on the possibil-ity of satisffing that need using one or another form of financing, withone of the possibilities being the BOT approach. Occasionally, an entre-preneur or developer is the ftrst to identiff a project and brings the ideato the government.

ln either case, a prelimtnary feasibility study normally has to be car-ried out, The study will carefully anaiyse the size, location, technical op-Uons, enviro4mental screening and potenUal revenue stream of the project.Unless the host government already has extensive experience with BOTprojects ln general and projects of the kind at issue in particular, it willprobably want at this point to hire experienced outside consultants to besure lhat l l re pro. lect tal<t:s into account ancl prolr :r : ls i ts i r r l r : rr :s ls. I loslgov{ : r 'n r ' rx :n ls s l ro t r l< l l l r : i rwar t : l l t i r l l r : r : lu t l t : ; r l i r ss ls l i r r r r : r : l i u r r l s r r r . ry l rcavallable li'om bllaterail and multllateral atd agencles to help deliay thecost of'studies and consultancy needed in the identification phase.

The lack of consisiency in administering BOT projects or their poormanagement is a familiar complaint of experienced project sponsors.Therefpre, at the outset of the process the host government should con-


l, ldentification

lll. Sponsor'sto Bid

lV. Selection

V. Development

Vl, lmplementation

Vll, Operation

ldentify ProiectDefine Form of FinancingPreliminary Feasibility StudyRssign Project Manager and TeamGovernment Decision

Procurement ProcedurePrequalilicationItoiecl Agnrorrrcrrtlender DocumentsBid Evaluation Criteria

Form Consortium/possibly project CompanyFeasibility Studyldentification of Potential partnershipSubmit Bid Package

Evaluate BidsClarifications/AdjustmentsProiect Award

Form Proiect CompanyEquity ContrlbuflonsLoan AgreementsFinancial ClosingConstruction ContractSupply Contract0tf-take ContractInsurance Contract0peration and Maintenance Agreement

Construct Facitity and Instail EquipmentTestingAcceptanceTechnology Transfer and Capability BuildingEvaluation

0&M during the Concession periodInspectionTrainingTechnology Transfer and Capabitity Building

Transfer Procedure

ll. GovernmentPreparation torIcrrdcdrrg

vilt.

UNID0 B0T Guidetines

sider appointing or contracting a project manager, who will provide theleadership, coordination and institutional memory needed to develop aBOT proJect. The project manager may be a government employee or anoutside expert.. Thrr f l rst s lcJr, lhen, is lo lc lcnl l [y er ' .proir :r : l : tnr l r l r : r : i r l<: wlt t : t l r t : r l r r

l ) r t rs r r ( : l t on a . l lO ' l ' l l i r s ls . ' l ' l r t : p ro t : t : ss o l 1 l r '< l l t :< : l l t l t : r r l l l l t :a l lo t t w l l l < :o t t -

tlnue through preparation of a request for proposals and the inviting ofbidders to submit design, construction and financing proposals.

I

r Govelnment pleparation lor bidding

The next step for the government is to decide the procurement proce:dure. Alternatlves lnclude competitive bidding, sole source procurementor some limited tender system. Most governments will want to prequaliffpotenttal investors, whether they adopt purely competitive bidding orsome other process. A large number of bidders may not be the govern-ment's ftrst priority. Rather, the need to attract serlous, quality inves-tors should drlve the design of the procurement process. If, as will usuallybe the case, competitive bidding is used, three, four or flve serious com-petitors may be enough to achieve the host government's objectives.

The request for proposals provides a detailed definition ofthe project.It noimally sets forth criteria that must be met, including size, timing,performance and the nature and range of proJect revenues. It is also ad-visable to include the proJect agreement in the invitation-to-tender docu-ments. This phase is extremely important from the host government'spoint of view. If the iniflal proJect delJnition is impracttcal, or if the gov-ernments ct'iteria for award are unrealistic or unclear, interested inves-tors will have great difllculty in responding with realistic proposals.

A quality bid package and a transparent, well-defined bid evaluationprocess are of critical lmportance for a successful BOT proJect. Experi-enced bidders consider the bid package and evaluation process as animportant indicator of the project's feasibility and of the host govern-ment's commltment to make it a success. The terms of the competitionmust be clear and consistently applied, or serious competitors wtll .bedisbouraged from pursuing the process. The issues.involved in competi-tive bidding for BOT projects are discussed in chapter 6.

From the host govemment's vtewpoint, it is the bidding and evaluationprocess that defines the terms of reference of the project and is largely


responsible for the quality of the competltton and investors. Experiencesuglglests that chooslng the most suitable proJect consortlum ls usuallythe single greatest determinant of the success or failure of BOT projects.

rsponsor's prepatation of a bid

:In response to the request for proposals, a group ofinterested investors orsponsors normally form a consortium to put together a responslve bid.The consorttum members reach a preltmtnary agreement at thls stage oncost sharing, the role each expects to play ln the project and the potentialproJect structure. If conlldentlal or proprietary information have to beinarea among proJect partlclpants, whtch is often the case, the prelimt-nary consortium agreement includes appropriate confidentiality agree-ments. or the partlcipants wtll separately enter lnto such agreements'

The consortium carries out lts o-!vn more detailed feasibility studies forthe proJect, which are a critical factor tn its decision to proceed and i:r itsability to attract financing. It then seeks tentative loan commitments andpreliminary contract prices from potential lenders, equity investors, con-tractors and suppliers in order to structure its proposal or bid.

The consortium then prepares and submits its bid. The request forproposals should require that the bid contain a credible financing plan,although not necessarily delinitive financing commitments. In some in-stances, the bid should be allowed to suggest amendments or alternativesolutions to one or more aspects of the proJect in order to better achievethe project's overall goal, For instance, the feasibility studies undertakenfor tJle consortium or the consortium's expertise ire proJect design anddevelopment may suggest an alternattle to some feature of the proJect asorigfnally outlirred tn the request for proposals.

'$election

In the next phase, the government will evaluate the various bids submit-ted tn response to the request for proposals and select the winner. It iscritical that highly qualifted technical, ffnancial and legal advisors areavailable to the goverrunent entity evaluating the bids. Bids for any compli-


cated proJect are never identical and are often very difficult to measureone against anotler no matter how clear the evaluation criteria may be.

The evaluation of bids for BOT proJects will not ordinarily be basedon price alone. It is, rather, based on factors such as price, rellability,experience and the degree to which the project as concelved and pro-posed wlll lead to other benefits for the host country, such as savings inforelgn exchange, promoting technologl transfer, and providing employ-ment and training to local employees and contractors.

Having evaluated the submitted bids, the government invites the se-lected bidder to execute and sign definitive contractual documents.

'Proiect deuelopment

Wjth the governmenfs acceptanee and the signing of the project agree-ment, the winning consortium is in a position to make definite'commit-ments among themselves to form or structure the project company if ithas not already been formed. The equity contributions required for projectrealization will have to be made. Similarly, the sponsors will now be ln aposition to approach or go back to potential lenders, as well as to thecontractors and suppliers, to obtain more definite commitments on termsand prices.

, Whun all of these agreements havc been negotiated by the sponsorsarid signed, the project will proceed to financial closing. Financial closingis the date on which the lenders and equity lnvestors advance, or begin to'advance, the funds for detalled design, constructiqn, purchase of equip-mentarrdotherstepsnecessa4rtoconcludetheproject'

These flnal steps after the'award of the proJect and the signing of theproJect agreement are crucial in the de-velopment process of any BOTproJect, Although most of 'the onus is on the winning consortium, thisfinal phase of proJect development may require some support from thehost government and flexibility on its part.

r Project implementation

Once the proJect reaches ftnancl.al closing, ttre implementatlon phasewill begin in earnest. Any particular project, of course, may not fall neatly


i

into these distinct phases. Some site assembly or development and evensome prellmlnar5r eonstruction may take place before financlal closing,but the main construction work and the deltvery of importaqrt pieces ofequipment for the proJect normally take place only afterwards, when theproject loan funds become available for disbursement. The constructionagreement and process are described in more detail in chapter 12.

The implementation phase ends when the proJect has passed the speci-fied completion tests and is finally accepted by the proJect company andin principle by the host government.

'0petation

Next, the proJect enters the operation phase, which will continue for theperiod of the concession. During this phase, the proJect company, eitherdlrectly or through ah operator. operates the proJect and maintains thefacllittes in conformity wlth the crlterla set forth in the proJect agree-ment and as required by the terms of the various loan agreements andagreements with tnvestors. The revenues or fees recelved during theoperation of the faeility allow the proJect compzrny to recover the invest,ments, serve the debt and make profits. To be sure that operation andmaintenance (O&M) are being carried out as required, the lenders, in-vestors and host government have extensive rights to receive reportsand carry out inspections of the facilities. The issues associated withO&M are described more fully in Chapter 13.

ln both the implementation and operation phases, the host governmentshould seek to derive as much benefit as possible from local capabilitybuilding and the transfer of technolory from the proJect company andcontractors into the local economy. These considerable benefits are de-scribed in chapter 5.

r Transfet

The final phase of a BOT proJect is the transfer of the project to the hostgovernment at the end of the concession period. As a rule, the proJectwill have been designed to enable the BOT sponsors to pay off theirproJect debt and to earn the expected return durlng the concesslon pe-

26 UNID0 B0T Guidetines

rtod so that the transfer to the host government wlll be for no consldera-tion or only a nominal one. The interest of the host government at thetransfer date wlll be to make sure that the proJect has been properly

maintained and that enough training and teehnology transfer have takenplace for the government to be able to continue to operate the project.

Dependtng on the type of project and the degree to which it has de-

clded to promote privatizatlon of its ir:frastructure, the host government

may find it advantageous to have the proJect company or the operatorcontinue to operate and maintatn the project under a negotiated exten-s 1 6 l r 1 l - l t r r . r . o r r < : r ' s s l o t r o l i t n ( ' w o p c r i t l l l t g r ' o t t t l ' ; t t ' 1 . ' l - l r l s r t ' s r t l t t r r l g l t l

r r r i r l t t : s ( : l l s i ( : l l , l rn ' l t t s ( i r t t r : t : , l l t t : govr : l t t i t t t : t t t l x : l k :v t : t l o l l t : r i t t [ t t t t o f t l t r :

project by a private sector entity provided better and more cost-efficient

iervice than its operation by the government itself. A host government

may therefore wlsh to preserve this option in defining the terms of theproject agreement. An alternative could be a new tendering process for a

new concession period. The various options and considerations involv-

ing proJect transfer are analysed in chapter 14.

UNID0 BOT Guidelines 2 7

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Chapter 3 describes the economic framework for the development ofBOT proJects. It provides an overview in four areas:

. The role of infrastructure in promoting a country's economic devel-opment.

. The potential benefits of private sector involvement in infrastructure.

r Tlrpes of private sector involvement.

r The economlc benefits and costs of BOT projects.

r Role of inftastructure innitlonat Uevelopment

Investment in infrastructure is clearly one of the prerequisites for contin-ued and sustainable economic growth. A developing economy must haveadequate services, including transport, electric power, telecommunica-tions, water and sanitation and waste disposal, along with education andhealth facilities, to successfully meet the challenges of modernZing anddiversilring production, expanding trade, coping with population growth,alleviating poverty and improving the environment.

Improved infrastructure provides widespread berrefits for the economy.Ttrese benefits, as well as thEir associated costs, have to be identifiedand estimated.

The promotion of industrial growth

Infrastructure availabiltty and quality is often the single most lmportantfactor inlluencing domestic and foreign investment, which is critical inpromoting industrial growth. An efficient and reliable infrastructure isessential for lndustries competing in global markets or participating in


global productlon treiworks' lnfrastructure is also a determinant for re-

gional development. n poot or-non-edstent infrastructure is one main

cause of slow irror"triJrlrowth in the less-developed areas of various

countries.

Reduced costs lor consumGls and Ploducers

lre allows for increased productlvtty and lower pro-QualltY infrastructuduction costs, u" *.iit" the more efficient supply of goods and services

tothepubl ic.Forexample'bettertransport l inksreducesdistr ibut ioncosts, and investm;il;;nologtcally efficlent power plants reduces

energ/ costs for corisumers'

A multiplier ellect on the sconomY

Direct expenditure on infrastructure fuels demand for firms supplying

the contractors, causing ripples throughout the economy".-tth one ef-

fect being tne increas"d-rr". tr ttr" labour force and, accordingly, higher

income. fhe murtif,ti"t "fittt

depends to a large extent on where the

project funds "r" "ie"i.

civir yorry, for instance, often have a high local

contentandinvolvetheuseoflocalrawmaterialsandlabour.Fordevel-oping countries *iitt

"upu"ity to produce capital goods and fixtures' in-

frastructure projects oit"" gtt'"'ate strong backward linkages to the

local industry.

Rise ol lall in land values

Mosttollroads,airports,portsandratlnetworkstendtoencourageprop:erty development in surrounding areas' On the other hand' heavy in-

dustr ieeandfaci l i t tesmayhaveanegat iveenvironmental impact,de.creasing land value in neighbouring areas'

The government shouli consider.the full economic impact of each

infrastructureproSectbeforedecidingwhethertheprojectwillbepub-licly or PrivatelY financed''

; A *mpr;;rril;*^ti.*n the role of infrastructure for economic growth in developing counlries is presented

in the World Bank publication iorld Development Beporl 1994: Inlrastruclure fu Devel,pnent'

32 UNIDO B0T Guidelines

! lmpact of pliuate sector inuolvementln infrastructure develoPment

A number of arguments have been made in favour of a maJor role for the

public seetor in the provision of infrastructure, First, such proJects in-

volve large sums of money and long lead times and hence carry large

risks. Secondly, they have widespread social and economic costs and ben-

efits that cannot be captured by user charges. Thirdly, the strategic role

of some infrastructure facilittes requires direct government involvement

in their implementation, operation and control.However, a number of countervailing considerations are being stud-

ied by many governments. Scarcity of public funds and constraints in

the access to sovereign loans and foreign technology threaten to delay

worthwhile proJects. In addition there is concern that some. public sec-

tor proJects have failed to capture the expected benefits because of cost

,o.re.r,-rtrs and quality and maintenance problems. Over the past decade,

technological changes have lessened the natural mlnogllistic charac:

teristics of many infrastructure services and allowed State-owned mo-

nopolies to be opened up to unbundling, competition and private par-

ticipation. More countries are turning today to the private sector not

only to build the required infrastructure but also to maximi?e the ben-

efits of lnvestment in infrastructure.From the standpoint of development stratery, private sector partici-

pation in infrastructure implementation and improvement will provide

aOOitionit flnance and may also lncrease economic efficiency. In the

past, many developtng countries promoted large investment programmes

to establish or strengthen their infrastructure. These investments were

made wtth a view to reducln$ external costs for enteiprises and custom-

ers allke. The programmes were conducted by the State or public utility

organizations and were lar$ely financed through sbvereign loans. How-

ever, the heavily subsidized prices at which the output was offered meant

that the income from the investments was often insufficient to repay

external and internal loans. AdJustment and austerity programmes set

up to control the expansion of exlernal and internal debt sbverely re-

striCted the ability of many governments to invest in new infrastructure

or even to adequately maintain existin$ facilities. Bringing in private

sector capital and efficiency is one way to implement and modernize

infrastructure, which in turn may lead to economic recovery and growth.

.tjr!i

r.{

UNID0 B0T Guidelines . t J

. Types of priuate sector involvement

The extent and nature of private sector lnvolvement will depend on thestrategtc signtficance of an infrastructure proJect to the host govern-ment and on its attractiveness to private finance. Under concession-type arrangements, the degree to which the private sector is involved inthe provision of infrastructure seMces can vary greafly (see box 2). :

Only limited private lnvolvement and commitment are required incontracting out or in a management contract, which could include mecha-nisms linking the contractor's compensation to the performance of thefacility. hvate participation increases in a leasing contract, where theprivate contractor is responslble at its own risk for the performance ofthe facility and the qualtty of the seMce provlded, typically against pay-ment of a lease fee.

In a BOT-type scheme, the prlvate concesslonaire is also responsiblefor deslgntng, flnanclng, burlding (or rehabilltatln$ and operatlng theproJect, whlch at the end of the concession period is returned to thegovernment. In a BOO scheme, by contrast, the proJect remains in theprlvate sector.

Conlracting out or management contracts, where the private sector constructs a lacility undera contractual arrangement 0r manages a facility lor an agreed period and fee, without takingon the linancing 0r revenue risk. As a variant of contracting out, the private sector retainssome or all of the revenue as its return for operating the facility and thus bears a revenue risk.

Leasing, where the private sector may design, build and finance the facility and receive leasepayments from the public sector for its use.

B0T-type schemes, where the private sector designs, builds and operates the proiect for anagreed period and then translers ownershlp of the facilily to the government.

800 scheme, where the facility is nol transferred but remains in private hands.

Privatieation, that is, lull private seclor ownership and control over an infrastructuro lacility orutility corporation,

3 4 UNl00 B0T Ouidelines

, *&ib' ""

Finally, privatlzation (or divestiture) lnvolves the transfer to the pri-vate sector of the lnfrastructure company assets and of the responsibil-ity for financing future expansion and for all investments required tomeet the obligations specified in its concession or'by the governmentregulator.

Properly structured BOT proJects offer efflclency gains and additionalfinance approaching those of purely private projects. Unlike outri$htprivatization, they allow the government to retain a greater degree ofstrategic control over lnfrastructure development.

Although the BOT approach may not be suitable for all types of infra-structure, it should be considered, broadly; where a number of condi-tions prevail:

r PriVatization is less appropriate because the government wants toretain a greater degree of strategic c<lntrol over the infrastructureproJect.

r fi significant initial investment in new or improved facilities is re-quired and the governrnent prefers to allocate public funds to otherpurposes.

r There are opportunities for efficiency gains in the construction andoperation of the facility.

. The government wants to establish a benchmark for public sectorefforts and thereby help to improve the efficiency of public projectimplementation and management.

r User charge rates are acceptable to customers.

. The prlvate sector can recoup its investment through user charges.

The types of infrastructure proJect where BOT contracts have provedmost successful are the following:

r Ttansport schemes, including qirports, light rail projects, major inter-city and intercountry roads, tunnels and bridges.

r Utility projects, including power, water and telecommunications. Iftariffs are set at market levels, it should be possible to rely on usercharges and to forgo continuing government subsidy.

There are fewer examples to date of successful BOT contracts in healthand education, where the government tends to be the purchaser and


therefore bears much of the project risk. There are, moreover, widersocial benefits of better health and education that may not be fully cap-tured through user charges, For example, higher educatlonal standardsgenerally stimulate economic growth, but seeklng to recover the costs ofeducation entirely through user charges may adversely affect the stand-ards. Innovative schemes that provtde for a genutne transfer of rlsk are,however, emerging in both sectors.

r Economic'benefits and costsot B0T proiects

tlOT projects potentially offer a number of economic benefits:

r Additional sources of finance for infrastructure and, in the case offoreign private sector participation, additional inflow of foreign ex-change.

r Govemment long-term strateglc control of infrastructure.

r E{Ilclency gains and lower operatlng costs. An lndependent experl-enced operator applylng well proven and up-to-date technologr andhaving an incentive to manage rlsks effectively through a well-struc-tured BOT contract is likely to be able to produce output more effi-ciently and at a lower price to the user. This benefit may enhance theprices of goods and services and increase a country's cost-competi-tiveness in a wide range of industrial sectors,

r Technolo5y and skills transfer. BOT proJects offer host countriesl l r c o ; ' lpor l r r r r l l v to o l l la l l r r r ; r - to -d i t l r : t t : chno logy lnd l t i t v t ' l l r r ' l l ' l o -

t ' r r l rvor l t lo rc r ' l l i r l r r t ' t l l r r l ro rv (o r rs t : l t . l ,o t :a l t :u l lub l l l l y t t ta ty bc s t l t t t t t -

lated further by long-term research and development agreementswith the private sector sponsor. This benefit may also stimulatetechnological progress in other sectors of the economy as a result oflearning by doing.

. Developing local capital markets. In an appropriate regulatoryenvironment, BOT projects, by virtue of their need for long-termcapital, can promote the introduction of new financial instruments{debt and equity) to local flnancial markets. This will stimulatedevelopment of the local capital markets and increase the financial


sophistication of local partieipants. including financial institutions,State-owned utilities, government agencies and private companies.

Eventual transfer of the assets to local control. The fact that a BOTproJect will be returned to local ownership and control may en-hance the political acceptability of this approach in the first in-stance. In addition, at the end of the contract period, the govern-ment may be able to agree to a new operating and maintenancecontract at a lower price than was called for in the ortginal BOTproject agreement and for a shorter duration. A shorter concessioncould also allow the market to be tested. All of this could lead tolower user charges and, if the new operator is a domestic firm, stemoutflows of foreign exchange to foreign sponsors.

The econor.nic costs associated with BOT projects inclucle thefollouring:

Costs due to an imbalance in experience. Governments with littleexperience in BOT contracts are advised to initiate BOT projects ona manageable scale and seek professional advice to compensate theoften greater experience of the private sector.

User costs imposed for the first time or increased to match marketrates, The economic costs of public seMces, once covered by the

' State, then become fi_nancial costs for the user.:.

Overpriced supplies. Potentlal confllcts of lnterest on prlctng amongthe proJect sponsors must be monitored. Care must be taken toensure that sponsors who supply goods or services to the project doso on a fully competitive basis.

High financing costs. Financing costs for BOT projects tend to behigh, as the legal fees associated with their contractual arrange-ments are ntuch higher than those for standard commercial con-tracts. The complexity of the credit also means that lenders needmore time than usual to assess a project's merits and will tend tocharge higher fees.

Given the importance of infrastructure investment to naticnaldevelopment it is essential that the wider economic costs and benefitsassociated with a BOT scheme are taken into account by governmcntswhcn dcsigning the economic and legal l iamework to promote privatesector investment in such proJects as well as when assessing thoseprojects. The wider costs and benefits outlined above will not be re-

UNID0 B0T Guidelines '1.7

fleeted in the financial return to a private sector lnvestor, and corporate

obJectives may conflict with national obJectlves and priorities.'Governments will ordinarily wish also to undertake a financial and

econornic appraisal to determine whether a particular BOT project is

worth doing. This appraisal exercise is covered in chapter 7.


THE GOUER]IMEIIT'S ROLE 11{PROVIDII{G FOR SUCGESSFUL

BOT PROJEGTS

Oueru tew . . . . , . . . . . . , . . : , . , . ; . , , . . . . . . . . . . . . . . . . . . . . . . . , , . , , . . . . . . . . , . . . . . . . . .41

BOT strategg at, tle cotnthg leueL ...,...................,...... 42

The promotion oJ priuate sector participation ............44

The legal Jrameu:ork Jor a BOT strateg g ................... 4 5

Administratiue Jrameusork Jor BOT proj ecfs ..........,... 56

Gouernment trcenttues and other Jorm oJsupport

Gouemment commitrnent to conctttde BOTprojects uithttt a reasonable Ume ...........71

Summarg . . . . . . . . . . . .72

a

E oveluiewi

One of the advantages of the BOT concept lbr a government is that aconsiderable workload, including responsibility for the financing, de-signing, construction and operation ofthe projects, is transferred fromthe government agencies and ministries traditionally responsible forinfrastructure projects to the private sector. This does not, however,imply that the role of the government is limited to supervision and moni-toring of the BOT proJects. BOT infrastructure projects require that thehost government play an active role, in particular in the preconstructionor preinvestment phases of a'project.

It is the government that initially approves the use of the BOTconcept in connection with the country's infrastructure policy and thatthen identifies sectors and projects that would be suitable for thisapproach. It decides the procurement process, manages the procure-ment proceedings and defines the crlteria for the selection of BOT spon-sors. The host government or one of its agencies will be directly involvedin the agreements that are essential to the arrangement of BOT proJects.The most important task will be to draft the proJect agreement, whichspells out ln detail the rights and obltgations of the proJect company andthe government agency authorized to sign the agreement.

Ttre government normally supports the implementation of the projectin a number of ways: these may include providing the proJect-site andaccess to lt, enerry supplies, transportation and other logistical sup-port. It will be lnvolved in facilitating licences, permits and approvals,as well as ensuring that they are readily renewable, provided that thesponsors have fulfilled their obligations. The host government normallymust ensure that foreign exchange is available with which to repay theloan used to finance the project, the fees of the foreign contractors andthe dividends to the fbreign project sponsors. The host government(or its agencies) may bg the purchaser of the output of the proJect andmay in some cases also be called on to provide financial support to theproject, for instance in the form of tax exemptions.

Finally, the government normally has the right to take over the projectassets at the end of the concession period or to arrange for some otherscheme to operate the proJect when the original contract period expires.


In short, a BOT infrastructure project cannot be realized withoutsubstantial commitment and cooperation on the part of the host govern-ment. Indeed, the host government's commitment is a critical factor inthe assessment of the BOT project's viability by foreign investors andcreditors.

By the same token, the government's control of so many of the ingre-dients of a BOT infrastructure project gives it an opportunity to managethe project in a coordinated and efficient way and thus to ensure that ittruly serves the national interest.

F B0T strategy at the country leuel

Each country must adopt a realistic and conststent BOT strategf basedon its particular situation and needs. First and foremost, it must assessrealistically its attractlveness to investors

The range of challenges associated with the development of BOTprojects and the need for govemment support vary from country to coun-try. Since foreign investors and lenders, not surprisingly, tend to favourBOT projects in the more industrialized developing countries, the ma-jority of BOT proJects have so far been implemented in countries withrelatively high GNP, stable exchange rates and inflation, fairly well de-fined legal and institutional environments and political stability. Struc-turing a BOT package in less developed, politically unstable and moreindebted countries has provecl to be a greater challenge.

'l-his tcndency is lreightened by the constralnts on the availabililyof finance, underdeveloped domestic capital markets and the shortageof financial resourcds in many developing countries. In such countriesthere may also be a shortage of private proJect sppnsors - particularlyconstruction and equipment supply companies - interested in and ca-pable of financing and operating infrastructure projects.

Hence, the real problem facing rnany governments that have decidedto adopt the BOT approach is to design a strategr for government sup-port that wlll encourage foreign and domestlc private investment in thecountry's lnfrastructure proJects, given the strong internattonal compe-tition for private finance. In doing this. the government must assess thefactors that make a developing country attractive to foreign lnvestorsand lenders. These factors include political stability, enabling legisla-tion, a credible legal framework that recognizes and enforces contrac-


:

tual obllgations, proven political and administrative support for BO'lprojects and the country's credit rating (which may itself take most ofthe preceding factors into account).

Many of these factors cannot be changed ovemight. If a governmentdecides to adopt a BOT strates/, it may consider taking positive steps toencourage private sector investment and reduce the negative impact ofexisting impediments. Experience suggests that a proactive governmentpolicy to stimulate BOT infrastructure projects can be a decisive factorin the competition for foreign investment in such projects.

There is no general recipe for a proactive government policy, as eachpolicy must be designed for the particular country involved. However,having certain essentials in place will considerably enhance the privatesector's interest in BOT infrastructure projects in a developing country:

r An explicit national development policy that clearly commits thehost government to promote private sector participatlon ln lnfra-strrcture projects.

r .{ credible legal and regulatory framework to facilitate a BOTstratesr.

r A credible administrative framework to expedite the implementa-tion of BOT proJects and to support such projects when they en-counter the problems inherent in all large projects no matter howthey are financed or what country they are in.

. Incentives and various forms of government support to encourage' the private sector to participate in BOT pro.iects and a pragmatic

approach to risk-reward lssues.

r fi clear government pommitment to concludb BOT deals within areasonable time.

Each of these essentials is now addressed in more detail. Anotheressential, an orderly and transparent BOT procurement procedure, iscovered in chapter 6.

UNID0 B0T Guidel ines 4 3

c The plomotion of pdvatesector ParticiPation

The host government's commitment to private sector participation in

the development of tnfrastructure services should be clear and unequivo-

cal. To thi extent possible, the govelnment should attempt to develop

broad political consensus in favour of such a policy. It controls so many

of the necessary ingredients for: the success of a BOT infrastructure

project tl-at no sponior, investor or lender will participate unless it can

count on the {lrm commttment of the host govemment for the duration

of the proJect.Idealty a host governmenfs publicly expressed commitment to pri-

vate secttr particip=atlon in lnfrastructure development should meet three

objectives:

r It should convince private sPonsors, investors and lenders that the

government is ffrmly committed to BoT infrastructure projects.

. It should disseminate lnformation on private sector involvement in

infrastructure servlces and galn publlc acceptance for this involve.

mcnt, which mity lte partlcrrlarly scnsll.lvc lrl prrbllt: <rplnl<lrr ll-tlrt:

servlces were prevlclusly provtded to the publlc at below cost or'at

no cost.

. It should ensure the support of interested groups in the host coun-

try, including the public admiiristration and the labour unions, for

private sector irrvolvement in what have traditionally been public

sector Projects and services.

Foreigln sponsors of BOT proJects and their lenders not only need to

know'that the host government is commltted as a matter of policy to

prlvate sector particlpation in infrastructure development. They must

also be satlslled ttrai ttre host $overnment has a strong ratlonale for

supporting thelr particular BOT proJect and ls not likely to withdraw

tnaf support, delay the proJect or renounce its obligations'Thus, each BOT proJect's economlc vlabllity, whtch to a large 94"1t

depends on t'he country:s or locality's need for the project, must be clearly

perceived by the government. For instance, the need for better telecom-

munications or transport systems or for more water or power should be

demonstrated in reports and proJect studies. The government's ration-

ale for adoptlng the BOT approach, both ftnancial and technical' should

be clearly and convincingly defined. A host country's need for the pri-

vate sector's financial and technical resources to implement and oper-


"&a*o.

erlc a much-needed lnfrastructure facility can be a strong addittonal in-centive fcrr i;

"ernment and its agencies to support the BOT project

over lts proJecL.:,, l fetime.Finally, Lach BOT project that is part of a larger infrastructure pro-

gramme must be ranked as to importance by the govemment. Whengoverriments do not have enough resources to pursue more than just ashort list of planned BOT proJects, failure to prioritize will lead to delays,which in turn wlll deter sponsors and lenders.

r The legal lramework for a B0T strategy

Tho legal framework a$ a key element In the investors'appraisal of a B0T ploiect

The attractiveness of a BOT proJect to private investors depends to a largeextent on the way the host government addresses fundamental legal is-sues, such as enforcement of conaacts, private ownership, security ar-rangements, taxes, remittance of foreign exchange and proftts, that arecritical to the success of all foreign investment in BOT projects.In particular, an ireadequate legal framework can undermine the strengthand effecflveness of the various t5pes of contracts that constitute the stmc-ture of a BOT project. In a broader sense, a supportive legal frameworkwill reduce what is known as the "country risk", a key element in spon-sors' and lenders' appraisal of a.BOT proJect in a developing country.

There is no perfect or universal model for a supportive legal and regu-latory framework for BOT proJects. The legal approach and techniqueswtll vary according to the edsttng legal system and tradltion ln a coun-try, lts BOT strategr and the specifics of the particular infrastructuresectors. Each country must decide questions such as the following:

r Should special legislation be enacted for BOT proJects or existinglegislation amended?

. Which terms should be defined by legislation? Which should be leftto be negotiated between the parties involved?

. Should government control be enforced by legislation, regulationsor administrative guidelines?


In some developing countries, namely those where BoT projects are

considered part of the government's general economic policy and the

existing laws and regulations for that policy are considered adequate,new legislation or regulations may not be needed.

some of the elements of a legal and regulatory framework for imple-

menting a successful BoT strategr are discussed next'

The basic legislative authority lor awarding B0T ploiects

A host government must provide the basic legislative and regulatory au-

thority for a given infrastructure project to be built and operated by theprivate sector. This includes designating the indMdual ministries, govern-

ment agencies or local governments authorized to procure and implementBOT prolects. It also includes passing regulattons that define the responsi-bilities of government agencies and ministries for the development and im-plementation of the proJects, the issuance of licences and permits, centralgovernment approvals and mechanisms for administrative coordination.

some countries may not need specilic legislation for the transfer of pub-lic infrastructure to the prlvate sector. For example, ln the majorlty of com-mon law countries, unless there is specific legislation to the contrary,the govemment and individual govemment mirristers usually have the au-thority to sell govenunent assets or to transfer them to private operators'

Irrespective of the legal basis for author'rzin$ BOT projects, what mattersmost to foreign sponsors is the clarity of the authorization. ln order to avoidlater disputgs, foreign sponsors. must know for sure who has the authorityto award BOT projects and the scope of that authority'

Enabling public legislation

A wide range of special public legislation and regulatory support may berequired to implement and operate a BOT project, depending on thecountry involved. For example, the host government may have to enactlegislation authorizing the acquisition of land for the project, the trans-fer of public assets to the project and the provision of logistical facilities,work permits or other necessary government inputs. Experience hasshown that to avoid delays and frustration it is very important to havesuch public legislation in place before undertaking a BOT project' Spe-cial public legislation may also establish a suitable framework to fostercompetition ln areas previously under the exclusive control of the publicsector, Such enabllng legislation mtght, for instance, abolish sectoralState monopolies and State subsidies so as to make non-subsidized pri-vate sector participation in the development of infrastructure proJects

. fo UNID0 B0T Guidelines

feasible. Since a BOT project involves either private ownership of theland and assets of the project or a leasehold in them, the host govern-ment must determine whether the public sector's exclusive ownership ofthe land and infrastructure assets is to continue or private ownership isto be al lowcd by enactment ol ' legislat ion. Likr:wisr: , i f owncrship orlesscr:ship rights art: vestcd only on nali<lnals of n r:ountry, lcgislativ(:reform urill be required to attract foreign sponsors. Again, the domesticlaws should be'changed before procurement begins.

Adequate securitv legislation

The more traditional forms of securlty arrangements such as lana mort-gages or securlty lnterests tn inventory and equiprnent are not of muchinterest to the lenders to a BOT infrastructure project. A BOT projectpay be uniquely valuable to the parties involved but of rather limitedvalue to third parties. Other securitlr devices, discussed below, are usu-ally more important from the lender's perspective,

In some BOT proJects, however, the lenders may be willing to rely onproject assets (in addition to the project's revenue stream) as securityfor debt repayment. To the degree that this is so, they may require lesssegurity from other sources. The creation and protection of security in-terests, mortgages and liens in respect to project ASsets in favour of the,lenders and the enforcement of remedies under the security packageshould therefore be assured by the host country's legal system.

Security arrangements tailored to the BOT nature of a project arenormally regulated in the project agreement, the purchase agreementand the credit agreement. Such arrangements may include offshore rev-enue and retention accounts, performance undertakings from the gov-ernment of the public agency's obligations under the project agreement,assignment of various contracts to the lenders, the lenders'right to cureany defaults by the project company within a reasonable time and theirright to take over the BOT project in the case of default, usually accom-plished by provisions in the project agreement and by having the projectcompany's equtty owners pledge all of their stock as security for theloans. l€gislation, however, may be needed to legally protect these addi-tional kinds of security, which are often critical to the success of BOTprojects. For example, enforcernent remedies and legislation to preventother creditors from obtaintng conllicttng interests must be enacted lfthey do not already exist in the legislative framework of the country.

Lack of provisions for the protection and enforcement of such secu-rity arrangements in a country's legal system has made bankers ex-tremely reluctant to lend to BOT projects. Examples of such customarysecurity arrangements for BOT projects are listed in box 3.

UNID0 B0T Guidel ines 4 7

r Pertormance unde(aking kom host government of its agencies' obtigations under the prolect

agreement.

0ffshore revenue and retention bank accounts.

Approval from the government or the central bank for foroign

Assignment of rights over bank accounts lo s-enior lenders.

Assignment ot interests under proiect c0ntracts such asagreements and 0&M agreements to senior lenders.

Stock pledges. ,

exchange transactions,

construction contracts, olf-take

Iake-or-pay arrangements.

Security interests, mortgages and liens on proiect assets.

Itrlornrance and maintenance bonds to secure various obligations of lhe company.

Insurance taken out in ioint names 0r assignable t0 the lenders.i

Notice to lenders of defaults.

Rights of senior lenders to cure any defaults by the company and the forbearance of thegovernment's rights to terminate the proiect agreement during the pendency of the cure.

Rights of senior lenders to enler and take possession of the project facilities in connection witha cure of delaults.

Rights ol senior lenders to appoint replacements l0r the project company or the 0&M companyuoon a delault under the loan documents.

Support from the government for issuance of approvals and permits t0 the new project developeror the 0&M company if the tenders appoint replacements.


legislation to promote foteign inuestment

Most develophg countrles have enacted foreign investment codes to en-courage and facilitate direct foreign investment. Although the objectives,scope and approach of the foreign investment codes differ greatly, thecodes all grant a broad range of incentives and benefits to foreign inves-tors. They need to be made applicable to investment in BOT infrastruc-ture projects, which are simply a different form of foreign investment.

Some lssues usually covered in foreign investment codes should berecggnized as particularly important to the financial characteristics andlong-term nature of BOT proJects:

. Rlght to exchange tocJ currency tnto foreign currency.

. Forelgn exchange convertibtlity at a reasonable exchange rate.

. Free remittance abroad of foreign currency.

' :Full repayment of loans and investment compensation upon anygovemment-mandated transfer of a project before the end of theproject period (expropriation, nationalization and acquisition).

r Simplified import licencing and customs procedures.

. The right to bring in foreign nationals needed to construct' operatemaintain projects.

r The right of foreign investors to establish co.mpanies in the hostcountry;

. Tax regimes for foreign lil/estment.

Obviously, lnvestment laws that limlt foreign investment or that man-date a minlmum level of domestlc partictpation in companies or proJectsrequire close analysis. The magnitude of a typical BOT infrastructureproJect will most ofteh require that such laws be adapted or changedbefore a national BOT programme is implemented. En

-&*


A legal framework for the B0T project agreements

The legal authority for the government or its agencies to develop andimplement BOT infrastructure projects is not given without any restric-tions. Rather, it usually defines more or less explicitly a mandatory legalframework for the BOT arrangements.

The strategies that underlie a legal framework for BOT proJect agree-ments vary considerably. Broadly speaking, the legislative approachescan be described as falling in one of three categories: (a) an open agree-ment approach, providing for a very flexible authoriff in any given BOTproicct, (b) a narrow agreenrent approach, where the leglslation ttsclf de-lcrlrrtnrls th<: cssrrntlarl ternrs of thc.BOl'proJect agreet:nents ancl (c) a wlrlt:range of approaches between "open" and "narrow".

The majority of countries that have author?ed private sector partici-pation in infrastructure proJects have applied an open agreement ap-proach. This allows the appointed ministries, govemment agencies orlocal governments to tailor all or rnost of the important terms to be con-tained in the project agreement. The broad delegation of authority is inprinciple restricted only by the general legislation of the country and bythe objectives of the government's BOT policy. Those objectives are usu-ally expressed in the authorizing legislation.

The open agreement upp.ou"h protrid." maximum flexibility. It makesit possible to adjust the BOT framework to the characteristics of thedifferent infrastructure sectors and to the different BOT projects withinthe sectors. A disadvantage of this approach is that it may take a longtime to draft the contracts,.which may be overly detailed since there islittle overall legislative guidance. If the open agreemenr approach is used,the national authorlties must have experienced admlnistrators and le-gal advisers to prepare the contract package.

An example of the narrow agreement approach is found in the BOTlegislation adopted by the Philipplnes. There, a rather extensive BOTlegal framework, including supporting regulations, has been passed bythe national legislative body. This approach is also well known fromEuropean concession legislation and from the petroleum sector in theNorth sea, where comprehensive legislation protects national interests.

This legislative approach may define the basic contract provisions forthe operation and maintenance of the BOT proJect, the maximum periodfor private ownership, environmental protection, the training of nation-als, repayment terms, limitations on financial support from governments,insurance obligations and so forth. Box 4lists typical provisions in nar-row agreement legislation. Althcjugh some important contract terms areleft to be tailored to the characteristics of the individual proJects, thisapproach establishes a rather strict and uniform legal framework forBOT projects.


,l+._

. Key requirements for construction, 0peration and maintenance of the project.

l l tg r iqlrt lu uso larrr l , rolrdsarrr l ol l tct sugrport irrg lat; i l t l i t ; l ; n(:(; t i : i l ; ; l ty l t t t l l t t : t ;ott l ; l t t tr ; l i r t t t att t l

operation of the project.

Duration of private ownership and operation.

Transfer ol the proiect, including assignment of shares in the proiect company.

Provisions on tariffs, lees, tolls and other charges during the operation of the project,

Training of nationals.

Use of national services and goods.

Transfer of technology.

A iramework or minimum requirement l0r allocation ol risks between the proiect companyand the government.

Assurance ol coppliance by the proiect company.

Perlormance incentives.

Proiect supervision.

Coordination of the proiect with other infrastructure projects,

Environmental protection measures.

Contract termination and adlustment,

Consequences when B0T projects are abandoned before the end of the concession period.

,

a

UNID0 B0T Guidelines E {

The narrow agreement approach allows the legislature and the gov-ernment to closely control infrastructure development and monitor thereallzation of the natlonal BOT obJectives. It also gves the authorities astronger hand in negotiating contracts with the private sector and mayhelp to reduce the time and legal costs of finalizing the BOT agreements.On the other hand, the lack of negotiating flexibility makes it difficult totailor the contract terms to a particular infrastructure sector or to aparticular BOT project.

Between the .extremes of those two approaches is a wide range ofhybrid systems. Tlpically, they provide some detailed rules and regula-tions, for instance in foreign lnvestment codes or ln detailed guidellnesapprqved by-the government. but leave wtde dlscretlon to dectde terrnsfor a given project. Such hybrid frameworks allow the authorlties to re-spond quickly and effectively to sectoral needs or the needs of a specificproJect. Their disadvantages may include a lack of predictabiltty andunequal treatment of sponsors

A fourth type of legal strategr is for the government to set up modelor standardized contracts for each BOT infrastructure sector, with apredetermined procedure for approval of tailor-made terms. This ap-proach may streamline the process considerably, reduce legal costs andprotect the parties against unbalanced or unexpected terms in the projecti t { t l ' ( ' r r l ( ' i l ls . ' l ' l r ls l t l lJ t r r t i t t : l t ls wcl l l<r towlr f rorn o lhr : r l r r l r : r r r i r l l< l l r : r l < :o l rtracltr:rl :rrraugcntetrts arnd has beerr adoptecl by Chlna and Paklstan.

It is not possible to say whlch project agreement terms should be left tothe negotiating process and which should be determined by legislation,regulation or standardized contracts for each BOT sector. However, it is fairto say that the host country's legal framework for BOT arrangements mustbe firmly established and ascertainable prior to the tender proceedings.

General business legislation

Although not directly associated wtth BOT infrastructure proJects, acountry's general buslness legislation may have a far-reaching impacton the implementation of BOT proJects. Such proJects will not fare wellwhere property rights are unclear, the enforcement of contract rights isuncertaln, there is no protection of lntellectual property and there areother legal impediments to business activities.

ldeally, a country's existing business legislation should be compat-ible with the government's Bor obJectives. It is outside the scope of theGuidelines to examine the broad range of business laws and regulationsthat directly or indirectly inlluence BOT acUvities. However, it can besaid that general business legislation, to be supportive of BOT projects,should include nine elements.

c z UNID0 B0T Guidelines

Laws protectlng propertg rlghtsMost fundamentally, property rights (ownership of land and project'facilities or contractual licence to use them) must be clearly.de{inedand protected by law. Obviously a project company cannot carry out

4 BOT proJect unless its rlght to use the project site and the projectfacilities are protected by law against interference from third parties.

Protection oJ propertg rights against expropriation and na'tlonalizatilonObviously, expropriation and nailonalization of private infrastructureproJects are contrary to the basic intent of the BOT approach. Spon-sors and lenders will ask whether, in the event of political change, anew government will maintain the agreements made by the preced-ing government. Since all countries reserve their right to expropri-ate for public purpose, expropriation of BOT infrastructure projectsshould be subject to judicial review, and fair compensation for theowners ofsuch projects should be guaranteed. The guarantee shouldbe expressly provided for in the law of the host cguntry.

A legal frameutork Jor intellectual propertg protectionA legal framework for intellectual property protection may includeratlfication of international agreements on intellectual property pro-tectton, Some developtng countrles grant preferential treatment forthe lmport and/ortransfer of advanced technologr. Intellectual prop-erty protection has become increasingly important for BOT projects.

Contract e4force abilitgEnforceable agreements are the legal cornerstone of BOT arrange-ments. The contract laws of the host country must ensure that thelo4g-term agreements between the BOT parties are legally bindingand enforceable, including against the host government. The enforce-abillty of contracts is of particular concern in countries without well-developed legal systems and legal institutions. Since the success ofany BOT proJect depends on a complex system of underlying con-tractual arrangements, sponsors and lenders may seek to reduce theenforceability risk by requesting protective provisions in the contractsand by additional non-legal measures (see the following section).

Adequate corporote la usLaws delining the rights and obligations of companies should be inplace. These laws should include provisions for the establishmentof companies, foreign ownership, limited liability operation of thecompanies, minority protection and/or sale or transfer of shares.


I*gislation on leasing and, JranchisingIrgislation setting up special business mechanisms such as leas-ing may be an important vehicle to support private participation inthe development of infrastructure proJects. This is particularly truein countries that do not permit private ownership of infrastructurefacilities. The project company must at least be entitled to lease orhave a contractual licence to use and occupy the land needed tocarryr out the proJect for the concession perlod without lnterferencefrom third parties.

B ankrtp tcg le g lsl ationCommercial liquidation, bankruptey and insolvency legislationshould also be in place. lnan agreements generally protect BOTlenders against default well before the bankruptcy stage. Bank-ruptcy and insolvency legislation may, however, provide a secondline of defence for the proJect company's creditor.

Commerciol b onking and hrsuronce legi,slationA proper legal framework for the host country's banking systemand financial laws, such as credit and insurance legislation, will beof concern to potential sponsors and lenders. Banking legislationmay, for instance, be needed to author?e the transfer of projectrevenues to offshore revenue and retention accounts.

Enuironmentcl laurs ornd. labour lcursBOT sponsors and lenders need to know the host country's envl-ronmental and labourlaws and regulations, first of all because thevwill of course have to be bomplied with but also because they will bLa cost factor. of crucial importance to project sponsors and lendersis whether future changes ln environmental legtslation that cannotbe antlcipated when the sponsors enter into long-term BOT obliga-tions will apply to the proJect and, if so, who will pay for the addedcost of compliance. To attract foreign sponsors and lenders, gov-ernments often offer some protection against material changes inthe environmental legislation or they provide adequate assurancethat the cost of compliance with such changes will be for the ac-count of the host government.


. 4"-

Ptotection of contract rights under the governing lawand by adequate legal institutions

Even if a BOT strategr is supported by an adequate legal framework, thequestion arlses whether the many BOT contracts'and the supportivelegislation will be respected and can be enforced by investors, construc-tors and operators. Thls means that a country's judicial system andother instltutions must ensure the rule of law.

Various devices are used to ensure the enforceability of BOT contracts.Among these are traditional legal instruments, such as provisions for theresolution of disputes by internationally recognized arbitration. Waiver ofsovereign immqnityfrom suit aqd judicial enforcement is required in somecountries to ensure the efficient application of the law.

The protection of contract rights may also be addressed in a numberof non-Judicial ways:

' Multinational sponsorship, preferably by respected foreign spon-sors and investors.

Investment or loan guarantees from the World Bank or one of theregional development banks.

l,oans and/or guarantees from the government export credit agen-cies of industrialized nations.

Loans to the proJect in which a broad range of international banksparticipate, some having other loans to the country with cross-de-fault clauses. Such arrangements can be strengttrened by closelyassociating the bank syndicate loan with a loan to the same projectby the World Bank or a regional development bank. It is unlikelythat a developing country would intentionally risk harming its inter-national credit standing by not paying amounts due to interna-tional lending organizations like the World Bank or to internationalcommercial banks.

Special legislation

Whether a specific BOT law should be enacted depends largely on acountry's eldsttng legislative framework. It may be easier to amend andsupplement edsting laws to fill any perceived gap or it may be moreefficient to introduce a new body of law.

Some countries (the Philippines, Turkgy and Viet Nam, for instance)have enacted rather comprehensive BOT laws and regulations in con-

&


nection with their BOT programmes. These laws address most of thelegal issues discussed ln this chapter, including authorization, requiredgovernment approvals, preferential tax treatment, procurement issuesand the framework for BOT project agreements. An alternative approachis to develop BOT legislation by stages, As a first step, the host govern-ment may establish minimum enabling legislatlon for BOT proJects. Theftrst BOT proJects {pilot proJects) based on that minlmum legislationmay then set the stage fgr a more detailed legal and regulatory frame-work, if it is needed. This approach was adopted by China and Pakistan.

There are significant advantages to having a specific BOT law:

. It helps foreign investors to,find, with relative ease and in one place,the main legal provisions related to BOT projects.

. It provides readily available answers to the essential issues, suchas the rights of foreign investors, procurement procedures and se-curity requirements, involved in BOT projects.

. It clarifies and gives legal effect to the support and incentives to beprovided by govemments.

I It sends a clear and positive signal to potential investors of thegovernment's commitment to develop BOT projects and, possibly,to government departments and local authorities who might other-wise not give their full support

. It reduces the cost of drafting proJect contracts and the time neededto do this by reducing the number of conditions that need to beincluded in the contracts.

. It may mandate the protection of national interests.

Many of these positive effects can also be achieved by legal approachesother than a specific BOT law, in partlcular by the mandatory use ofstandardized IIOT contracts for each inliastructure sector.

o Administrative framework for B0T proiects

The host government must establish a credible and efficient administra-tive framework to successfully implement its BOT strategy. Complicated

UNID0 80T Guidelines

;&':4,+.,-

bureaucratic procedures and lack of authority for administrators to makedecisions are often cited as serious obstacles to BOT operations'

Since potential sponsors and lenders wlll carefully evaluate the or-ganization, experience and procedures of the procuring administrativeentity in the host country, an efficient administrative framework willconsiderably accelerate private sector investments in BOT projects.

There is no single ideal framework for the development of all BOTprojects, as each country has its own administrative system and admin-istrative culture. An analysis of existing BOT policies, however, can il-lustrate some tlrpical problems and solutions to administrative issues.

Planning and cooldination

At the institutional level, most governments have appointed an internalfocal point to formulate and coordinate their BOT policy. In some coun-tries this point is in the ministry that has taken the BOT lead, such asthe Water and Power Department Authority in Paklstan, the Mlnistry ofPublic Works in Chile, the Ministry of Finance in Argentina, the StatePlanning Commlssion in China and the Office of the Prlme Mtnister inMalaysia. In other countries, such as the'Philippines and Sri Lanka, theGovernments have established high-level, intergovernmental commit-tees as instltutional focal points to formulate and administer BOT policy.

The, institutional focal points for BOT projects have a wide range ofresponslbilities:

r Formulating government BOT policy and selecting sectors suitablefor BOT proJects.

. Proposing legislation and setting up administrative regulations topromote and monitor BOT projects.

. Setting up rules to rationalize and coordinate administrative proce-dures with ministries, government agencies and local authorities.

Ensuring proper economic and financial analysis of BOT projects.

r Initiating the drafting of model or standardized project agreementsand approvtng any deviations from such agreements.

Identifying and prioritlzing appropriate BOT projects in coopera-tion with the implementing ministries, government agencies andlocal authorities.

UNIDO B0T Guidelines c {

. Deciding on the procurement method to be applied to BOT proJects

and initiating and approvlng the drafting of procurement regula-

tions for BOT ProJects.

r Examining and approvleg the development and implementation of

BOT proJects, includin$ the use of consulting companies'

I Cutting through bureaucrattc entanglements to ensure prompt ap-proval and implementatlon of BOT projects'

The focal polnts are usually composed of hlgh-level representatives

from the governrnent and the relevant mlnlstrles and of clvil servants

with experience and training tn the technlcal, financial and legal as-

pects of BOT proJects.

Administration of B0T Proiects

Insufficient administrative preparation and organization can substan-

tially delay the development and implementation of BoT projects. Ac-

cordingly, before inviting BoTproposals, the government should provide

a clear framework within which they will be considered. A considerable

amount Of work can be done in'advance, including economic analysis'

market statlstics and forecasts, feasibility studies, preparation of facil-

ity designs, drafting of legal documents and other tasks desi$ned to

avoid or solve problems that can be anticipated. Development banks or

internaflonal organizations such as UNIDO can provide guidance to thehost government in thts important preparatory phase.

sitrce a BOT proJect wtll require approvals, permits and licences from

several mintstries, agencies and local authorities, it is desirable for the: host government to coordi:nate in advance the policies and responsibili-

ties of those entities. If this is done, the authorization proceedings willbe clear and easy for the private sponsors to follow, avoiding costly andunnecessary delays; if it ts not, they may be extremely time-consumingand frustrating.

Some countries and sponsors belteve that the so-called one-windowsystem is the most efficient approach to the administration of BOT projects.

Under such a system the proJect company needs to deal with only onegovemment office to obtain and renew all necessary approvals, permits

and consents for the construction and operation of the proJect. In addi-tion, that government office usually coordinates the decision-making proc-

ess to expedite tl.e project company's applications. A one-window system*ras beerl applied to administrative proJect management in several coun-tries, for example, Ecuador, Malaysia, Pakistan and the Philippines.


,&@*",

Another method [or an addittonal one) of avoiding delays in obtainingapprovals, permits and consents is to requlre in the project agreement (as

a condition precedent for the contract obligations of the project company)that all such approvals, permits and consents that can be obtained priorto the construction of the proJect shall be in place at a specific date'

To avoid or shorten the long development phase that has character-ized many BOT proJects, the government should select its proJect teamcarefully. It should give the team clear authority to develop the particu-lar BOT proJect and to cut through administrative obstacles' Most im-portant, it should ensure that the team stays with the project throughthe financial closlng, avoiding personnel changes in the middle of projectdev,elopment. This will ensure consistency in the government's positionand give the private sector confidence that the host government is com-mitted to closing the transaction.

B0T training proglammes fot administrative personnel

Many administrative problems arise because government officials or lo-cal authoritles ate not fully familiar with the BOT concept' Administra-tive procedures to cope with lnternational proJect financing and privatesector participation in public infrastructure have notyet been sufficientlydeveloped in many countries,

Any government deciding to apply the BOT approach to infrastruc-ture proJects should, therefore, consider training its administrative per-sonnel to understand and appraise BOT schemes as well as to tailor theproject terms to meet government objectives

r Govelnment incentives and othetforms ol suppott

The type and extent of goyelnment incentiues and suppott

Host governrnents must recognize the need to provide incentives andsome direct or indirect support in almost all BOT projects. The extentand type of supportvaries considerably, depending, among other things,on the country risks, the feasibility of the project, the country's need forthe project and the competitive position of the host government. Althoughhost governments do not normally provide equl$r, loans or direct guar-

UNtD0 B0T Guidelines 59

antees for loans, they have used a ivide ran$e of indirect financial sup-port mechanisms to advance BOT projects. Some of these mechanismsare discussed below.

Tar incentives and concessions

Most foreign lnvestment codes make speclal tax regimes avallable for pri-vate irrvestors. Investors tn BOT proJects should, of course, enJoy the sameta< concessions, The tax regime of a host country greatly inJluences theIinanctng of BOT proJects. While tax concessions are not a direct infusionof capital, they have many of the same effects by reducing cash flow neededfor operating expenses.

It should, however, be recognized that tax concessions are not an in-herent part of BOT arrangements. Private investors will naturally ask fortax exemptions, tax holidays and similar concessions for their BOT project.They have, for o<ample, sought tax relief from host goverrlments to com-pensate for taxes on dividends levied by their home country. Special taxconcessions should be carefully analysed and offered onlywhen they willbenefit the BOT project or are needed to attract foreign investors.

Tax regimes for foreign-sponsored proJects may include the followingfeatures:

Exemption from corporate tax for the concession period (tax"holiday").

Exemption from income tax for foreign proJect staIf.

Exemptlon from or reductlon of real estate tax.

Exemption from or reduction of import duties on equipment, rawmaterlals and components for the construction, operation and main-tenance of the proJect.

Tax concession on royalties.

Tax refunds for foreign investors reinvesting their profits in newinfrastructure projects in the country.

Deductions from taxable income for the cost of logistical suppliessuch as electricity, water and transport.

Capital allowances in the form of depreciation and amortization.


Tax concesslons and the like must be assessed on a case-by-casebasis. An important consideration for the host governmentwhen de-termining the type of tax relief to be granted is rvhether the taxespaid to it may be eligible for a tax credit in the home country of thesponsor. A host government should review the contents and applica-bility of the sponsor's nationaltax legislation so it can take them intoaccount tn a fair manner in its BOT strategr.

Land and other logistical facilities to be provided

rn most eor p,oj"".", .r;t:!;1';:::::::1,o.,*"" ",opn* , o,," o,more of the followlng forms:

. Commonly, governments provlde the land on which the project is tobe butlt. Such land lease or land transfer provisions are importantprerequlsites for the financing of a BOT proJect. They should covera term equal to the proJect's life and include all the easements overadJoining property necessary to provide full access to the projegt,

'including land for connecting rqads, water supplies, energy trans-mission lines and so forth. Some BOT agreements provide for thereimbursement of the cost of this support over the concession pe-riod or after 10-15 years, that is at the end of the loan repaymentperiod. In any case, it is advisable that the host government or itsagencies acquire the land for the project.

. In some projects the host govemment constructs associated infra-:structure facilities, including access roads, transmission lines andcommunications.

The government may ensure the avallability of labour during theconstructton and operatlng pertod, although ttte proJect comPanymust of course comply wtth the labour laws of the host country.

In some proJects the government ensures that the building materi-als and raw materials needed for the construction and operation ofthe proJect are available. This is particularly irnportant when thereare local monopoly supplters of cement, steel and other basic mate-rials. Prlvate sector sponsors may insist on a government guaran-tee for the allocation of sufficient supplles to-the project at areasonable price. Usually the government also ensures the supplyof electrlcity and water and telecommunication facilities.

UNID0 B0T Guidelines o l

Governments must normally ensure that the varlous private par-ties, sponsors, equlpment suppliers and O&M contractors are freeto import plant and materials and that duties and taxes are non-discriminatorv.

Contilbution of existing assets by the host govetnment

In some BOT proJects the host govemments have contributed to the

t)r{ri<rr:f5 by awardlng lhc sponsors tlre rlgtrt to opt:r:ttc iu-ttl lo (:itrn t'('v-etrucs li'onr exlsttrlg assets. Ilor lnstance, tn the North-South l{tglrwayproject in Malaysia, the sponsors w€re awarded the right to earn tollsfrom the existing SOO-kilometre expressway. In the Bangkok Second-Stage Expressway project, itwas agreed that tolls from the edsting First-Stage Expressway would be shareil between the private sponsors andthe government at an agreed ratio.

In Thailand, a BOT proposal to build and operate a 60-kilometre el-evated rail and toll road system for 38 years included the sponsor's rightto develop commercial and resldentlal complexes at stations throughwhich the transport system was to run.

In the Sydney Harbour T\rnnel proJect, the sponsors obtained the con-cession to operate the existing $ydney bridge as gne of the lncentives. Tofinance the new project, thebridge toll was increased to the same level asthe toll for the tunnel.

Such incentives not only provide additional revenue but may alsomake it possible to have lower fares than would otherwise have beenrequired to make the project economically viable.

Power purchase agleement

The power purchase agreement (PPA) between the government utility oragency and the project company is a central contract in the vast major-ity of BOT power plant proJects. From the obligations set forth in thePPA, basic resources (or cash flow) are provided to meet (a) debt service,(b) operation and maintenance costs and (c) return on investment. Forthis reason, the terms of the PPA and the creditworthiness of the powerpurchaser are key factors in the prlvate sponsor's and the lender's as-sessment of the risk of a BOT power proJect in developing countries.

PPAs have usually been on take-or-pay terms equal to the life of theproject or at least as long as the terms of the loans. A take-or-pay PPA isan unconditional obligation to make periodic payments for an agreed

;


quanttty of available electriclty whether the purchaser takes the elec-trictty or not. In other words, it is an obligation for the purchaser to pay

for the capaclty of a power plant.The obligation to take or pay may be in a variety of forms. Tlpically the

obligation to pay for the agreed capacity of the plairt is not subject toeounter-claims and exceptions. The termination rights of the utility andthe proJect company are limited and subject to the rights of the lenders.

Therefore take-or-pay contracts are called indirect guarantees.If lenders to a BOT-financed power plant are .relying on a take-or-pay

PPA for repayment of the loans, the payment will be in an amount suffi-cient to both service the proJect company's debt and pay fixed and vari-able: operating expenses of the plant.

The PPA and the terms and conditlons of this contract heavily influ-ence the lenders' risk evaluation of the project, The greater the risk orperceived risk to the projected revenue stream, the higher the price forthe flnalclng. Thus, to reduce the rtsk to the revenue stream, the take-or-pay term has become an tmportant lnstrument,

The credltworthlness of the government uttlity signing a take-or-payPPA has sometimes been supported by a performance guarantee fromthe host government at the request of the sponsors or lenders to theproJect.

The task of establishing and draftlng the content of a PPA usuallyrequires detailed economic analysis, reflecting the uniqueness and com-plexity of each power plant proJect. In general, the kdy issues of a PPAare capacity or quantity of available power; electricity (or power) pur-chase charge or price, normally in terms of a capacity charge for fixedcosts and an eners/ chargc f<lr costs assoclated wlth opcratlng thc plant:tariff adJustment scheme; duratlon of contract; prolongation of contract;billing and payment procedure; and payment schedule.

A detailed power supply procedure, including dispatch principles,voltages control and monitoring, abnormal operation and accident rhan-agement, operation records, communication systems and inspections'has to be arranged for, preferably in an appendix to the PPA.

When using a competitive bidding approach for BOT power plantproJects, the PPA can be incorporated in the bidding documents as asupplement to the project agreement.

Fuel supply support

Ttre avallabllity of fuel and the reliabiltty of its supply during the conces-sion period may be crucial to the revenue stability of BOT proJects, par-ticularly those i:r the enerSr sector. Normally the private sponsors andthe lenders will require that the government commission an lndepend-


i

ent study on the availability of the particular fuel from national or re-gional sources, alternative foreign sources, import restrictions, adequacyof the delivery systems etc.

This issue, however, is of less concern to the sponsors and lenders ifthe central government signs a long-term fuel supply and transporta-tion agreement. If either the supplier or transporter of fuel is a govern-ment agency, performance guarantees from the central government maybe required.

Goyernment guarantees and stand-by financing

The host government in some cases provides indlrect guarantees andstand-by financing to advance the proJect. In theory, the BOT concept isthe opposite of traditional sovereign borrowing. However, to encourageforeign investors and to assist in the structuring of financial packagesfor BOT proJects, host governments may provide indirect guarantees tosponsors and lenders, stand-by financing and even support loans on acase-by-case basis. In the Malaysian North-South Highway project, forexample, the Govemment provided a stand-by loan for the first l7 yearsof the 3O-year concession period, to be paid if there is any shortfall inthe traffic volume forecast. In addition, it provided a stand-by loan tocover adverse exchange rates and interest movements in external loans.

The different forms of financial support that governments have pro-vided to advance BOT projects are now described briefly.

Indirect guarontee oJoperoting inc:omecrnd stand -bg loansIndirect guarantees of revenue by means of long-term off-take agree-ments are common in certain countries and in certain BOT sectors, par-ticularly the energy sector. A government may cover the risk ofnon-payment by a performance guarantee under which it guaranteesthe public utility's performance of its obligations to the proJect companyas they fall due. The central bank of the country may need to approvethe indirect performance guarantee. The government may also mobllizerisk guarantee faciltties for proJect finance from development banks tohedge its guarantee to sponsors and lenders covering non-performanceof government contractual obltgations.

Toll road, tunnel or bridge proJects with a substantial demandrisk may require some form of government support (a guarantee or risk-sharing). In the Sydney Harbour Tunnel proJect, the project companywas guaranteed a minimum income from tralfic tolls. Similarly, the Gov-ernment of Pakistan guaranteed a fixed minimum percentage of the pro-Jected traffic level for a toll road proJect. such guarantees are exceptions,but those that are given should be structured so that the retum is de:

UNID0 B0T Guidelines:

6 4

pendent on operational efficiency. Provisions to share profits above a

certain level may be included in the project agreement, thereby protect-

ing the national interest.In some BOT proJects ln Malaysla, Paklstan and Turkey, the host

gbvernments have agreed to make loans available on a stand-by basisover a certain period of time. The loans can be called on for senior debtservice if revenues fall below a certain minimum. This was the mecha-nism used in the North-south Expressway proJect in Malaysia, referredto above. In Pakistan and Turkey, the governments have also agreed to

make stand-by loans available to provide for senior debt service if andwhen the project company's cash flow is insufficient for such purpose

owing to specific force m$eure events.

Protection o;go;itrst the loss oJ expected reuenues due tocompeting proiectsThe host government may have to give the project company some pro-

tection'from competition to ensure the expected revenues. This may beparticularly important in toll road projects, where an additional roadcould undercut the revenue flow. Protection from the consequences ofcompetition is briefly discussed in the section on assurance against acompeting project.

Guar ante e of c ommer clot ir e e do mIn the Eurotunnel proJect, the proJect company was guaranteed comrmercial freedom, including the right to determine its tariffs. This ap-pears to be an exceptlon. Although the success of a BOT proJect tssigniflcantly affected by the government's wlllingness to allow the sew-ices of the proJect to be sold at a price sufficient to pfenerate a reasonablereturn to investors, changes in agreed tariffs, tolls etc' are usually regu-lated by detailed contract terms subject to government approval.

Subsidy supportAn all<trnertlvc to tlre lrrll cornrnerclal frtx:clont lo clt:lr:rnrlnc larll-lls, lollsetc. ls lbr the governnrent to pr<lvide revcnue support to cover the dlli'er-ence between the full commercial price and the actual user charges. Aproject may be subsidized by revenue support so as to retain the incen-tive for private sector efficiency. However, the need for such subsidyfinancing may reduce the creditworthiness of a public sector project ifthe long-tenn sustainability of the subsidy guarantee is politically ques-tionable. Revenue support, moreoverr is somewhat difficult to managein that it requlres ongoing monltoring to measure and control projectoutput and administer subsldy payments.


Curtencg exchange ProtectionI-rxrns to BOT pro.fects ln developing countries are often ln forel$n cur-

rency, and lenders usually expect repayment to be ln the same cur-

rency. Sponsors and lenders therefore often require guarantees from the

government: i

. Convertibility: that it is permitted to change local currency for for-

eign currency.

. Availability: that sufficient foreign cun'ency will be available in the

host country.

. Transferabillty: that it is permitted to remit the foreign currency to

foreign bank aceounts.

A further risk is that the exchange rate wlll depreciate faster than the

agreed increase in revenue (more precisely, that local inflation will in-

crease faster than that of the culTency of borrowln$. Irnders will not

normally accept this form of risk, particularly where turbulent macro-

economic conditions make it difficult to predict the future real exchange

rate. The different methods of covering forei$n exchzrnge risks are dis-

cussed in ChaPter 8.

Interest rate reimbursementHigh inllation in the host country will have a significant impact on the

equity returns and preservation of the value of the sponsors' invest-

ment. ln cases where the private sponsors were given an tnterest rateguarantee by the host government, they will be reimbursed if the inter-est rate increases by more than a stipulated percentage during the project

period.

Uninsurcble force maJeure euentsForce mqierte risks that cannot be covered by lnsurance at a reasonablepremium may pose a difficult problem for BOT projects' l,enders arerarely willing to take Jorce mqJeure risks, and sponsors are unwilling toprotect the lenders against the economic effects of uninsured Jorcemqjeure events exceeding thetr own equity lnvestment. This means thatsome form of government support for unlnsurable Jorce mqieure risks isusually required by sponsors and lenders.. One government remedy to mitigate the effects of somerforce mqieureevents is to provide the sponsors with an extension of the contract pe-riod equal in tength to the time during which the Jorce mqjeure eventhad an effect, provided, of course, that the effect was only for a limitedperiod. lf a Jorce mqieure event impedes or altogether prevents the op-

oo UNID0 B0T Guidelines

I

eration of the project for a longer perlod, buy-out provlsions or termina-tion compensation provisions may provide adequate protection for thesponsors and their lenders. l

Similar remedies, including compensation provisions, may providesome protection against political risks such as expropriation, militaryevents and substantial and adverse changes of laws. Guarantee facili-ties from international financial institutions, such as the World Bankand the Multilateral Investment Guarantee Agency (MIGA), can hedgegovernment guarantees for some untnsurable Jorce maiewe events andpolittcal risks.

SummcrytGovernments can provide financial support and undertakings that arenot formally government guarantees and sovereign loans but that aresufficient to provide credit support. When drafting provisions for thehost government's support of the ftnancin$ for a BOT proJect, much careshould be taken to promote the incentives for private sector efficiencythat are such an important part of the BOT concept.

Loans and equity contlibutions

Very few BOT proJects have recelved dlrect loans from host governments.In the Sydney Harbour Tunnel proJect, the Government provided a sub-stantial loan to fireance the construction costs' In the Malaysian Ex-pressway proJect, a supporL loan was given by the host Government tobridgethe loan repayment to the banks payable after 17 years' But theseexamples appear to be exceptions.

Direct equity investment from host governments, their agencies orlocal authorities has been proposed in some BOT projects. Such partici-pation in proJect equity may have the advantage of assuring governmentinvolvement in and support for the implementation and operation of theproject. It may also help to strengthen the government's monitoring ofthe projects.

If there is a shortage of foieign exchange for government equity, moneyfrom bilateral or multilateral aid may be used for this purpose. Shiftingsuch aid from the straightforward funding of public sector projects tothe financing of government equtty contributions to private sector projectsmay overcome critical constraints on the financing of BOT infrastruc-ture projects.

UNIDO B0T Guidelines 67

Assulance of no eompeting ptoiects

To analyse the feasibility of a BoT proJect and to obtain financlng, pri-

vate sponsors must be reasonably certain what the demand - and thus

the revenue - will be once the project is completed. To ensure that the

anticipated demand is not threatened by competition, the private spon-

sors and their lenders will seek assurance that competing public or pri-

vate infrastructure proJects wlll not be undertaken, at least until certain

revenue thresholds are met, In a toll road proJect, for instance, sponsor-s

and lenders often want assurance that no new parallel toll or non-toll

roads will be built or no e>dsting roads will be materially improved that

would compete for the same trafficThe point ior the host government ls to balance the sponsors' need

for assurance and stability with the country's need to conttnue the de-

velopment of infrastructure sectors. A BOT arrangement cannot be al-

towed to frustrate future improvements and expansions of a country's or

a locality's transportation system. The private sponsors should there-

fore be offered pr-tection against competlng proJects only as long as the

BoT project can satisff the current demand and continuously provide

the quality of service required.In offering the sponsors some protection from competition, host gov-

ernments should also be careful not to create monopolies that put na-

tional consumers at a disadvantage'

Gompletion and perfolmanoe incentiYes and penatties

BOT projects can, and should, be structured to give the proJect com-

pany a stron$ incentive to meet its obligations and to achieve, if possi-

Lt., u higher ievel of perforrnance than forecast. One way to achieve this

oblecttvJ ls to include a bonus arTangement ln the proJect agreements

baled on the degree to which the project company exceeds proJections.

Bonus incentives, which can be lump sum or percentage payments made

to the proJect company, are of dlfferent types:

r d signature bonus ts a lump sum amount payable lf the proJect

agreemen! is signed by a date sttpulated ln the BoT proposal. This

piyment is anlncentive to the sponsor to accelerate negotiation

activity and tends to encouiage compromise on issues that are not

really material but that mi$ht otherwise unduly prolong the nego-

tiation Period.

r A completion bonus is a sum payable if construction cif the project

facilities is completed before the date stipulated in the proJect agree-


,*dhh**

ment. An earlier completion may improve the economic viability ofthe project to a degree that far outweighs the amount of the com-pletion bonus. Such a bonus is not, however, an essential ingredi-ent of BOT arrangements. Indeed, the BOT approach contains astrong, inherent incentive for the proJect company to complete con-struction ahead of schedule. Earlier completion simply means alonger operation period and thus more revenue for the project com-pany. Indeed the construction time for a number of BOT projectshas been considerably shorter than anticipated in the project agree-ments. In some projects, a longer-than-anticipated constructionperiod may have been written into the project agreement in order toaddress the rlsk of delay. Gsverrrmerrts are advised to earefu,lly con-sider, on a case-by-case basis, whether an additional comjletionbonus should be offered to a project company. ,

r A performance bonus is an amount payable if the output of theproJect (for instance, the production of a water supply system or apower plant) exceeds a stipulated level. Some countries, like Paki-stan, have made the performance bonus system for power infra-

; structure proJects more attractive to sponsors by stipulating a ratherlow target for productivity in the project agreements. The projectsponsors are thus able to obtaln a higher return on investment astheir productivity rises. Obviously, it is important that the incen-tives a host government offers are consistent with its main proJectoblectives. Where earlier completion and higher productivity clearlybring economic and financial benefits to the country and facility

' users, the government may consider introducing an element ofprogfessivity into the bonus provision.

Normally, completion and performance bonuses are balanc,i;lby pdn-alties for failure to meet performance targets. Penalty provisions must betailored to the individual contract. For example, it is not realistic to im-pose penalties far beyond the expected profits of the project company. Inmost cases penalties are stipulated as a percentage of the revenue fromthe project for the period in which performance falls below base-case ex-pectations. For instance, in the labuan Water Supply project in Malaysia,if the proJect company fails to supply the specified quality or the dailyminimum quantity of water, it will have to pay to the host government apenalty equal to a certain percentage of the agreed monthly payment.

UNIDO 80T Guidelines 69

Attlactive rislt'teward provisions ing1 5 \

i the Possi-

T?rere is no better incentive than to give private BOT sponsors

birityoranattracuv;;;;;tFltffi*,ffi "ftffiTit?J:*Htinil:'ff itru"t*ll?TH;fi ila:.;&;;'l;;l;".economicand""o"i'u"t""t

".li:^Y::sue raises two fundam"":"J t:^"^t:":ls' rhe first

The risk-rewarohvblves the proper iir"l"ti"" ""a "natrni

oitt*t beiween the host $ov-

ernment and the dfi; ";;;"or". urrr"u'tiJiic "*p""tations.of

what cdrn

be accompl'"nta ov ii"uiJ"""to' p"*"ii^it" itt ittttu"tructure proJ ects

mav complicate tneP'r"it Jl;;;#' rt i" i"i uncommon for governments

to propose eotproJ;;;tt," 'Tn::ldio; tt''i'ir llfJecl;"ns should

rest entirely *,n #J pnr"te sectot ""iiiitt"-4"t" "1li: transfer of the

orolect facllity to ;;g""t;;;;t cot'"**"'ts tend to ignore or under-

v a I i r e t I r c . i, r' " r r' "l'"i*'lJ'i* ;; ! I * :::X **t H:i;l J :l# : ;:?:n$HJ'S:il?;1ffi:",il"t ..T' o','i"r. issues ln some cases'

io"e;.",;ir::"#l;;i3:S',T:ff "i"T*ll{{$,SX.1"":11BOT ProPosals in stl

risk allocation ano ;'ffi;;; ! ";ii^"1":iw r""t"t"i";luatins a Bor

proposal requires a';;;i";" valuation of the project risKs'

tn principle, the;il;';t"""or" of ";i;i;*Jtct

should take all the

basic project risks' i't' litJtrt" ry1o"1tiJ'Jitt' *tttttt'ction' comple-

tion and p.'rot'o*"t:ft;";;;"ta incruae cost ovemrns and operating

failures as well as tiquiaated damaggs' However' serious private spon-

sors will normally ;l;;il;;;"l to tir.", e"""ral risks teYond their con-

trol, such u" "o""tfi dffit*tirisks' Hi"i g*tt"T'"1t-^1""t therefore

bewillingtotake"I"il;;;;ilssuchu""*itoptiatlonandnationaliza-tion risks, foreign ""fu"gt

risks' t"*t i"I"J"i ed f:rc1'Tleure risks

and the "ot"tot'""1t-oiiii;"e;"

'" tt'" i"i"it"e*et!1ational risk allo-

cation will greatly t*;;; if" 15acw"i""s 6f t Bor pro'iect to spon-

sors, lende," *a."i,,1,u"to.". tt," '"ui';i.-"i''-r. alolation and risk

mzulagement in eoT;t";;b;T: !|1"Y* in detail in chapter 8'

The second ri"x-."w"ra quesuon itl;il;;;i" structure the level of

returntothe"po"to'"to$vettsome"r'elsonaUferelationshiptotheirassumpilons "f

.,Jt]inr",Z investors arJ "ti"tuffy

unwtlling to partici-

pate in a higher ""it ry":""1":

tfl:::f;-;;"o"tur" rate of return' on

theotherhand'*i"nu:ttarateof'"t"*tf'utisnotcommensuratewiththe private n"o

"""'i'i'nu* may create Ut" per""puo" q"t-P" sponsor is

taking advantage Jru'Ttt"ti t"t!W $;tt't solutions' tncluding mecha-

nisms ttrat capt"l:;";;;:ia"t* tt*"""") profits but do not dis-

courage trigrr pronlJ'iitv' *'u b" f"'fi;t;i""o""!a in chapter l l ' one

accepted *""tu"rjill'a uilo*ttr".pt"i""i compally to earn a certain

maximum ot' "="Jl'l'i';;S;;(fftertot")

'""d then to distribute

sclnr(fin

prfu


excess ievenue between the company and the government entity accord-ing to a pre-aiTanged formula. Thus, the public also benefits if the projectts very successful. Such an arr€rngement may help to overcome the mis-trrst that can arise when public and private entities work together,

r Government Gommitment to eoncludeB0T proiects within a reasonable time

- A government must be seenby proJeclsponsors and lenders to have acredible commitment to conclude a BOT transaction within a reason-able time. Failure by host governments to adhere to reasonable timeschedules for the development phases of BOT projects has caused enor-mous frustration among proJect sponsors, and many competent, well-financed sponsors have ruled out doing business in some developingcountries for this reason.

Schedules need to be adhered to because the cost to sponsors ofretaining a proJect team is very htgh and may increase the overall costsof the process conslderably. Moreover, when the procurement processgoes on beyond a reasonable time, lenders, contractors and suppliersbecome reluctant to extend lending commitments or give firm quotes forsupplies and equipment, a serious drawback for the packaging of a BOTproJect. The basic assumptions underlying a BOT proJect may also changefundamentally durtng a leng$hy development phase. An unduly protracteddevelopment phase often means starting all over again, with new bid-ders and all the delay and additional expense that entails

A clearly defined urrd ,.u"onably tight time schedule for the projectdevelopment phase is therefore essential for BOT projects to attract spon-sors and lenders. It is recommended that the host government shouldrequire firm bids and should set up and adhere to realistic target dates(milistones) in the BOT tender invitations for the bidding and the devel-opnient process, leading up to the eventual signing date. This is also im-portant in the exceptional cases where the procuring government entityengages in direct negotiations with a private sponsor company (single-source procurement). At an early stage of the negotiations, the host gov-ernment, together with the sponsors, should agree on a schedule andthen take all reasonable steps to meet it,


r summaty

The government's approach to the issues discussed in this chapter will

deteimine to a large extent whether private sponsors and lenders decide

to participate in BbT projects in a developing country' If the $overnment

takes a proactive uppio.Ltt, the private sector's interest will !e

consider-

ably greater. The more encouragement and asslstance private sponsors

."""ii" from a host govemment, the better able that govemment will be

to compete for private sector participation in infrastructure proJects in

the face of growing demand worldwide.

7 2 UNIDO B0T Guidelines

TRAI{SFER OF TECHIIOTOGY Al{DCAPABILITY BUILDI}IG TH ROUBH

BOT PROJEGTS

Ouerui.ew . . . . . . . . . . . .76

Sele ctinn and acquisition oJ techrwlog g .............. .. ..' .. 7 B

TransJer oJ technologg through tle useof natonal good.s and serutces ......,.......... ".. . '..... ". " " B0

TfansJer oJ technologg throttgh traintng and

emplogment oJ natiano;ls ...............

TransJer oJprojecttechnotogg at the expvAoJ ttue concession period .,.,...85

REhts to improuements and inrpuations ... ................ 87

TlansJer oJ tecfutologg ttvough R attd DproJects,jotX venttres and otherdousrtstream acttv i t ies . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . , . . : . . . . . . . . . .88

Summary

ffi

Chapter 5 discusses how the host government should seek to maximizetwo of the benefits of BOT projects: local capability building and thetransfer of technolog$ from the project company sponsors and contrac-tors into the local economy. In these Guidelines, the term technolorydenotes the sum of knowledge, experience and skills necessary for plan-ning, engineering, irnplementing and operating an infrastructure project,including the managerial and marketing aspects. The issue of technol-ogf transfer through such an infrastructure project is complex, becausEthe transfer involves not only services, equipment and production proc-esses but also capability bullding and research and development activi-ties. Since the discussion here focuses on BOT projects in developingcountrles, lt is framed tn terms of the general relationship between for-eign investment and transfer of technologr.

Foreign investment has traditionally been a source of technology formanufacturlng sectors in developing countries. A significant flow of newtechniques and processes has followed in the wake of foreign capitalinvestments, often made by large corporations, whether through whqllyowned subsidiaries or controlled joint ventures. Ailoping foreign compa-nies full or at least controlling ownership of the enterprise is often a pre-condition for advanced and sophisticated foreign technologr to be made

. javailable to developing countries.Since legislation in most developing countries customarily required

that infrastructure projects be publicly owned and operated, the infra-structure was implemented and run by the public utilities, and foreignprivate participation was on a much smaller scale than in the manufac-turing sector, generally being limited to construction and the supply ofequipment,-

Foreign contractors and suppliers usually left a project aft.er the worksor installation was completed and.their contractual obligailons fulfilled.Under a tumkey arangement, such obligations were usually fulfilled withina year or less of completion. The failure to secure a transfer of advancedtechnologr from the contractors and suppliers over the long term and toimplement capacity-building programmes might have contributed to thehigh rate of breakdowns; len€thy intermptions and high malntenancecosts in infrastructure projects in some developing.countries.

The BOT approach gives host countries an opportunity to promoteeffective technologl transfer and capability building over the long term.In this approach, foreign contractors and equipment suirpliers usuallyform part ofthe sponsor group and therefore are interested in the goodperformance of the prolect throtrghotrt the concession period. They are

UNID0 80T Guidetines 75

motivated to provide advanced technologr and training to the project

company, as well as to local workers, subcontractors and suppliers, to

.rr"rrr. ihat local delivery and services meet the efficiency and quality

standards needed to implement, operate and maintain the proJect,

Properly structured BOT projects can thus provide for the transfer of

advanced technologl, reductng developing countries' dependence on for-

eign technologr and enhancing their technological self-reliance'

r ousruiew

fhe Potential fol technology tlansfer

The BOT concept provides a goodlopportunity for a country to obtain

and use advancld technologl. The sponsors and contractors make such

technology available because it helps the proJect company to more prc-

cisely meet the proJect techntcal specifications, as well as to maximize

the economic advantage of the proJect. The host country benelits, in

turn, because power or other services are produced at a lower cost to

industrial users and individual users.However, certain sophisticated technolos/ may not be made avail-

able to infrastructure projects in developlng countries unless the com-

pany that owns it is assured of control over or protection of the technologr'

which is the case under the BOT concept.The BOT concept ensures that a technologr is upgraded throughout

the long eoncession period, for doing so sewes to increase revenue. The

challenge to the host country ts to ensure that the proJect agreement

and other contracts require the proJect company to fully transfer the

technology and all its tmprolements lnto the local economy durlng the

concession period.The BOT eoncept also provides an opportunity for employlng and

tratning natlonals in the development, construction and operation of the

infrastructure facilities. It is important for a proJect agreement to stipu-

late that such tralning must be carried out throughout the concesslonperiod, so that more and more national personnel are e.mployed in all

ptr""." ofa proJect and are ready to take over its operation at the end of

the concession PeriodTlpically, a proJect agreement and the associated contracts will insist

on parttcipation by those local companles that are internationally com-

petitive in-the development, construction, operation and maintenance of

project facilities. Such a requirement contributes to capability building

/ o UNID0 B0T Guidelines

. * .

and enhances the competitiveness of national industries and services.Similarly, provision may be made to transfer the project technology to thegoverrrment at the end of the concession period. In particular, the opera-tion and transfer obligations of the project company may include the ob-ligation to use up-to-date technologr on the project.

Certain BOT projects may be structured to provide for cooperationbetween the project company, which will be operating in the host coun-try for the long concession period, and national companies in such down-stream activlties as research and development and joint ventures.formanufacturing equipment and components. Technological cooperationof this sort may open the door for further profitable cooperation in the

-international markel Ttris has been the case w-here advaneed teetrnsl-ogl developed for local conditions in the host country proves to be ap-propriate to othercountries as well.

In short, the use and transfer of advanced technolory is one of themain benefits of the BOT concept. At least one country (Norway) hasused the BOT concept systematically as a springboard to develop na-tional technologr at the highest level.

Mechanisms fol plomoting tectrnology transter in B0T Floiects

The extent of technologr transfer will depend on the nature of theparticular BOT proJect and the care taken by the host government instructuring the project. A number of legal mechanisms should beconsidered in formulating a practical and progressive technology transferstrates/. One mechanism is to have in place legal and regulatoryrequirements such as the following:

. Minimum technical, safety and environmental standards for infra-structure proJects,

r Protectton and acquisition of technological innovations throughoutthe conceSsiort perlod, and transfer of the proJect tcchnolog! at theend of the period.

r . Competitive national companies as suppliers of goods and servicesto the BOT project.

r Trainlng programmes for nationals at all Ievels throughout the con-cesslon period.

Obviously, legislation and regulations can do no more than provide aframework for the promotion of technologl transfer, with the details being


left to the drafting of tl-e project agreement and other related contracts'

They may, howevJr, strengthen ttre trana of the government unit engaged

in BOT arrangements urri .tt",tt. that all relevant technology transfer

issues are considered by the parties'

Theb idd ingprocedures themse lvesmaybest ruc turedsoasto in -clude criteriu ilr"t promote the transfer of technology. Both' the govern-

ment's tender documents and the bidders' proposals can be made to

address the-government's technologr transfer requirements' In addi-

tion, a bidderls past record for transfer of technologr has in some coun-

tr iesbeenafactor inawardingtheBoTconcessions.Another essential mechanism for realizing the potential of BOT proJec_ts

fgr transfer of teehngloglis. olcourse, the projec|agreenrent. The tech.

nologl to be used for the project desi$n and construction, maintenance

andoperat ionrequirements,requirementsfortheuseofnat ionalcom-panies' capability building through training -and employment' protec-

tion of innovations and so iorth can all be,set forth in reasonably precise

terms ln a project agreement. Examples of such provislons are provided

in the sectlons that follow'There is one further mechanism to promote the transfer of technology:

agovernmentmayprovideara4geofincentives,includingtaxrelielpr:-ferred status for fuiure proJects ana ttt" right to downstream activities' It

should be noted that the project sPonsor's stay in the host country for a

longconcessionperiodu' 'au'"prospectsof i ts-part ic ipat ioninfutureinfrastructure pro;ects there may give it a very real incentive for cooperat-

ing with national companies on technology transfer, on the sharing of

innovations and on research and development'

r Selection and acquisition 0f technology

Suitability for local conditions ;

In principle, it is the government that sets the rules for selecting the

tecirnoiogl for a BOT project. The selection process usually passes

through Jeveral stages,-from the.feasibility study througtr the prelimi-, nary ind detatled dJsigns ofthe proJect, to the draftlng ofproject spect-

ficaiions in the tender document and, finally, to the evaluation of btds'

Whereatechnoloryisfairlywellknowntothegovernment,orwherethe government wanG a particular technologl because it is consistent

with ttrat used in other similar proJects ln the country, the govemment

may give detailed instructions in its tender documents. If the technologi-


cal requlrements are not foreordained or the government is not fully awareof all the technological solutlons and wants to draw on the prospective :

bidders'knowledge and lnnovative skills, the proJect requirements maybe set out only broadly tn the tender documents

In any case, lt is important for the government to ensure that. the technologr most appropriate to local conditions is adopted. The tech-nologr applied to an infrastructure project must be compatible withnationally available inputs and with the present and projected demands

. of the country. The most advanced and sophisticatpd technolog/ sector, may not be the most appropriate technolory: less sophisticated tech-: niques that rely on indigenous factor inputs and skills may better serve

" the national interest.

Beliability of the technology

Lenders to a BOT proJect will usually insist that ttre project uses well-established technologies and engineering practices. The lack of experi-ence urith innovative and experlmental technologies, the uncertaintyassociated vrlth them and the rtsks they pose to the reliable operation ofa project normally make lenders hesitant to finance them. New and un-proven technologl ls therefore unllkely to be ftnanced ln the absence ofa guarantee from a strong and credible sponsor.

Thts consideration aside, the selection of the most appropriate tech-nologr is still a key issue in BOT proJects, because there are importantdifferences even among standard and proven technologies that may haveconsiderable impact on developing countries. In addition, there may al-ways be some potential for innovative steps to be introduced into stand-ard and proven technologies.

Fina'lly, it should be noted that very innovative and advanced tech-nologl available has been applied to some projects financed by BOTarrangements, for example those for the exploration of oil in the NorthSea, In the final analysis, the critical issue for the lenders may not somuch be whether a technologl is established or innovative but whetherit can be proven to be reliable,

Acquisition of the selected technology

The technolory used in a BOT project is normally an integral part of thebid package. Sponsors are often established construcuon and eqtiipmentsupply companies that have their own technological base and do not needto purchase technologl, If they need to acquire technologr for a proJect, itis mostly to cover speciflc gaps in their technological knowledge.


Host governments need to review the arrangements for transf6r oftechnologr from sponsors (or their parent company) to the proJect com-pany, as theyvary considerably. In some cases, there is no specific chargefor supplying technologr and ensuring the flow of technolog5r serviceand components thpoughout the concession period. In others, the costof the technologt is ponsidered to be a capital contribution to the prolebt

company. In still other eases, additional payment may be demanded fortechnologr senrices provided during the operation of the project' Whilestrch demands for payment are not necessarily unfair, a government

neec ls toscru t in ize t l remto tnakeSure | t i sno tbe ingoverc l ra rsed.

rTransfer 0f technology through the useol national goods and seruices

Gurrent B0T legislation and proioct agteement plovisions

One way of transferring technologr through BOT proJects ts to give do-mestic companies the opportunity to participate in BOT projects as sup-pliers of goods and services. Some concession codes and projectagreements insist that the project company afford some measure of pref-erence for national goods and services, provided that they are availableon competitive terms and conditions. One such requirement is expressedin a Malaysian project agreement:

"Lacal matdriab and serutces; Subjecf to satisJactory qualitg, auail-abititg and timelg deltuery, ttrc Compang shall use Local materiab andseruices in the construction and maintenance of the Works."

Norwegian Concession Code for Petroleum Activities, Section 54. 1,provides as follows:

'In connection with acduities couered. bg tttts act, competitive Noru;e-gtan suppliers shall be giuen genuine opportunities to secrre orders Jordeltueries of goods and. seruices."

lnternational procurement rules such as the Uruguay Round Agree-ment on Government Procurement and the World Bank Guidelines onProcurement provide some limits for the use of local suppliers. For exam-


ple, World Bank procurement policy would allow, under certain condi-tions, a cost difference of 15 per cent in favour of doYnestically manufac-tured goods and of 7.5 per cent in favour of domestic cbntractors

The objective of such provisions is clearly to encourage the participa-tion of domestic companies, in order to strengthen their capabilities andtheir competitiveness. Experience suggests that the involvement of do-mestic suppliers in the development, construction, maintenance andoperation of BOT projects may be a great help in national capabilitybuilding and other forms of technologr transfer.

General calls for the participation of domestic companies in BOT projectshave not always been heeded closely by foreign project companies. In anumber of projects it appears that such companies have preferred toaward subcontracts to suppliers of their own nationality. To underscorethe importance of building national capability, some governments haveacted to enforce four principles (see box 5):

. Domestic suppliers must be included in all invitations to tender forsubcontracts provided they offer the goods and services required.

r The project company must award the contract to domestic bidderswhenever they are competitive and must in any case take the domesticcontent into accorrnt when evaluating foreign bidders.

' The project company must report to the host government alltendering for subcontracts and the tendering and proposed awardsto domestic suppliers so that the government can monitor national

' capabilitybuildingthroughsubcontracting.

. The monltored record of a project company will be an evalqationcriterion when the project company is bidding for future BOTconcessions.


"Arlicle 12. Use ol domestic goods and servioes

12,1 Companies shall use.domestic goods and services in lhe performance ol the work in sofar as they are competitive with regard to quality, service, schedule of delivery and price.

12.2 Domestic conlractors shall be included in invitations for tenders for subcontracts in sotar as tfrey proviOe gooOs or rent servGs ol the kind required.

-

In evaluating olfers given by domestic or foreign bidders for subconkacting portions 0fthe work, oompanies shall take into accountthe extentto which bidders will use domesticgoods and services.

1.2.4 Contractors shall be responsible lor the observation of these provisionssubcontractors:

12.5 When evaluating bids lor future concessions, the ministry shall take into account theextent to which companies have used domestic goods and services."

r Transfer 0f technology through trainingand employment of nationals

Typical plovisions in existing B0T project agreements

Another important benefit to be gained from BOT proJects relates to thetransfer of technologr through training and employment of nationals.Given the importance of this issue for the operation of BOT projectsafter the concession period and for the adequate absorption oftechnol-ogr, surprisingly few proJect agreements include more than casual pro-visions on training and education of nationals. Such provisions, whichare usually found in construction contracts, require only that the projectcompany train and employ national subjects "as far as practical", orthey give the project company "the right to select a number of nationalsfor training and education" or obligate it to grant scholarships to semi-

8 2 UNIDO B0T Guidelines

--&*.

;

nars or universities in the project company's home country..Proceduresto monitor compliance or to impose sanctions in the case of non-compli-ance are rarely provided for or effectively used.

The following provision in a standard proJect agreement was draftedby an experienced govemment unit. It exemplifies a more thorough andserious approach to technolog/ transfer through training and employ-ment:

"Ftom the commencement of tte construrtion work and conttnuing tothe TransJer Date, the project companA shatJ anange Jor training oJ thegouernment's personnel. Such training stnll be both tLeoretical and pra.c-ticat aid. incLttde tecfutical, admhtstratiue, busmess , operational and. other

sftrncfircns tahich the gouernment mag u.rish to coDer. The government magrn this connection nominate national personnel as counterparts to expatri-qles crrrcl demand. lhctl. a rcasonable nunrber o.[ its emplollees shall tuctikh the project contpanres' orgonization, in ord.er. to luue proper ancl reL'euant on-tfe-spot-training tn all aspects oJ tte achurties. In strch euent, thegouernment shalt paA LDages and other expenses strch as board, Iodgingand trauelling expensesJor tts personnel. To a reasonabLe extent, tlte gou-emment shatl hanse access to the proJect companies' interna'L courses. Theproject compqnA must t4form the gouemment oJ courses to be arranged tndue time. IJ the proJect compang fails to etfect tralning reJened to in thisarticte (reJer to the liquldated damages article)."

This sort of provisicin adequately defines the project company's obli-gation to train and employ nationals. The next step, of course, is toensure; that compliance with the provision is monitored by thegovern'ment.

llrafting and implementing training and cmptoyment provisions

A host government's obJectives for training and employment of nationalsmay be summarized as follows:

r Training and employment of national personnel in the constructionand ongoing operations and maintenance of the project in order tobuild capabilities in the different phases of a BOT project.

' Training and employment of national personnel so that after thetransfer they will be able to independently operate and maintainthe project.

,"do,. '


r Training and employment should pertain not only to personnelwho manage and operate the proJect, but also to governmentpersonnel with supeMsory responsibilities.

The need to employ and train the local workforce differs, of course,from country to country, depending on the extent to which personnelwith the relevant skills and competence have already been developed,and from project to project. certain basic principles may, however, beconsidered by host goverrrments when drafting or negotiating employ-ment and training provisions in BOT-related contracts:

fte gouernment may require the pr€J€eeeompany to supply an-orjganizattonal chart showing the personnel requlrements for the devel-opment, construction, operation and maintenance of the project. Themirrimum technical and other gualifications for the personnel shouldbe speciffed in suftcient detail for the govemment to determine t]leextent of training and employment required. If practical, the govern-ment's prequaliftcation process should require such information.

It is advtsable for the government to clearly define in an appendix tothe project agreement the categories and numbers of naiional per-sonnel to be trained as well as the specific training obligations of theproject company in relation to each category. It may also be advis-able to dgfine the qualilications of traineei for each category or posi-tion, including linguistic abilities. Experience suggests that latermisunderstandings between the project company and the host gov-ernment can be avoided by specifying the qualifications of trainees inthe contract.

The training should be undertaken as much as possible inside thehost country and on-the-Job. while training seminars in the spon-sors'own facilities in their home countries may prove useful in cer-tain circumstances, the skills needed to operate and maintain aBor proJect are usually best acquired through on-the-Job experi,ence' The best concept for on-the-Job traintng may be so-called"ghost" training, ln which nationals i.re assigned as ctunterparts toexpatrlates in crueial operational and managerial posittons.

In formulating training obligations for Bor proJects, time schedulesare of paramount importance. The obJective of the. government is toensure that the necessary training is completed well before the con-cession period ends, so that a competent national staffand workforcecan take over the operation of the proJect. It can be achieved bysystematically.arranging the training of nationals throughout the

UNID0 B0T Guidetines84

duration of the proJect. The proJect company should, tn addition, be

obligated to prove prior to transfer that the project's technologr has

beei master"d "ffr"ir.ttly

and effectiVely by the national personnel

who will assume responsibility for operation and maintenance.

The technological information needed to operate and maintain a

BOT project ls also conveyed in technical documentation, includin$

drawings, manuals, quality assurance programmes and computer

programmes. Adequate training of nattonals requires their partici-

pation in developing, organizing and utilDing such documentation.

The piolect documentation should be available to government per-

sonnel ior operating and maintaining the project and as future ref-

erence for similar ProJects'

A yearly audit of trainin$ and employment programmes and special

reports on imporLant aspects of such programmes will emphasize their

: importance and ensure that they are faithfully carried out'

r Transter of project technology at theexpily of the concession Petiod

' Technology tlansfer as palt ol tho ttansler ol ownotshlp

The technologl pertalning to a BOT proJect ls normally transferredalong with the ownership at the end of the concession pertod. The govern-

ment wlll naturally receive the riglrt to use the proJect technologr, includingthe technologr embodied in the machinery and equipment. This is an ad-

equate solution for the govemment, providing that national employees have

bien trained to opet'ate and maintain the equipment and technologl'In BOT prbjects that involve patented or otherwise protected technol-

os/, the government may insist on a transfer provision in the project

agreement, whereby the project company is obligated to grant, free ofcharge, a licence to use the technology after the transfer of the proJect.

One may find such provlstons ln the proJect agreements under the head-ing "Patents" or "Licences and patents". A typical provision reads:

'Tle proJect compang grants the gouernment an treuocable, rogattg'

free, non-et@usiue licerrce, under all patents noLI) or here@er oturted orcontrolled bg the project companA, to the extent recessary Jor the opera'tion, maintenance, repair or alternation oJ tte project."

UNl00 B0T Guidelines 85

!n very exceptional cases, where tl.e technoro6r is highry complexand constantly being upgraded, addtilonal transfeimechanrsms or con_tract provlstons may be necessary.

Gonditions restricting tho use of transferred technorogy

A host government shourd scrutinrze a proJect agreement for any di-rect oy implied restr{ctions in the use of thl tiansreiea tectrnotogr. rx_amples of such restrictlons are discussed below. ----:ry' -"

Post transJer supplg oJcomponents

.Sonr< . l l ro f r . r . l cor r r ; l i r r rk .s r ru ry s t . r .k lo i r r r .a l tg t : l l r r : s r rp l t l y o l . l r : r : lu ro logyso that the government, after transfer of thetownefship, *iir u. depend_ent on the proJect company for components and "p"t

putt" needed tooperate the technolory. (It is common knowledge ttrat aparrrr;i;il:sum fees and royalties, the most significant source of income to compa_nies possessing technorogl often comes from supprying components andspare parts.) such an arrangement may be aisaa^"aotig.ous to the gov_ernm€nt, particularry if it can obtain components and spare parts of thesame quality from other suppliers on more favourable ierms.

To reconcile thts conlllct of tnterests, it is usually recommended toprovi.de in the proJect agreement that the gou"**!rrt ;".o.blil; ;;purchase component-s and spu*e parts frori " "6;li;r'iesignated bythe proJect company, but thai th9 supptier in_turn is obligated to supplythese on terms not less favourable than it offers t, ."1, o?fr.r of tts cus_tomers, or on terms not ress favourabre than those o., *r,i"t tt e govern_ment can secure components.and spare parts of the same quality fromanother supplier.

Co.nfidenti c titg prouisions

Most proJect agreements provide that the proJect company and the gov-ernment must treat technologr inforrnation, orawings, -ut"tur" "rrEhother similar matters in conniction wtth the Bor p.A;"t;" ;tric'y con_fidential. The parties are not allowed to drsclose any technicar rnforma_tion to a thtrd party. The proJect agreement may, ,'o..o"lr,^ilffi;

confidentraritv requirements- tong artJr the expif ;i t-h. ;;;;essron pe_riod, particularry where technici tnow-rrow aiplied t" ;h; pro3ect isproprietaryr but not patented..


Durlng the concesston period, confidentiality provisions are fairly easy

to live with. However, problems often arise after the transt'er of ownership

of the proJect to the $ovemment, when such provisions may unduly re-

strict the government's ability to contract with a new concessloner for the

project. Accordln$y, it is critical for all parties to consider at the contract-

ingstage how to balan6e the legitlmate need to.protect proprietary tech-

notogr, on tfte one hand, a$alnst the need for long-term projects to proceed

efficGnfly and effectively after the lnttial concesslon period has ended.

Indemniffcstlon Provislon

Finally, the government should include in the project agreement an un-

dertaking by the project compurny that the use of the technolos/ trans-

ferred will not infringe any industrial property rights or result in any

claims against the government by a thtrd party alleglng infr{ngement by

the use or tn. proJect technologr. The governrnent can protect itself by

an;indemnification provision such as the following:

,,Patent, design and, copgright indemniilcation. The project compclna.

herebg agrees to deJend., irdemndg and. keep the'gouernment harmless

from and against all cfirims, los5es, costs, damag es and expenses tncurred

bg the gouemtrLent a, a result oJ, or in connectwn wiflh" ang alleged pat-

eit, desgn or copgrlght inJringement asserted agah.st tlv gouernment and

ari^sw out oJ the constructlon, operation or malntenance oJ the project,"

The govemment and the proJect company may tnclude addltional con-

tract provisions that establtsh a procedure to.be followed in case of a

claim'by a third party alleging that his industrial property rights have

been infringed.

r Rights to improucments and innovations

During the long concession period of a BoT project, the technolos/ might

be improved and technologtcal lnnovations developed. The rights, titleand interest to such improvements and innovations may be addressedin the proJect agreement (see box 6).

When the tmprovements or lnnovatlons are made during profect con-struction and operatlon under the responslbility of the project compa'ny'the company ryill probably insist that all ri$hts, title and interest in theimprovements or lnnovatlons belong to it. This may be reasonable and

;


acceptable if the improvement or lnnovatlon stems solely or mainly fromtechnologr programmes and engineerlng skllls provlded by the proJectcompany. If, however, lt results solely or mainly from the efforts of na-tional contractors to the project, a different result may be approoriate.

There are several practical solutions for dealing with this issue. sinceboth the proJect company and the local contractor usually have an inter-est ln obtaining the use of the improvement or innovation made by theother party, the proJect agreement should provide that each party is obli-gated to inform the other party about any improvement or innovationmade in connection with the proJect during the concession period. Bothpafties should have the rlght to use the lmprovement or innovation toperform tlreir obltgatlons on the BOT proJect.

In any case, improvements and innovations made by the project com-pany or by domestic contractors during the concession period may af-ford an opportunity for the parHes to arrange for Joint research andtechnologr development. This opportunity ls dlscussed ln more detail inthe next section.

r Transfer of technology through R and llproiects, ioint ventures and other

downstream actiuities

Bor proJects may provide the opportunity for technology transfer anddevelopment through downstream activities in the host country. In thepetroleum sector, for example, cooperation in research and developmentbetween foreign project cornpanies and national institutions and com-panies, joint ventures for construction service and manufacturing ofequipment and other downstream activities have been quite commonand productive for all parties involved.

Three different methods appear to have been used by governments topromote technologr transfer from foreign proJect companies to nationalsthrough downstream activities. First, it is not uncommon for projectagreements to contain general statements by the project companies abouttheir lntention to enter lnto or asslst ln the establishment of proJect-related downstream acttvtfles. Experience suggests, however, thlt iuchgeneral statements are difficult to implem"rrt in pracuce. Good inten-tions, here as elsewhere, are no substitute for legal obligations,

secondly, the bidding procedure has proved to be an efficient instru-ment for the host government to promote transfer of technologr throughdownstream acttvities. crlteria for awardlng Bor concessions shouldtake into account foreign bidders'willingness to transfer technologr to


.J&r*-.*

the host countr5l by particlpattng ln local manufacturing, R and D proJects '

and other actlvitles in conjunctton with the technologt selected for a

BOT proJect, as well as their track record in this matter. The fulfilment

of thise criteria is made a condition for the concession and defined in

detait ln the proJect igreement. A reporting or tracking system should

be implemenled- to ensure that the proJect company fulfils its down-

stream obligattonsThe gove-rnmenfs obJectlves ghould be stated clearly in the tender

documents. One such host government evaluation of biddels: proposals

for downstream acttvitles reads as follows:

"Special enphasis shall at afl titrles be giaen to initiotittg projects ;yrhict:1

"nt61tt a trat16,JZr oJ tbctuwlogg arvd.ftoue a gteneral seope tecfutologicailg'"

"lmprovemenls and innovations made during the concession period

1.1 lmprovements and innovations made by a cgntraclgr during the performance ofhis obligations shall be the property of the contractor. This does not apply,

i however, to improvements and innovations mainly based 0n technology,programmes and documents received from the proiect c0mpany, which shall bethe property of the proiect company.

1.2 The parties shall notify each other of all such improvements and innovations.

1.3 Tho project cgmpany shall grant to the cgnkactgr an irrevocable, royalty-free,not-exclusive licence to improvements and innovations, which are the proiect

company's property in accordance with Art. (1 .1) to the extent necessary for thecontiactor to perform or to imprgve the performance 0f his obligatigns t0 lheproiect c0mpany.

1.4 The contractor shall grant to the prgiectcgmpany an irrevocable, royalty-kee,non-exclusive licence to improvements and innovations, which are thecgntractg/s property in accordance with Art. (1.1 ) to the extent necessary f6r theproiect company to perform 0r t0 improve the performance of its obligatlon toconstruct, maintain 3nfl 3perate the proiect during the concession period."

G

ffiUNID0 B0T Guidelines

I

The bidder's obligatlon to transfer technolory downstream will nor-mally be speclfted ln the proJect agreement. The standard term used byone host government reads as follows:

"In wtdertakirg tle . . . project in . . ., the Company will ensure thatreleuant tecfutologg and" krwus-how which ts at the Compang's drisposalwiII be made availableJor tte pedormatrce oJ the propc[."

A third approach to the transfer of technolory from the proJect com-pany to the host country has been to negotiate Joint ventures betweenthe proJect company and national companies to exploit technology ap-plled to the BOT proJect. For instance, the establishment of productionfacilities for spare parts has often benefited the entire project and allparties concemed. This approach has helped domestic suppllers to im-prove their technological and quality standards.

r $ummary

BOT proJects offer a valuable opportunlty for host governments to en-hance thetr country's technological capablllttes and to secure the trans-fer of technolory to their local companies and institutions. Moreover,they can be a sprlngboard for developtng downstream R and D and othertechnical actlvities to the mutual benefit of the forelgn sponsors andlocal companies and instituflons. countries with considerable experi-ence in Bor projects have weleomed foreign-sponsored Bor projects,particularly in sectors where technological experience is scarce or notavailable locally.

Bo-T proJects are not, of course, a cure-all. Host governments cannotexpect to obtain technological benefit in every Bor proJect, given thecompetition ln the world economy. some infrastructure proJects mayuse conventional technologr that is of limited impact for the technologi-cal development of a particular country. policles and instruments thathave proved advantageous In one country may be dlfflcult to apply Inothers. The main polnt, however, is that a govemment plannlng tts in-frastructure policy is well advised to give close attention to the technol-ogr transfer and capability building that are possible within theframework of a Bor project and that are one of the most signtflcantadvantages of the BOT concept.


""* ,

PROCUREME]IT ISSUESAND SELECTION OF SPOIISORS

Pr o crr ement str ate g ie s

The current legal and. regrlatory Jrameworks

for BOT procurement',. ,........, '98

Specific issues -for Proctremenl.o-f IIOT proJects

A basic procedure Jor procuring BO1' projects.....'... 103

:

r Ploculement strategies

An adequate procurernent strategr or procedure must be in place before

a countrj/s BOT policy can be carried out. The success of a BoT project

will depend to a large extent on what occurred before the sponsor group

was selected. By then key issues should have been identjfied and dealt

with. If not, the project will either limp to its conclusion at an unaccept-

able cost or, m0re likely, fait.Procurement procedures for BoT projects will be influenced by a va-

riety of factors, including the host country's existtng legislation govern-

ing publtc procurement of construction work, internatlonally acceptedrules for publlc procurement, the buslness environment, the overall i1-frastructure pollcy and the nature of the partlcular BOT proJect. Thefundamental issue, however, is the cholce between the two contrastingapproaches to procurement, that ts, between a competltive tendering

system or a negotiated system.In choosing a procurement procedure for BOT proJects, a host gov

ernment should consider if the procedure wlll achieve the following

obJectives:

. SafislU the needs oJtte particular BOT project. A host government's

overridtng purpose tn designing a BOT procurement system is to

ensure that each proJect is in accord with the country's develop-ment plans and that it is authorized, approved and built as rapidly

and economically as possible. This requires, among other things, aprocurement system whereby the proJect proposals and the selec-

tion criterla are tailored to the government's particular economic

and social obJectives for the BoT project under consideration andthe content and the value of each proposal is fully assessed. ProjectobJectives must be clearly defined: the government must decide,before it selects a particular procurement method and requests pro-posals, what it wants and how a BOT approach can best achievethose objectives.

. i Ensure procedural clarttg,;fairness and trantspo:rencq, An ordedyprocurement process is imperative if foreign BOT sponsors are to'be attracted. Integrity, equal treatment and transparency are thekey elements of an orderly process and are essential for curbing


EI*r

f

; a

abuses. Sponsors can be expected to embark on leng$.hy and ex-pensive project development and bidding only if they are confidentthat the process for awarding the project ts well known, orderly andfair. The signposts along the path to success must be well lit.

Promote competttion One essenttal obJective of a BOT procurementprocess is to encourage competttion, which in turn will foster theeffectiveness and efficiency of the private sector, a cornerstone ofthe BOT approach. The need to promote competition may be par-ticularly strong in countrles where edstlng procurement regulationexcludes intematlonal participation in public proJects or favourslocal contractors by way of preference criteria. In a wider sense, aprocurement method that encourages competition for public infra-structure proJects will help to increase the market orientation of acountry's economy. Ways to encourage competition ln lnfrastruc-ture procurement include public announcement of the proJect, pro-curement laws and regulations that are accessible to the public,transparency, as few restrictions as possible for participation inthe procurement process, solicitation documents that provide acommon basis for preparing and evaluating proposals; and obJec-tive, non-discriminatory evaluatlon criterla made known to the pri-vate sector in advance;

Encourage priuate sector innouation and, alternafiue solufioru. A fun-damental reason for applying the BOT concept to public infrastruc-ture projects is to take advantage of the private sector's capabilityfor innovation and creativity in design, technologr, managementand flnancing.The procurement method should therefore allow flex-ibility and provide incentives that encourage the private sector topresent alternative and innovative project solutions. It should en-courage recommendations for better specifications, improvementsin construction methods, technical innovations and other propos-als that may reduce cost, accelerate the schedule and introduceefficiencies. The government must take care to ensure the protec-tion of intellectual property in innovations and ideas sought fromthe private sector. Quallfted sponsors wlll not contlnue to competefor BOT proJects if they see their entrepreneurlal ideas and innova-tions being copled in tender documents sent to rlvals.

Assure uruestors, Iertders artd. otter parties thd the gouernment t:r;rsselected tfte dgtttBoT proposal. Whether a BOT proJect is financeableis to some extent influenced by how investors and lenders react tothe procurement method used,by the government entity doing theprocuring. In general, competitive tendering based on internation-

UNID0 B0T Guidelines94

.,&nt*r,

ally recognlzed prtnciples ls the preferred method of procurement forcontracts flnanced by t]le development banks. I.enders feel that trans-parent and orderly procurement procedures are most likely to resultin eost-effqctlve proJects with the least risk of abuse and default.

Strengttwn pubLic co4fidence t7 tte BOT approach to infrastnrchredeuelopment. A transparent, fair and orderly procurement processwill streng$hen public confidence in private sector financing of pub-

lic infrastructure. BOT infrastructure projects usually have a highpublic profile because they involve large sums of money and manydifferent, and often competing, interests. A transparent process

whereby private sponsors are chosen pursuant to publicly avail-

able procurement regulations and on the basis of objective evalua-, tion criteria made known in advance will encourage both private'sector

interest and public confidence. Public announcement of thelist of lnfrastructure proJects to be awarded on a BOT basis, dis-

semination to the public of information about.tenders and awardsand requiring that a record be made of the key decisions taken'bythe procuring government entity: these are some of the other mecha-nisms that promote adherence to the procurement rules as well ascorrfidence in the integrity of the procurement process.

Promote an earlg awoird oJ the proJect, An efflcient and early awardprocess greatly lmproves the chances for flrm proposals and for asfnooth conclusion of the many contractual arrangements neededto finallze a BOT proJect. Experience shows that partictpants find itdifflcult to prepare firm proposals and to arange firm commitmentsfrom lenders, constructlon compurnies and suppliers when the pro-curement process is lengthy and fraught with uncertainty as to thetirne of its conclusion, The solution is to design a procurement proc-ess based on a clear timetable with specific milestones for the keyphases. Clarity and predictability in the contract award process,wlth the final award made on a timely basis, are characteristicsexperienced BOT investors look for.

Minimize the timeand costs oJdeuetoping BOT proiects. The time- anclcost-lntcnslveness of developlng a typlcal BOT proJect (see box 7) iswidely regarded as such a project's greatest disadvantage' The devel-opment costs of BOT projects, especially the professional fees, havefrequently been riruch higher than under the procurement of con-stmctlon contracts for government-financed infrastructure proJ ects.High development costs and the length of the process may have kepta number of BOT projects from moving forward arfi/or limited thenumber of qualilied bidders, thus reducing tJre eompetition and effi-


ctdncy goverrrments wish to harness from the prlvate sector. Experi-ence shows that one matn cause of healy development costs and alengthy procurement process is the lack of adequate, streamlinedBOT procurement procedures, lncluding standardized contracts andother standard documents.

A competltive tendering system would seem to be best suited to meetmost of these suggested objectives. Such a system helps to foster effIcienryand competition, which are the hallmark of private sector participation ininfrastnrcture proJects. There is a danger ln any negotiated system that thenward nray bc based on arbltrary Judgement or undue lnflue ncc.

'l'lrc Integdty, cqrral treatment and transparency of thc procurlng prri<:-t:ss, whk:h are of paranrount lmportancc when lt. comcs to attracting anumber of foretgn sponsors, is certalnly better secured through a formaltendering system than through a negotiated system, the outcome of whichmay be unpredictable for the sponsors.

Competitive tendering may also be the best method of encouragingthe private sector's innovative ability and efllciency. Moreover, a trans-parent competitlve tendering system ts probably the only procurementmethod that can strengthen public confidence in the BOT approach inpolitically sensitive infrastructure areas and reduce suspicion of undueinfluence. Competitive tendering systems that follow international prin-ciples are preferred-even required-by lenders and investors for basicallythe same reasons as mentioned above.

Obviously the cost- and ttme-driving faetors (all but the ftrst threeitems in box 7) are all obstacles that can be mitigated by adequate pro-curement methods, that is, they are not inherent in the BOT approach.Fortunately, with experlence, some countries have found creatlve waysto minimize the hlgh development costs and the lengthy procurementprocess. Sponsors confirm that the costs (and time) of project develop-ment are much less in countries with well-established BOT or similararrangements, such as independent power proJects in the United Statesand Norwegian petroleum proJects ln the North Sea.

Competitive tendering systems are not, however, without possibledrawbacks. At the policy level, the advantages of competitive tenderingfor BOT proJects must be weighed against the fact that such tenderingmay at times be more rlgid and time-consumtng than direct negotiationswith one or two selected sponsors. Another problem is that the costs ofpreparing bids for projects of the size and complexity of most BOT projectscan be very high. Qualified and serious companies are known to haveconsidered the bidding risk for BOT proJects tg be too high and haveaccordingly lost interest in the proJects. This indicates a pressing needfor some form of prequalification or limited tendering procedures forprocuring BOT proJects.

UNID0 B0T Guidelines96

"d&.**

*r'

L O ssuilepln0 108 00lNn

: lspuol P 1o (oulsolc) ecuqdasce

lEUrl 0roleq (s).repprq petrelerd qlrr* suollelloOou ulPUooun puu peDuolot;

. 'olnpaLlos pue elnpooold luauatncotd poqsllqulse r{ltea;c u l0 lcel aql

'1sgt 0u;pprq qOlq oql acnpar snql pue sropplq l0 Jaqunu0r.lt ilurll 0l ropl0 ut 'slapptq 0u1,{l11enbetd }0 spoqloul paqs!lqelso }0 Icsl atll

'slusurncop 0ulpptq pozlplepuels pue sluaueat0e 1ca[old pezlpepuels l0 IcPl oql

'stesodo:d lcalotd ct]stleel llc!los ]uauutanoO eqt dlaq 0l pw 0lqull s1 1ce[otdeul lelil uJJ|]uoc ol solpnls r{1r1rq1see1 pouolsslullllo3,{l1uapuedepu1 l0IcEl otll

'sprq 0u11en1en0 l0l epolllc luo13 l0 )t3el otll

'senllcelqo lueuuteno0Jsalc lo lcel B 0urpnlcut 'llo,llotuPll lcalord peul;ep r{1lea;c E l0 IcPl sLll

'].toddns a^tlellslultupP pue fi o1e1n0at,{ressoceu optlold ol lueututeno0 eq1 1o fi111qeul otll pue spe[old alnlsn]lsel]u!cllqnd ul uorludlclUBd tolcas olenpd trôllP 0l uo11e1s10e1 elBnbape l0 I3el eql

'slcelord 1gg 0u1Oe1ced pue 0uldolerepul slplclllo luotuutanoO ;o pue salped oql lo ouos 1o ecue;tadxaul olllelor oUI

'ssosold luauidoloâp oql ul po^loûl sotued lo loqunua0re1 aql pue slcafo.rd l0g lo a:nlsnlls lelcuPuu pue lpnlcerluoc xalduloc aql

r The current legal and regulatorylrameworks for B0T procurement

A brief survey of the current legislative framework in countrles with es-tablished BOT experience may help to place some of the above observa-tions in the correct context.

Legislation in two countries, the Philippines (1989) and Vtet Nam (1993),authorizing BOT infrastructure projects requires public bidding of theprojects. Both pieces of legislation and the implementing regulations pre-scribe in great detail a prequalification, bidding and awarding procedure,ineluding criteria and guidelines for evaluating bid proposals. Direct ne-gotiations may be resorted to only under special circumstances, for in-stance if only one-bidder meets the prequalillcation requirements.

ln Chile, the Public Works Concession [.aw Reg.ulattons prescribe com-petitive tenderlng for BOT lnfrastructure proJects and stlpulate ln detailthe items to be covered in bid specifications, evaluation criteria etc. InEcuador, the Modernlzation law of 1993 and the implementing GeneralRegulations require competitlve bidding for all private concesslons in-cluding BOT concessions; in addltlon, the Ecuadorian authorities havedeveloped specific btAamg regulatlons for BOT concessions wlthin theener$/ sector (1995).

Government provislons and gutdelines for awarding BOT proJects inPaktstan (power plants) and in Sri Lanka also provtde for a eompetitivetendering process and requiring all government-soltcited BOT proposalsto be made public. The evaluation of proposals ifi Sri l-anka attachesimportance to a broader range of crlteria than does the legislation of thePhilippines or Viet Nam, including, as it does, factors such as relnvest-ment in the country and the training of nationals. The award procedurein Sri Lanka includes a detailed negotlatlon stage after bid evaluation,based on a letter of intent. In Malaysia, Hong Kong and Thailand, theauthorizing ministries usually prefer a competitlve bldding procedurefor BOT proJects. Examples are the Second Stage Expressway System inGreater Bangkok and the Shah Alam Expressway in Malaysia

Statutory provisions requiring competitive tendering for the publicpurchase of construction work, goods and services are found in mostAmerican and European countries. The principles of competitive andtransparent awarding of public proJects, which underline such statu-tory provisions, may apply to BOT proJects. The European Union (EU)has adopted directives that require competitive bidding for the publiccontracting of construction work, goods and seMces over a certain thresh-old value. Basically, the EU procurement system requires that the gov-ernments advertise and award relevant contracts (t.e. those above theestablished threshold) only after a transparent, competitive btdding

O A UNID0 B0T Guidelines

process. Contracts must be awarded on the basis of either the lowestprice or the most economically advantageous tender,

The new General Agreement on Tariffs and Trade (Uruguay RoundAgreement on Government Procedures), generally applicable from 1996,has established a procurement system rather similar to the EU rules forprocurement'by any contractual means", which may be applicable toBOT projects. The new agreement on government procurement will re-place the old government procurement code of GATT. It provides for ex-panding coverage to the procurement of services and construction and,to a certain extent, to state and local governments. It also establishes anumber of criteria for procurements, designed to improve transparency,fairness and due process.

The worldwide acceptance of competitive tendering as the preferredprocurement method for BOT infrastructure projects does not imply thata BOT tenderlng procedure has been laid down in one universal set ofrules. On the contrary, the tendering procedures vary not only fromcountry to country but also to some extent by infrastructure sector andtype of project. For example, governments differ as to how specific theyget in defining the project in the invitation to tender. At one extreme, theprocuring government entity specifies in great detail what is wanted. Atthe other, it specifies very little, leaving it to the ingenuity of the biddersas to how best to meet the project needs.

G overnments use different prequalification strategies. Some prescribea detailed prequalification process in advance of the invitation to tender.Others speei$r only minimal prequalification criteria in the invitation totender and require bidders to supply only modest information abouttheir qualifications and capabilities.

There are a variety of accepted procedures for clarification of andmodification to the bid documents, as well as for how bidders may pro-pose alternative commercial and technical solutions. The evaluation cri-teria governments use for selecting bids also vary greatly. Some aredetalled, obJective and quantifiable; others simply call for the "best" pro-posals; sometlmes no criteria are speclficd.

There are different approaches as to whether the procuring govern-ment entity may engage in direct negotiations with a "provisionally se-lected" bidder to obtain the most favourable offer in a final procurementphase. The procurement regulations in some countries provide for award-ing a letter of intent after the best bid has been selected and approved inprinciple, while those in the majority of countries appear to move auto-matically from the selection proeess to the final award. Formal rules ofprocedure and tJle extent to which they are followed (for example, theprocedures for advertisement, time schedules, period of effectiveness oftenders, submission and opening of tenders and so forth) also vaqr fromcountry to country.

UNIDO B0T Guidel ines q q

To take into account the diversity of circumstances that may be en-countered and the different procurement procedures that may be applied,the United Nations Commission on International Trade L^aw (UNCITRAL)has produced the UNCITRALModeI Law on Procurement, with an accom-panyng Guide to Enactment for legislators using the Model [.aw.

r $pecific issues for procurementof B0T proieGts

The procurement methods in use for BOT infrastructure projects reflecttwo characteristics of BOT proJects. First, the internationally recognizedprinciples for competitive bidding normally used for traditiona-l construc-tion contracts appear not to have been suitable for contracts for BOT projects.Indeed, the contrast between the tendering procedures for traditional pub-lic sector proJects and those for BOT proJects can be substantlal:

r Traditionally, the public procuring entity produces ire the biddingdocuments comprehensive descriptions and specifications of theconstruction work to be procured. The invitation to bld for a BOTproJect, in contrast, may precede any destgn work and may outlineonly in very broad terms the need or performance criterla the proJectshould fulftl. Whlle this approach may have the advantage of draw-ing on each bidder's expertise and innovatlve abilfty in proposingsolutlons to meet the prescrlbed need, lt hardly provldes the solidcommon basis on which bidders for traditional publtc sector proJectsare accustomed to preparing their bids and having them evaluated.

r Financial and legal issues typically take precedence over technicalissues lrr structuring a BOT proJect. When preparing the bid docu-ments, it is crucial for the procuring government entity to under-stand what investors and lenders are prepared to accept. For thebidders the ability to arrange an attractive financial package hasbeen the decisive factor ln wlnning the btd for a nu,mber of BOTproJects. The unique and complex financial and legal issues of BOTproJects are, naturally, not covered by the rules for: procurement oftraditional public construction contracts.

. Unlike traditional tendering processes, the BOT tenderJng processdoes not necessarlly aim to mildmlze the number of competitors: toensure the quality of a limited number of competitors is a more im-

1 0 0 UNID0 B0T Guidolines

. "

portant obJective. Bidding for BOT projects can be very expensive,particularly if the proJect description in the bid document ls open-ended, requiring potential bidders to present their own concepts fordesign, construction, financing and operation. The need for a strictprequalilication proceeding, to reduce the cost of unsuccessful ten-dering for BOTprojects, is therefore considerable, as mentioned above.

Negotiations or "discussions" with bidders during the evaluationperiod on, for instance, technical or financial solutions have notbeen uncommon in BOT proceedings in some countries. This isclearly inconsistent vrith the traditional prohibition against nego-tiation with respect to tenders submitted.

For the s€une reasons it is not unusual that, as the procuring govern-ment entit5r evaluates the different BOT concepts and solutions pro-posed, it becomes aware ofa need to change the scope ofthe proJect.In such a case, it does not normally reject all bids and start thetendering process again. The practical approach appears to be tonegotiate the changed scope of the BOT proJect with a single bidderor to present it to a short list of bidders. This approach, which is notuncommon for other large construction works, is not fully consistentwith the principle of equal opportunity for all bidders. -

The proJect to be performed and the required content of the bids ismore comprehensive for BOT projects than for conventional con-structlon contracts, reflecting the more extensive obligations of thecontractors under a BOT.scheme. This agaln influences the criteriaused in evaluating and comparing BOT tenders, making them lessrigid and more varied than the traditional criteria, Not only thetender price, or a combination of that price and other criteria closelyrelated to the construction work, but also such criteria as the at-

'tractiveness of the financial package, the econemic strength of thesponsor group, the transfer of technolo5,ry and capability building,and the soundness of the operating plans may.be used to compareand evaluate BOT tenders.

Moreover, there have been a number of BOT projects where it appar-ently has not been practical or possible for the procuring governmententity to apply a competitive bidding system. There are a number ofreasons why this can be so:

r A financial package that includes favourable bilateral loans to de-veloping countries may exclude competitlve bidding if the host coun-try is obliged to use contractors from the donor count4r.

UNID0 B0T Guidelines 1 0 1

The technical or operational character of a BOT proJect may requirea direct approach to a particular private company, for instance ifthere is a need to continue with a stAndardized technolory that isthe property of that company, or if that company is already in-volved in operating the specific infrastructure sector in the countryor locality.

An urgent need for a BOT project can make competitive biddingimpractical because of the time it entails.

In some developing countries, particularly where it appears to beextremely difficult to secure competitive bidding, the procuring en-tity has decided to directly negotiate with a chosen private sponsorbecause the entlty has considered it unlikely that a sufficient numberof bidders would engage in competitive proceedings for the proJect.In countries where no capital market exists, where regulatory pa-rameters are not well established and where the political risks aregreat, it may be unrealistic to orpect to obtain competitive bids fora BOT proJect within a definite time. In such environments the onlypractical solution may be to" negotiate directly with one or a fewchosen sponsor(s) in accordance with some established benchmarks,or to use some form of limited competition

In countries where the BOT approach to infrastructure proJects iswell established, the private sector is often encouraged to take theinitiative to identiff projects and come forward with detailed projectproposals. Although private, unsolicited BOT projects have beensrrbnritted to competitlve bidding proceedings, a procurlng gov(:rn-ment entity may consider lt more practical to negotiate with. thecompany that originated the project proposal,

Some of these procurement issues are lnherent in the BOT concept.Others may simply reflect problems that crop up with any rather newand complex proJect concept. Whatever the reasons, the types of pro-curement proceedlngs used so far and the issues encountered have tobe considered when decidlng on an adequate procurement method for aBOT proJect.

The next section suggests a basic procedure for conducting procure-ment in BOT proJects. The use of competitive tendering is recommendedas it is generally the most effective way to promote the objectives setforth at the beginning of the chapter.

1 0 2 UNID0 B0T Guidelines

'A basic tJB?'$,Ti?:lJ o'o'urinsa

The stages in BOT procurement, discussed below, are summarized infigure III and described in detail ln the flow chart in figure IV.

Assessment of f inancingslrate0y and procurcment

Preparation ol tenderdocuments

Preparation andsubrnission ofprequal ifi cation

documents

Clarif ications prior totender submission

Preparation andsubmission of l irm tender0pening, clarif ication

and evaluation oftenders

UNID0 80T Guidelines

Stages

1. Assessment offinancing strategyand procurement method

Government actions Tenderer actions

2. Creation ol aprocurement committee

3. Preparation of tenderdocuments

Composition, obligationsand authority of the

orocurement committee

Record of the procurementproceedings

Define clearly majorgovernment obiectives

ol the proiect


Stages Government aclions

Project description.Ihe scope of works and therequirements ol the project

Tenderer actions

ldentify major project risksand make clear stalernentof proposed risk allocation

ldentify bid evaluationcriteria for the project

Arrange lor public approval,permits and licences to beprovided by the government

Prepare lorecasts, statisti csand other data to be

provided or commissionedby the government

E['


Stages

4.Prequali l icationproceedings


Decide uileria forprequalification and

prequalilication proceedings

5.lnvitation and instructionsto tenderers .

Eventually, make a short-listol selected bidders to be

invited to main proceedings

Notify all pre-qualifyingcomoanies of

prequalif ication decisions

Instructions for preparingand sub4itting tender

proposals

Conditions lor submissionof alternative tender

proposals

Clear statement ofconfidentiality andintellectual property

protection

106 UNID0 80T Guidetines

Stages Government actions Tenderer actions

6.Clarification prior toten{er submission

T.Preoaration and submissionof firm tenders

Piocedures to be lollowedlor submission, opening,

clarif ication and evaluationof tenders

Time schedules fors0bmission, opening,

clarification and evaluationof tenders

Formation of consortiumof interested sDonsors

lssue invitations and tenderdocuments to prequalified

E

.*&..




Agreement on the sponsors'role in appraising theproject and preparing

the tender.Allocation of tender costs

Detailed appraisal of theproject, determining itscommercial viabil ity

Negotiate tentativecommitments from lenders.offtakers, conskuctors and

other project-relatedconkactors and eyaluale

their impact on the project'scommercial viability

I

Stages

9.0pening, clariticationand evaluation of tenders

10. Awarding ol thepro.iect and project closing

Government actions

Clarify and evaluate whethertenders are res0onsive

Ensure eventual approvalof the award by higher

authority

Tenderer actions

__t___Submission of f irm

alternative bid together with.the unmodilied bid

Notify the successfultenders ol the award

Notify unsuccessful tenderersand return tender bonds


Govetnmenl actions

Assessment of financing stlategy and ptoculement method

After a proJect has been identified and the need for it has been demon-strated, a government will normally conduct a prefeasibility study for it.The study establishes the basic requirements of the proJect, wetghs thepros and cons of Borfinancing and government financing and seryes asthe basis for proJect procurement. without a comprehensive prefeasibilitystudy, the government will not be able to design a procurement frame-work that meets the obJectives of the proJect and will not be in a strongposition uis-d-uis potential sponsors.

The prefeasibtlity study should as a minlmum establish and evaluatethe following:

r The baslc characterlsilcs of the proJect.

r Sources and availabtltty of proJect lnput.

LocaUon, geological and soil condltions and access to site,

r Environmental impacts.

Signing of projeclagreement Formation of project

company. Signing of projectagreement

Request performanqe !ond

Project Closing

1 1 0 UNl00 B0T Guidelines

! .

Preliminary engineering and technologr possibilities.

Implementation schedule (it should be flexible enough to allowresponding to changing conditions and construction delays).

Allocation of risk between the private and public sectors.

Financial appraisal of the project profttability, including sensibilityanalysis using different assumptions for key variables.

The prefeasibility study may also serve as the basis for a final feasi-bility study; whieh-is usual$ prepared by the sponsors at the request sfthe lenders and-eventually-as part of the required content of the tender.

Once the prefeasibility study has been analysed and a BOT approachselected for the project, it is time to decide on the procurement method.Idealiy, the government entity doing the procuring should choose theprocurement method best suited to the project. Competitive tendering isnormally chosen to promote competition, to prevent negative public per-ceptions, to attract qualified private investors and to satis$r the lenders.

If competitive tendering is chosen, the findings contained in theprefeasibility study will serve as a basis for the drafting of the biddingdocuments, in particular for laying down minimum performance stand-ards as well as the economic parameters to be observed by the bidder inpreparing the bid and, if successful, in building and'operating the proJectfacilities. The prefeasibility study should also be used for defining theevaluation criteria for the bids.

Creation of a proculement committee

Before the procuring.government entity begins the procurement pro-ceedings, it is advisable to establish a procurement committee or a proJectteam that will be responsible for preparing and conducting the procure-ment proceedings. This committee should have, as a minimum, the fol-lowing composition:

r fi high-ranldng official of the procuring government entity.

r A legal official with experience in the particular type of BOT pro-curement and contracting.

r A, technical official knowledgeable about the project.

r I financial management officiat experienced in project financing.

ET;


:

The procurement committee may be authorized to use the services ofconsultants with appropriate orperience in the procurement and imple-mentation of BOT proJects. :

The procuring govemment entity may, additionally, consider nominat-ing or inviting a facility user to Join the committee (for example, a repre-sentauve of a consumer organizailon or a union) to lmprove transparency'and strengthen public confidence in the proceedings. Another way to pro-mote transparency and accountability is to require that the committeekeep a record of the proceedtngs. The record may contain informationsuch as a summary of the prequallfication proceedtngs, the prtncipal termsof each tender and a summary of the evaluation of the bids. It should beruaile public for inspection after a bid has been aceepted or the procure;ment,proceedings terminated without the proJect having been awarded,provided that it does riot disclose confidential information from thetenderers. An adequate procurement record may also facilitate the workof the central government in supervistng and controlling Bor proJectsdeveloped by government agencies or local authorities.

Preparation of tender documents

The procurement committee should prepare the tender documents be-fore prequalilication is initiated. These documents should set forth clearlyand precisely the work to be accomplished, the operating and mainte-n€rnce conditions, the proposed tarilf structure and the proposed con-cession period. To promote transparency and internation;l c;mpetition,the tender documents for Bor proJects may include the following:

r Detailed instruction to bidders on bidding proceedings and the formof tender.

The prefeasibility study unflertaken for the proJect.

The required mlnimum content of the bid.

The text of the project agreement.

The type of facility(ies) to be constructed and the proposed technol-ogr, lncluding design standards, technical

"p""ifi""uons and per-

formance requirements.


'International and national standards governing the work, equip-ment and materials and a statement as to which equipment andmaterials meeting other standards that ensure the same or betterquality will also be accepted

Technical specifications based on performance criteria.

Description of the site location and access to the site.

Specification of the facilities to be provided by the $overnmentauthority.

Timetable for completion of the constru.ction work.

Maximum concession period.

Statement of the financial requirements, including the minimumcommitted equity. ,

Proposed tairff, toll or fee structure and revenue-sharing arrange-ments, tf any.

lnformatton about rules and regulatlons governing forelgn exchangeremlttances.

Nature, amount,'period of validity and other principal terms aldconditions of security and warranties.

The criteria to be taken into account in evaluaUng and comparingbicls, lncluding how such factors may be cluantilicd or ol.herwise evalu-ated and the method for evaluating altemative proposals.

Environmental perform€Lnce norrns and the environmental impactassessment (E[A).

(For power projects) power purchase agreement and, possibly, fuelsupply agreement.

Information about the market conditions in the sector.

. Other provisions that need to be included in the bidding documents.

To provide a uniform basis for preparing the bids and on which theprocuring govemment entity can compare them on a net present value

UNIDO B0T Guidelines 1 1 3

basls, the procurlng entlty may al$o conslder prescrlblng the followingeconomlc parameters:

. The currency in whtch btds may be expressed.

r The procedures and forelgn exchange rates for converslon of cur-rencles to a common base for comparison.

r Inflation and discounttng rates.

r Modmum period for project construction.

r Timetable for project operation.

. Formulae and price indices to be used in the collection and adjust-ment of tarlffs, tolls or fees.

The tender documents for a BOT projeet are in many wdls compara:ble to the tender documents for international competitive bidding forpublic works and construction. some additions and adJustments are,however, necessitated by the character of the BOT scheme. The proeur-lng government enttty must decide whether the bidders shall be requiredto submlt thelr blds ln response to a speclflc and detalled set of technl-cal crlterla or whether the bld documents shall spectS only the basicproJect performance criterla, leavlng the choice of tlchnoloEl/, construc-tton method, proJect schedule etc. to be proposed by the bidders, Thetwo different Bor procurement approach.s-ure ,r",trtty described as,respectively, a structured approach and an unstructured approach. Thestructured approach can streamline the procurement process, savingcosts and time. The unstructured approach encourages tnnovatlon butat the same time makes the bids;more time-consuming and expensive toprepare and evaluate. slnce the sin$e biggest challenge for Bor projectsts to reduce the time- and cost-intensiveness of their development, itmay be advisable to opt for a structured approach under most circum-stances. If the procuring government entity wants to encourage projectideas and creativity, it may allow bidders the option of submitting analternative bid in addition to a structured bid.

In case the procuring entity is unable to formulate detailed specifica-tions for a Bor proJect, it may use a two-stage (or several-stage) biddingprocess to arrive at the optimal project proposals.


I, dr:,:.

Prequalif ication ptoceedings .

Competent prospective bidders may be reluctant to participate in the cost-

and time-intenslve procurement proceedings for BOT contracts if they

risk having to compete with unrealistic tenders submitted by unqualified

or disreputable companies or if they think the number of bidders is too

large. To ensure ttrat uperlenced and serious sponsors with the abihty to

develop the particular BOT proJect are invited to submit tenders and re-

duce the bidding risk, it is advisable to limit the number of bidders at the

pre-tender stage by a mechanism known as prequalification.Prequaltflcatlon proceedings are normally subJect to a number of pro-

cedural requlrements and condlttons, tncludlng advertisement of thelnvltaflon to prequaltff, prequaltftcatlon crlteria, mlnimum penod forpreparation of prequalificatlon applications and notlfication to the ap-pltcants of the result of the prequaltfication. Such procedural safeguardsensure that the proceedings are transparent and:non-discriminatory.Unlike conventional methods of prequalification that may consider con-tractors for a number of future proJects (bidders list), prequalification

for a BOT proJect is normally based on the ability of the prospective

bidders to perform the particular BOT project satisfactorily and on their

resources. Tlpical prequalification information-and criteria-for BOT

proJects include the following:

. 'Ihe Jtwrcial capabililg oJ the appticcnrt.lhe applicant must provide

evldence that lt has the resources to finance the engineering, con-

stfucton, operation and maintenance of the project. Tlpically, it must

document its flnancing capability by submitting the following:

o A report on the state of its financial situation.o A report on the proposed flnancing structure ofthe proJect.

o A statement from a reputable flnancial institution or bank onthe intention to extend a line of credit to the applicant for theimplementation of the Project

Ttrc experience and track record oJ the appllcant' I)pically' the pro-spective bidder must provide the following evidence:

o That, by ttself or with others, it has undertaken one or moreproJecti that,are simtlar or related to the BOT proJect to be bid.

o That tts key personnel and those of its contractors have suffi-cient practical experience in the relevant phases of the BOTproject to be bid.

UNID0 B0T Guidelines t l c

. MarTogerlent stru{ctures and. operatlonal capabtltfies of tte applicant.The prospective bidder typically provtdes lnformation about its per-sonnel, the equipment and construction facilities to be applied to theproject, quality assurance systems, health and safety records and-normally-its edsting workload and that of its contractors.

. Legalrequirements. There is typically an undertaklng,flssl the par-ticipants in the Joint venture or consortium that, if awarded theBOT contract, they will bind themselves jointly to perform the obli-gations under the contract. They also give evidence that they arenot insolvent or in receivership and state that they have not com-mitted any crlminal sffence related to professlonal conduet. Infor-matton about any pending legal claims against the applicants mayalso be requested.

Most international rules on the procurement of public works and serv-ices require that all applleants meettng the speclfled prequaltflcaton crl-teria be allowed to bld. This prtnctple may be less sattsfactory for BOTproJects, where proJect development and the evaluaflon of tenders aremuch more compltcated, costly and time-consumlng. Since experiencealso shows that quallfied developers may not parttcipate in procurementproceedtngs for BQT proJects if the competitive fleld is too large, it is oftenrecommended to limit the number of BOT proJect bidders to fewer thanflve qualified companles or consortia. The procuring government entityrt l : ly : r<lopt a qtranl i la l lvr : rat l rr$ systenr frrr the ;rreqrral l f lcal lon cr l lcr l ; r lort<' l t l t : t ,r ' stt t : l t i t slrr lr t l ls l ol <lualt t lccl blcldcr 's.

' l l rc posslble clhrr lrratkrn ol

some prospective bidders for thts purpose and the,application of a ratingsystem must be clearly stated in the lnvitation to prequali$r.

Finally, it is advisable that the procurement regulations require aprequalified bidder to reconfirm its qualifications at the time a Bor con-tract is awarded, in accordance urith the same criteria utilized for theprequalification. A post-qualification requirement is particularly impor-tant for complex and high-value Bor infrastructure proJects. To safe-guard national interests, the procuring entity must be sure that thequalification information submltted by a developer at the time ofprequalification remains valid.

Inyltation and instructions to tenderers

The bid document package sent to the prequaltfied bidders wlll contalninstructions to the bidders and a tender form in addition to a number ofdocuments and lnformation as specified above under preparation of ten-der documents. The fee charged for the bid document package should


be reasonable, reflecting only the cost of its printing and delivery to the

bidders. Unreasonably high fees for BOT bidding documents could dis-

courage qualified proip""tin. bidders from participating in the bidding.

\Mh4e the whole bid document package is interlinked, the tender pro-

ceedings will basically be continued in the instructions to bidders, which

outline, among other things, the required content of the bid, the proce-

dures for clarification of bidding documents and for submission of bids,

securtty requirements, how the bids will be opened and evaluated and

the procedures to be followed for the award of the project'

The instructions to the bidders for a BOT proJect contaln mainly the

same provislons as the lnstructions to bidders for conventional large in-

dustrlal projects. The instructions as to the cOntent of the b!d-are, hgw-

ever, dlfferent i:r so far as BoT proJects are more comprehenslve and

complex than tradltional govemment-financed ir:rfrastructure proJects. Nor-

mally, a bid for a BOT proJect includes the following data:

. Technical proposal

Operating programme and costs' including the quality of

service to be offered.o Maintenance programme and costs.n Environmental Protection Plan.o Plans for operation and maintenance of additional facilities.

o Evidence of the capability of committed or proposed construc-

tion contractors, equipment suppliers and O&M contractors'

Financial proposal

o Feasibility study prepared by the tenderer.o In-vestment proposal, including financial structure and

security package.o Pricing (tariffs, tolls or fees) proposal' including any adJust-

ment formulae.o Escrow account schedule.o Period for completing construction of the proJect'

o Proposed concesston Period.o Expected period over which the proJect

preciated.o National capabllity building and transfer of technologr offered'o Any offer to reduce charges to consumers lf the return on net

worth or assets exceeds a certain mildmum (profit sharln$'

facilities are to be,de-


. Irgal proposal ;

o Acceptance of the terms of the proJect agreement.o Acceptance of the land conveyance agreement.o Draft shareholder's agreement, consortium agreement, Joint

venture agreement or a similar contract by which the sponsorscommit themselves to perform the project agreement if theyare awarded the BOT project.

o Acceptance of the terms of the purchase agreement (for energrprojects).

o Acceptance of the terms of a supply agreement.o Evidence of other contractual commitments., ktter of conveyance signed by the authorized representatives

of the compEury or consortium submit{ing the bid.

From a legal point of view, the lnstructions concerning the content ofthe bid should read as a minlmum requirement so as not to preclude thebidder from including additional information that it considers relevant.

Clarifications pliol to tender submission:

The ldeal situatlon is that the bidding documents and annexes comprisea complete set of provislons coverlng all technical, financial and legalaspects of the proJect. The bidders are then to enter their tenders lnconformity with these provlsions so that all tenders will be based on thesame obligations and therefore directly comparable

Because it is often difficult to adequately describe and cover all thefactors ln a complex infrastructure proJect in the bidding documents,.there must be a way to have unclear provlslons or omissions from thellidding docrrnteltls clarifiecl and to have errors corrected.

l'he irrstructions to the bidders will normally spects a procedure per-mitting the bidder to ask for clarification or eorrection of the biddlng docu-ments. To preserve the principles of transparency and faimess in thebidding proceedings, there should be procedural safeguards to ensurethat all bidders are given the same clarifications and corrections. usuallyclarifications and corrections must be communicated to all potential bid-ders in writing without, however, disclosing the source of the request.

The procuring government entity may condugl a,pre-bid conference inreasonable time before the deadline for submission of bids to clari$ andcorrect the bidding documents or any related matter that the bidders mayraise, The salient results of a pre-bid conference should be put down inwriting in a bid bulletin and sent promptly to aI bidders.

' 1 1 8 UNID0 B0T Guidelines

"-1,ro" . . -

iviost instr,r-tions to bidders state the name of a.person on the pro-eurement co: 'e who is to receive the qrrestions fiom bidders duringtender prepal', and.] .i the q' -t-ions be in writing. Theremay also be a stnct prohibitiorr on infonlt.ri contacts to ensure equaltreatment of bidders. :

Since BOT infrastructure contracts often involve considerable sumsof money (and for other reasons as well), the competition may be severe.Some BOT procurement regulations and project agreements containdetailed and rather strict provisions against inducements and otherundue contacts with current or former officers or employees of the pro-curing government entity.

Freparation and submission of fim tendel

An important element in fostering participation and competition is to givebidders sufllcient time to prepare their tenders..The time allowed for thiswitl be determined by the circumstances of the BOT project, in particularby thg level of preparation provided by. the procuring government entityand by the sile and complexity of the proJect. Generally, however, 90-120days from the date of the tr:vitation to bid-or, if later, the date on whichthe bidding documents become available-should be allowed for prepara-tlon and submlssion of tenders for BOT proJects. Instructlons to the bid-ders must clearly i:rdlcate the deadline for the submisston of tenders,includtng the place for their receipt.

Tenders must usually be submitted on standard forms provided bythe procuring government entity as part of the bidding documents. Thisconsidqrably eases the process of data assembly and analysis duringthe corirplex evaluatlon process.

To ensure the transparent, falr and reasonably elliclent conduct ol'the procurement proceeding, the tenders that are submitted must befirm. The bidders are not allowed to consider the bids as admission tick-ets to the procurement committee's negotiation table. Most internationalprocurement regulations and instructions to bidders therefore request abidder to submit its definite and binding terms and conditions, togetherwith a cover letter in which the bidder explicitly verifies or validates thatthe bidding documents are fully understood, the period of effectivenessof the bid and its completeness. According to the prevailing procure-ment rules, a bidder is not permitted to alter its bid after the deadline forthe submission of bids.

The request for firm bids for BOT projects will not normally prevent abtdder from uslng an escalation formula to compensate an increase infinancing, material or labour costs during the procurement proceedings.


The effects of escalation formulae will, however, be calculated by the pro-

curing entity and considered when bids without such formulae are being

compared.To secure due performanee by the btdder of the firm obligations un-

dertaken in the bid and to afford the procurlng government entity rea-

sonable protection against irresponsible bids, the bid is normally

accompanled by a bid security, usually in the form of a letter of credit or

a bask guaJanty from an acceptable bank. As already menuoned, the

bid securlty required for a BOT proJect should not be set so high as to

discourage bldders. Securlty eQual to approdmately 2 per cent of the

expected total capttal costs of the proJect appears to be quite normal for

BOT projects. The bid se.curlty should remain valid at least for the sameperiod as the effectiveness of the bid.

A tenderer submittlng a bid may be an tndividual, a scile proprietor-

ship, a corporatlon, aJoint venture, a consortium or a general or a limltedpartnership. Wtratever the case, the submttted bid must provide sultable

.rrid.tt.. oithe legal form of the bidder and that the individuals managing

; the tendering proceedlngs are authorized by the bidder. In most BoT

proJects, the project company has not been formally established at the

time the bid is submitted. A preliminary cooperafion agreement or a draftproposal of a shareholder agfeement, a joint venture agreement or con-

sortium agreement by which the bidders commit themselves to perform

the pro.;ecf agreement if they are awarded the BOT contract should there-fore be submitted as part of the bid, and the bid should preferably besigned by all prospective partners.

i Altelnatiue Ploposats:

To enhance the comparabillty of btds for BOT projects and to reduce thetlme and costs of the evaluatlon process, it ts generally required that thebids comply fully with the terms and conditlons of the bidding docu-ments. If a bid is incomplete or lf lt ts not substantially responstve, thatis 1| lt contains material devlations from or reservations to the speciflca-tions. contract terms and other conditions in the'bidding documents, itwill be rejected.

The required conformity of the,bids may have a negative .impact onthe creatlvity of the private bldders, whlch ts generally supposed to beone of the advantages of the EIOT concept' A prospectlve bidder mayhave the knowledge to offer a solution to the implementation of a BOTproJect that ts dtfferent from the solution described in the bidding docu-ments. Of special importance to the government is that the bidder may


;

be able to come up with changes in the construction method, in theproject specifications or in the O&M methods that could save time and/

or reduce costs to the benefit of the consumers.The practical solution wlll generally be to invlte the bidders to present

alternative bids, provided that such bids will reduce costs, shorten the

development schedule or allow better implementation or operation of

the prolect. Altemative bids must be accompanied by a detailed descrtp-tionof the proposed methodologr, technical speciflcations' a price break-

down and other relevant details. Alternative bids that are not fully detailed

and priced should not be considered.For reasons of comparability it is generally stated ln the lnstructlons

ts bidders that no alternattvelcid will be concidered by tbe plocuqemg4! ,comfnittee unless the bidder also submits an unmodified bid in accord-ance with the bidding documents.

0pening, clarification and eualuation of tenders

'fo prevent a tlme gap between the deadiine lbr the submission of IJO'I

tenders and the opening of the tenders, it is recommended that the ten-

ders be opened ui ttt. time specified as the deadline for submission of

tendels. Otherwise a time gap may create opportunities for misconduct '

(e.g. disclosure of the content of bids prior to the opening time) and

deprive bidders of the opportunity to minimize that risk by submitting a

tender at the last minute, immediately prior to the opening of tenders.

The bid opening procedure for BOT tenders usually follows interna-

tionally recognlzed princtples, often with some formality. This includes,among other things, the principle that the tenders are opened in public

and the name and address of each bldder are announced together withthe total amount of each bid. Blds received after the deadltne for sub-mlssion of bids, as well as those not opened and announced at the bidopening, are not considered.

Ttre procurement commlttee may ask bidders to clariff their bids tohelp in its examination, evaluatton and comparison of those bids. Re:quests for clarification and the bidder's final response should be madeand confirmed in writing. Such clarification or discussion exercises arequite normal for BOT procurement proceedings owing to: the size andcompledty of most BOT projects. It is very important for the procuringgovernment entity to,make certain that both parties have an identicaland full understandiirg of all the provisions and issues in the bids.

As mentioned above; however, subsequent negotiations or bargainingbetween the proquring entity and the bidders to change, for example,proposed tariffs, concession period, risk allocation and other matters ofsubstance in a submitted tender are not uncommon in BOT procurement


a

proceedtngs. Such negotiations after the bids have been submitted areclearly contrary to most lnternationally recogntzed procurement rules andguidelines. The Organisation for Economic Co-operation and Development(OECD) Rules on Good Procurement Practlce, arlicle 7t thre United Na-tions Commission on Intematlonal Ttade Law (UNCITRT\L) Model Law onProcurement, article 3l; EU Dlrective 9Ol531, article 15; and World BankProcurement Guidelines 2,45 all clearly prohibit negotiations between aprocuring entity and a bidder concerning a tender submitted. For exam-ple, the UNCITRAL Model law on Procurement, article 31, stipulatesas follows:

"No-twgotialinn shall toke place betuseen the proeurb,g- entitg and asttpplier or contractor with respect to a tender submitted by the supplier orcontractor."

,.

The Model I-aw does, however, provide methods of procurement thatallow technical discussions and negoflatons between the procuring en-Uty a{rd bidders (e.g. two-stage tendering and request for proposals).

The Uruguay Round Agreement on Government Procurement does notfully prohibit subsequent negotiaton of bids; but.the scope and proce-dure for such negotiation are rather strict. Thus, subsequent negoila-tions of bids are permttted only if such negotiations have been indicatedin the invitatton to tenderers or tf it appears from the evaluaflon that nostn$e tender ls obviously the most advantageous. They should primarilybe used to identiff the strengths and weaknesses of the bids and shouldnelther dtscdmtrnate between the bldders nor provide lnformailon thatwould help a bidder to raise tts bld to the level of other bidders. In particu-lar, the procuring entity should ensure that any elimination of btdders iscarrled out ln accordance with the evaluatlon criteria set forth in the bid-ding documents, that all modifications to the criteria and to the technicalrequirements are transmitted to all remaining bidders and that when thenegouauons are concluded, all runainingbldders are permitted to submitfinal tenders on the basis of the revised requirements and in accordancewith a common deadline (see the Uruguay Round Agreement on Govern-ment Procurement, article )ilV).

The general prohibition or strict limitation of subsequent negotia-tions between the procuring enuty and the bidders is intended to protectthe transparency of the proceedings and to prevent discrimination andopportunities for misconduct. There seems to be a deflnite feeling amonglarge construction companies that subsequent nbgoUaUonS or the op-portunity to "re-bid" might result in an -auction", in which a tender offerby one bidder is used to apply pressure on another bidder to offer amore favourable tender. Negouations between the procuring govemment


.*&"*-

entity and the bidders on bids already submitted ls known also to havedelayed the procurement proceedings for BOT projects considerably.

There may be differences of oplnion on both thg negotiation of BOT

, tenders after the submission of the tenders and how far such negotia-

: tions may go in relation to substantial terms and conditions of the bid.However, in the light not only of international procurement rules butalso of the critical need to reduce the expenses and time needed for BOTprocurement proceedings, it may be advisable to prohibit-or strictly limit-

concernlng tenders submitted.The evaluatlon process requires two steps. The first is to determine

- wtre.ther a btrd is:rS9!!5€]. Bids that arenot responsive are rejeeted-This flfst step is Mndl,ecililore or less like any traditional procurementof conbtnrction works. Once responsiveness has been determined, thes( :<:oncl s l t :1 t ls lo t :v i r l r rar l t : t l r t : l - l lc ls on t l t t : basls o l t l t t : t :v : r l t ra l l t l r t < : r l l t : r la

stated in the bidding documents. Price and non-price evaluation criteria

for BOT projects and the method of objectively assessing the relative

attractiveness of the bids are discussed in chapter 7 in the section on

evaluating bids.

Awatding ol project and proiect closing :

Tlhe instructions to the bidders are usually worded to give the procuringgoverrrment entity a free hand in choosing between the submitted bids orielecting all the bids. This meurns that a bidder, even after having submit-ted the most favourable bid, has no claim to have his tender accepted.

Normally, however, the procuring government entity will award theBOT contract to the complying bidder with the highest number of evalu-ation points well within the period of effectiveness of the bids. In somecountries the award of the BOT contract will not be effective until it hasbeen approved officially by a higher goverrunental authority. The instruc-tions to the bidders should speeiff a time limit for such approval.

Having awarded the BOT contract, the procuring entity will noti$ theunsuccessful bidders about the award and return their bid securities.The project agreement will usually be signed promptly or within a speci-fied number of days of the announcement of the award, probably afterapproval by the higher governmental authority.

After the award, the successful bidder has to frnalize and execute anumber of arrangements and agreements before project implementationcan take place. This process includes the following:

. ; Binding financial commitments from the lenders and equity inves-tors (financial closin$.

UNIDO B0T Guidelines ,123

:

Execution of the proJect contracts and documents that are neededbefore the flnancial closing can take place, lneludlng constructionand egutpment supply contracts, lnsurance contracts and securityagreements and asslgnments.

Approved studies and reports tncluding feasibility studies and en-vironmental reports required !y tfre lenders..

'l'he establlshment ancl lncorporatlon of the proJect company in thehost country.

* eertifieation of:anumber of corporate documents.

. Obtainment of approvals such as constructlon permits, import li-censes and environmental permits.

. Legal opinions from local counsel and project counsel.

r A performance bond issued by a reputable financial institution tothe government entity.

These flnal steps prior to proJeet implementatlon are cruclal tn thedevelopment process of any nO'f pro.leci. Although most of the onus ison the winning bidder, not even the most experienced developer wtllbe able to complete thts final phase of the proJect development success-fully and in time without support and fledbility from the procuring gov-ernment entity.

The legal franrework for the project closing process is typically em-bodied in the project agreement. The obligations of the successful bid-der to take the proJect to financial close and to linalize other steps beforeproJect implementation are usually worded as conditions precedent tothe e{fectiveness of the project agreement. The date when all the condi-tions precedent have been complied,with is deffned in the project agree-ment as the'effective date" of the contract, fromwhich date the concessionperiod shall begin. If the conditions preeedent are not satisfied by thedeadline agreed on in the project agreement, the procuring govemmententity may terminate the project agreement and award the BOT proJectto the second best bidder

Unsolicited proposals

An unsollctted proposal is one prepared and submitted solely at thelnitiative of a private developer and not in response to an officlal requestfor proposals. Unsolicited BOT proposals are sometimes discouraged, in


particular by lenders. The validity and seriousness of unsolicited pro-posals can be difficult to determine. Experience indicates that unsolic-ited proposals may not lead to the cheapest infrastructure projects orthe best service to the communilr. On the other hand, encouraging theprivate sector to identiff and structure BOT infrastructure projects ontheir own initiative may help a country's BOT programme to succeed.The private sector may have better knowledge of new technologies ormay have better insight than the public sector into local solutions toinfrastructure problems. BOT agreements based on unsolicited propos-als are normally reached on the basis of negotiations between the pri-vate proposer and the authorized government entity. Such negotiations

-need to be eonducted orta ease-by-case basis' To make sure that unss-licited proposals are evaluated following approximately the same crite-ria as are followed for officially initiated proposals, the government shouldconsider setting up rules for this in the general procurement regulationsfor BOT proJects. Such rules typically stipulate the following conditions:

r An unsolicited proposal should be consistent wtth the government'sinfrastructure policy and with its general plans for solicited pro-posals in order to be considered.

. It should meet the same criteria for BOT projects as solicited pro-' posals, including financial viability, economi.c viability and envi-

ronmental and social impact assessments. '

. It should meet the usual prequalification criteria, that is, provide'evi-dence that the proposing entity has the financial and operational ca-pability, the experience and the resources to successfully implementthe proposed BOT proJect and that it fulfils the legal requirements.

If an unsolicited proposal meets these initial conditions, the propo-nent should be required to provide a detailed project proposal based onthe {minimum) requirements for the content of bidding documents andbids set forth in the general procurement regulations.

The detailed proJect proposal should then be evaluated against thecost and other criterta for simtlar BOT infrastructure proJects, for exam-ple, against a benchmark toll tariff or a benchmark prlce per kilowatt-hour established by existing proJects or other proposals.

To promote transparency and integrity, it is recommended that thegovernment entity announce the receipt of an unsolicited proposal, therequest for a detailed project proposal and the agreement and that itrecord the stages of the negotiations.

Although unsolicited pgoposals for BOT proJects are normally negoti-ated between the parties, some unsolicited proposals have been submit-

UNID0 B0T Guirjelines

4 r . . . ;

125

ted to competitive bidding by the government entities (a well-known ex-ample is the Flong Kong Harbour Tunnel proJect). It might be better,however, to avoid negotiating unsolicited proposals in countries thathave established a competitive bidding process for BOT proJects, sincesuch negotiations may seriously undermine competitive biddtng (if pri-vate proposers know that their proposals will be considered on an unso-licited, negotiated basis they will have little incentive to submit to therigors of competition). If unsoliclted proposals are submitted to competi-tive bidding, the govemment may consider reimbursing a portion of thecost incurred by the proposer of preparing the unsolicited proposal and/or encouraging pdvate initiative by rewardingthe proposer, in the coursesf-the erraluation proeess; w'ith some-additional points for its initiative.


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Chapter 7 focuses on how to assess the linancial and economic viabtlityof a BOT project. It also covers commercial, technical and environmen-tal appraisals and prequalification assessment studies. It is not intendedto provide detailed guidance on project feasibility, which is available inthe UNIDO publication Mat'tualJor the Preparation oJ Industrist Feasibi|-rtg Sfir.dires.2 Instead, it outlines a methodolory by which a governmentcqr qptry[s. 891 schemes. It points out the key differences in the waygovemments and sponsors assess projects.

In particular, the chapter does the following:

Briefly describes the different project appraisal techniques, sug-gests those that are appropriate for the various parties to a BOTproject at different stages in the project cycle and compares theappraisal of BOT projects with that of more traditional proJectsfunded through government borrowlng.

Provides a framework for a government's financial and economicappraisal of BOT projects.

Discusses how the sponsor's financial considerations are likely todiffer from the government's considerations and how different par-ties in a BOT contract are likely to assess risk and evaluate ex-pected costs and revenues from their own perspectives.

Shows how a financial and economic appraisal framework can beused to evaluate bids.

2 W. Behrens and P M. Hawranek, Manual lar tha Prcparation ol Industrial Feasibilily Sludles (UNlD0 publication,Sales No. E.91 .lll,E.1 8). See also Guldelrne s tor Project Evaluation (Uniled Nations publication, Sales No. 72,11. B.1 1 ):6uide to Practical Project Appraisal: Social Benelit-Cost Analysis in Developing Counlnes (United Nations publication,Sales No. 78.11.8.3); L. Squire'and H. G.van der Tak, Econonic Analysis ol Prcjects (Baltimore, published tor theWorld Bank byJohns Hopkins University Press, 1975); l.M.D. Little and J. A. Mirrlees,ProTecllppraisal and Planninglor Developlng Counlnes (London, Heinemann Educational Books, 1 974); M. Bridler and S. Michailol, Guide pratiqued'analyse de projets: analyse $cononique et linanciire de projet dans les pays en voie de d|veloppemeni 3rd ed,(Paiis, Economica, .1984); and J. Dickey and L. Miller, Road Project Appraisal lor Developing Counliles (New York,John Wiley, 1984).


Outlines some of the means by which a government may improvethe financial viability of a Bor project to encourage private sectorpart ic ipat ion. '

r Types of applaisal

Appralsal of a Bor proJect wlll be carrted out by dtfferent parfles durtnglhq \Larlous stages of the prgect cyele: proJeet identifleatiou feasibflit!study, analysis of options, bid evaluation, proJebt implementation andfinal evaluation. The host government wlll focus primarily on the eco-nomic appraisal of the proJect, which is concerned with national costsand benefits and the best use of the country's resources, In prepartngan economic appraisal, the government will, however, need to draw oninformation from the technical appraisal and the ftnancial appraisal andfrom al ana$_sis of the proJect's likely social and environmental impact.

The key differences between the sponsor's and the government's cri-teria are that the sponsor wtll usually emphasiZe financial rather thaneconomic issues, will use a higher discount rate to reflect its higher costof capital and will place a higher cost on risks.

The key difference between the appraisal of a Bor project and that ofa more traditional public sector scheme are that the former tends tofocus more on risk, so the project's financial viability will be more im-portant than for a scheme financed entirely by the public sector.

Five types of appraisal are usually carried out in connection with aBor projeet: commercial, technical, environmental,,financial and eco-nomic. The five types are summarized below, and their relevance forBOT projects is discussed.

Gommercial appraisal

In preparing a commercial appraisal, the government or the Bor spon-sor will conduct research on the markets for the output of the racitity,including the following:

' The identification and location of potential customers/users.

r Historical trends in prices, production and demand.

r Current and future government tariff policies.


I

The actual or expected regulatory framework.

The present and proJected capacity of potent ial competi torfacilities.

r Competitive characteristics of the sector.

This market information is used to generate demand and revenueforecasts and to project the market share of the proposed facility and' also in a risk and sensitivity analysis. For a BOT transport project, traf-fic or passenger forecasts will be required and the elasticity of demand

It is essential to clarify the assumptions underlying the market pro-

Jections, including the basis for the output, demand and price projec-tions, operating and administrative costs, the debt profile, insurancecosts, tax rates, dividend policy, inflation and exchange rate assump-tions and the govemment's expected regulatory policy, in particular priceregulation. The effects of likely variances, particularly downside ones, indemand and income levels on the financial viability of the project mustalso be tested, given the tendency to opttmistic bias ln appraisals.

Technical appralsal

The obJectives of a technical appraisal are to ensure that the BOT project issoundly designed, uses the appropriate technology and meets intemationaldesigp and engineering standards. It is based on a technical description ofthe proJect and information provided by engineers and other technical spe-cialists. The appraisal is used by governments, sponsors and lenders toassess the likelthood that the project will be completed on time and withinbudget, that it will be capable of operating at the design performance leveland that its operation will not be constrained by technical factors. It pro-vides essential information on construction and operating costs for the fi-nancial and economic appraisals.

The BOT technical appraisal will consider, among other topics, thefollowing:

. The suitability of various technologies, including equipment andprocesses, to national, local and environmentirl conditions.

r The likelihood of achieving the planned performance level, includingcapacrty and quality of output.

I


Location, scale and layout of the infrastructure facility, includinganalysis of the terraln and ground conditions.

Acquisition of land for the proJect, including, where relevant, trans-mission lines and access roads.

Procurement arrangements, including the availability and supplyof raw materials and utilities.

. Availability of a suitable, experienced managem'ent team.

r Av*ilability of a skilled workforce and addltlonal traiRiRg of projectpersonnel.

r Detatls of the construction works involved.

Assessment of whether the construction schedule is realistic.

Review of the cost estimates for construction and operation and theunderlying engineering data on which they are based.

Trade-offs between initial construction costs and later maintenanceand renewal costs.

Enyironmental assessment i

In developb:g and lrnplementing most BOT proJects, as is normally the easein conventional krfrastructure projects, envlronmental screening, environ-mental impact assessment and the speciftcation of environmental perform-ance norrns assume special importance. Incorporating environmentalassessment into the relevant phases of the project satisfies three objectives:

. Identification of environmental risks from the inception of the project.

r Definition of an acceptable environmental impact.

. Establishment of environmental norms and standards to which theBOT contractor is expected to conform while developing, construct-ing and operating the proJect

Environmental'assessment is the subJect of a vast body of riterature.Thls section identiJies only the most important tasks in the various phasesof the proJect:

1 3 2 UNID0 B0TGuidelines

Durtng proJect identiJlcation, the host govemment or agency re-

sponsible for developing the project should incorporate the results

of an environmental screening into the specification: The screeningshould vert$ the likely impact of the project on all environmentalmedia (air, water, soil) and also on concerned parties such as com-

munities and impacted or displaced populations.3

When developing the project to the stage of an invitation to bid, the

host government or agency usually undertakes a cost-benefit analy-

sis of the project. Along with the cost-benefit analysis, an environ-

mental impact assessment (EIA) should be undertaken. The EIA

, -

that all alternatives have been examined and that the project has :maximized benefits in relation to social and environmental costs.

H:,3,?";:X3i:;*ilf"ffi"ffi'#:*"f;*::Hl,Tlffi':'ff i;then be specified in the invitation to bid. This would enable thebidder to incorporate the desired norrns into the project design andthe technologr proposed. It would also enable the bidder to identify

strategic choices that would mitigate the project's foreseen envi-ronmental impact, i.e. to use cleaner technologies rather than end-

of-pipe treatment.

' r In analyslng the bids, the host government or the procuring agencyshoutd verify the followlng:

t' o That environmental performance norrns have been respectedin the specifications provided by the bidder.

o That those norms can, indeed, be metwith the proposed proJect

I design and the chosen technologYItI . The project agreement should establish an environmental perform-t ..tce reporting system. Such a provision would ensure that project

design, construction and operation can be verified as conforming tothe agreed environmental norms, The project company should beobliged to lnclude this provision in all relevant contracts, such asconstructlon contracts and O&M contracts.

. 4 .

3 At the screening stage, projects are usually categorized according t0 the degree of their environmental impact.Prolects that are vlewed as havlng malor environmental impact would obvlously require more rigorous analysis andspecification than pr0jects that have a marginal impact.


Financial appralsal

A financial appratsal ensures that the Bor project is a financially viableentity and that there are sufficient funds to cover the costs oi imple-menttng the proJect according to the planned schedule. The financial

-ldability of a-BoTproJeet depend+onrnany factor$including the cost of-constructlon and operation, the proJect's overall expected ftnancial re-turn, the cost of raising the flnance requlred for the project. A'financialappraisal is also necessary to determine which of various options wouldachieve the greatest financial return.

A financial appraisal of a Bor scheme evaluates the monetary costsof project implementation and operation and the projected monetaryrevenues associated with the project over the contract period. It focuseson the agg1ljas! flows arising from a project, although a sponsor willalso neeilto for.@ ..,d p@"

@ercr-antore"r.The net cash flow is then discountea by an appropEt6 oGcornt .alereflecting the cost of capital, to arrive at the project's net present valuet . The purpose of the NpV and IRRcalculation is to assess whether [h?-investor can expect to earn a returnon the project that would be greater than the return that could be earnedfrom alternative investment opportunities, taking into account the rela-

, tive risks of each. All of the interested parties in i nor proJect are likelyto carryr out some form of financial appraisal:

. The government needs to estimate the monetary costs and benefitsas a first stage in an economic appraisal. A ftnancial appraisal willalso allow it to test whether proJect cash flows alone iie likelv toslve ,a sufficient financial return to a private sector

"pot"o. o,

whether a contribution will be required from the public sictor. Thegovernment may also require a financial model toevaluate the bidsin the competitive tender.

. Potential sponsors look at both operational and financial cash flowsto check the project's financial viability and to assess whether theproject company will be able to meet all its financial obligations,including debt service. From the financial appraisal, the sponsorcan estimate the size of any funding gap that may have to be met by

For proJects that can have a substantial impact on the environmenr,the project ageement and the construction and o&M contracts shouldspecify the obligations of the contracting parties to evaluate, treatand / or remedy unforeseen environmental impacts.


a public sector contribuilon, the impact of different proportions ofdebt and equtty, and the risk and return to each form of finance.

Other equity investors need to be satisfled that the project's ex-; pected equity return on investment is acceptable in comparisbn

with returns they could obtain from other investinents with the sameor less risk. :

knders want to be satisfied that the project can service its debtwith a sufficient allowance to cover any contingencies. They nor'mally require that sensitivity analysis considering different riskstruetures should show a sufficient debt service coverage ratio to:ensure unintermpted debt seMcing for the term of the loan. Whilesome lenders may be content to examine the sponsor's financialappraisal and test the underlying assumptions, some internationalfinancial institutions will undertake their own independent appraisal.

Eeonomic applaisal

The key purpose of an economlc appratsal ts to assess a BOT proJect'spotenttal contrlbution to the government's development objectives for thewhole economy and, accordingly, the proJect's priority in the country'sinfrastructure development programme. Economic appraisal is concernedwith the best use of a country's resources rather than with just the mon-etary return to the project company. It therefore includes an appraisal ofalternative Ways to achieve the development objectives.

An economic appraisal of a BOT proje.ct does the following:

. Starts with the monetary costs and revenues identified by the tech-nical appraisal, the commercial appraisal and the financial appraisal,including capital and operating costs and revenues from usercharges, but excluding financing-related cash flows. The marketresearch prepared for the commercial appraisal is also required forboth a financial appraisal and an economic appraisal.

r Adjusts these monetary costs and revenues to reflect economic costsand benefits. Where market prices do not reflect the true resourcecosts because of distortions such as subsidies; foreign exchange con-trols and trade restricUon, shadow prices (see section on shadow prices,below), are used to value costs and revenues.

r Assesses and, where possible, assigns monetary values to the widereconomic costs and benefits of the project. These include the effect


i

on the host country's economic development, byvirtue of the project,seffect on growth and employment tn other industries, technologr trans-fer, labour force skills and the environment.

Considers the distribuUon of the costs and benefits (gains and losses)between different sectors and income groups. This can help thegovernment to determine measures required to compensate groupsthat lose from a project.

Assesses how the outcome of the proJect and its impact on theeconomy could change as a result of plausible variations in keyfactoresuch as eaptrtal eo.sts-dernand andlneomearofiles and en"vironmental conditions. These variations will be used later in a sen-sitivity analysis.

of the partles to a Bor contract, the government ls the one mostinterested ln the economic appraisal, because this appraisal ls concernedwith the real economic return to the country as a whole rather than withthe financial return to the project company. However, the sponsor maycarry out an economic analysis to support its bid, or it will at least ex-amine the government's appraisal, and it will be aware that the eco-nomic benefits of the proJect are part of the government's criteria fordeciding a competitive tender. Financial variables such as toll levels canhave a significant impact on the economic benefits of the project, sosponsors may wish to model the impact of different toll structures orconstruction timetables on net economic benefits.

r A llamewotk for the Souetnment'sfinancial and economio applaisal

Intloduction

; There ls no slngle correct model for the flnancial and economic appraisalof lnfrastructure projects. Any model wlll have to be adapted to the ctr-cumstances of the particular proJect. This section sets out an appraisalframework for a host government consisting of general prlnciples and asystematic process for applying those prlnciplJs to BdT projects. Theframework ls intended to ensure that better decisions aie made and

136 UNt00 B0T Guidelines

i

value for money achieved from the use of the country's internal resourcesand foreign investment funds. This analysis should be carried out be-

fore inviting proposalsGiven the importance of lnfrastructure investment to national devel-

opment, it ls esslntial to assess the net economic value of a BOT proJect.The wider costs and benefits Wlll not all be reflected in the financialreturn to a private sector investor, and corporate objectives may conflictwith national objectives alrd priorities. In addition, the government will

also need to consider the social and distributional effects of infrastruc-

ture investment, that is, the impact of investment on income distribu-tion and on the welfare of different social groups and the populations of

;- ' different loealities.

This section first sets out the principles underlying the financial andeconomic appraisal framework and then describes the key steps in theBOT appraisal process: identification of project objectives and options,the financial appraisal, the social and economic appraisal and the sensi-tivity analysis. Box 8 contains a check-list for this process.

Framework principles

The appraisal framework proposed tn the Guid.etines is based on a cost-benefit analysis, which sets a monetary value where possible on all fi-nancial, economic and social costs and benefits over the lifetime of theBOT proiect. The underlying principles for this analysis are as follows:

r In most cases, the relevant proJect lifetime to csnsider is set by the; expected life of the longest-lived major asset to be created by theproject. A discount rate is then applied to futurb costs and benefitsto arrive at the NPV of the project

' :. The elements of the analysis that can be expressed in monetary

terms should be set out on a spreadsheet with separate lines foreach type ofcost and benefit

. In principle, local currency should be used in the analysis, but an-other currency could be used if required as long as it is consistentlyused throughout the analysis and as long as the exchange ratesused are also consistent.

The analysis should be conducted ln real terms (constant prices),but with an allowance made for relative price inflation. This is be-cause it is the real value that matters in an investment appraisal.General lnflatton simply ralses all cash values by a glven percentage,

:ir

L

UNID0 B0T Gui.delines 137

Detcminc objectives of project within overall infrastruclurc plan.

Define oplions for both public and private finance and different technical options.

ls a B0T contract suitable for this project?

Does the-govemn+enl require tong-term strategic control over the facility?" ls signilicant initial investment required?o ls there an opportunity for efficiency gains in conslruction and/or operation?o Can the financial outlay be recouped largely through user charges?" Would such charges be publicly and politically acceptable and easy to levy?

Determine liletime of the project tor appraisal.

Determine apBropriate discount rate.

Set up spreadsheet model.

calculate project costs and revenues in financial terms, drawing on backgroundcommercial analysis and the technical appraisal.

Do markel prices reflect the economic value ol project costs and revenues? lfnot, calculate the appropriate shadow prices.

ldentify wider economic costs and benefits and altach monetary values wherepossible.

consider the environmental and social impact of each option and the netadvantage for diflerent regions and income groups.

ldentify the key risks and carry out a sensitivity analysis to estimate the potentialimpacton economic and financial feasibility.

compare options and make recommendations after weighing the advantagesand disadvantages,

2.

J .

4.

5.

o.

7t .

8.

9.

10 .

11 .

12.

1 3 8 UNIDO B0T Guidelines

although flnancial cash flow may femain constant if the debt hasbeen incurred at a fixed interest rate.

r The discount rate should also be expressed in real terrns. For a

f iliil$""* j;Hi:".:"'::1.?f"",3""".'3"i::i::?i":*i*l',""::"':"i:earned at the margin by slmilar proJects in the private sector.

. ' iffi;'"::.;T:,JT?:ffi::"ii.::"H:1ilff['f'::x?:h";. valuei should represent the e4pected value of each varlable, calcu-

- . -of that outcome occurring. However, an expert estimate of the "most

likely" outcome will be accepted if there is insufficient information tocalculate an accurate probability distribution. .

Proiect obiectives and oPtions

The first steps in the BOT appraisal process are the following:

r Define clearly the obJectives of the project' The government mustdecide what it is trying to achieve by the project and how this re-lates to its overall infrastructure strategy, capital formation andegonomic development policies. A subset of these objectives may bemade public at a later stage to provide $uidelines for potential spon-sors, bidders and proJect managers.

. IdenUff the dtfferent alternative optlons to meet the obJectlves. Wherepossible, this should include a conventionally financed proJect aswell as a BOT project.

Direct financial costs and benefits

The next stage in the process is to estimate the financial costs and ben-efits expected from each option over the lifetime of the project and theyear in which they will be incurred. These include the following:

r Initial capital eipenditure on land, equipment, licences etc. Anyresidual values for these assets should be shown as a negative ex-penditure at the end of the appraisal period.

. Other construction costs, including labour and materials.


. Operat ing costs over the l l fethe of the assets' lncludtngmalntenanee.

. Revenues expected from user charges, based on a forecast of thenumber of users, at dtfferent charge levels.

. Other receipts or revenue expected, such as contributions from land-owners benefiting from development gain.

The appraisal model should sum the expected financial costs and

each option, which will broadly indicate the net benefits of the project toa private promoter.

$hadow plices

The next step in the appraisal process is to adJust any costs and benefitscalculated in the financid appraisal to reflect their economic value, thatis the opportunlty cost to the country in which the facility is to be'lo-cated. Thls is often reflected ln.the market prtce for the resources in-volved. However, market distortions such as an ovewalued exchangerate, overstated wage rates, taxes and subsidies may cause economicand market values to dtffer. ln these circumstances, shadow prices, whichreflect true national scarcities, should be used in the appraisal.

The analysis of shadow prices is complex and whether it is worth cal-culating the true economic value for a particular project cost depends onthe relative importance of these shadow prlces to overall proJect vlability.

Wider costs and benefits

The next step is to identify the non-monetary costs and benefits of a BOTproject, expressing them in monetary terms where possible. Guidance onmethods of quanU$ing wider costs and benefits, such as the multpliereffect, time savi:egs and environmental impacts, is widely available. Dou-ble-counting must be avoided: some of the costs and benefits will alreadybe reflected in the revenues from user charges. t.,

Wider costs and benefits of BOT projects tnclude the following:

. The impact on:industrial development of removing blockages, en-hancing reliablllty of the lnfrastructure, lncreaslng the use of localproducts and servlces or of the multiplier effects of investment.

1 4 0 UNID0 B0T Guidelinos

. Effect on consumer savings of lower e1 higher user charges. .

. Environmental impacts related to the facility itsqlf and induced inother sectors (for example, telecommunications systems may re-duce the need for transport).

r i Potential for better safety standards, with consequent avoidancd ofdeath, injury and losses.

. Generation of employment during construction and operation.

. Impact on lmpro-vtng the supply of bastc needs.

. Impact on the consumptlon of energy and other natural resources.

This analysis of non-monetary costs and beneflts allows the govern-ment to capture the indirect impacts of the BOT project on the nationaleconomy.

Social impact and economic net plesent ualue

The next step is to consider the impact of the BOT project on differentsectors of the community and different income groups, This impactmaynot be quantifiable but should at least be reported on clearly so it can betaken into account by the decision maker.

The economic NPV can then be calculated for each option for theproposed BOT project as the sum of the net financial benefits, adJustedto reflect their economic value, plus the net non-financial benefits, plusany quantifiable social impact. This indicates the net benefits of theproject to the country as a whole.

i Sensitiuity analysis

The next step is to identiff the key risks in a BOT proJect and conduct asensittvlty analysls. Thls lnvolves modelllng the tmpact of changes inassumptions on the values asslgned to certain costs and revenues to seehow thl changes affept the project's overall financia-a-mic vi-ability. A simple sensitivity analysis would consider the impact of, say, apossible percentile variation up or down from the expected value. A bet-ter method would be to conslder a likely range of variation based on pastexperience or engineedng estimates. Athird, and more powerful, methodis to calculate the "switching value", that is, the change in a variable


required to make the NPV negatlvetand the proJect unviable. The likeli-hood of a change of this magnitude may then be assessed

The analysls should be used to assess the sensltivity of the proJect'sflnancial and economlclndicators to changes tn the underlylng assump-tions. If proJect vlability is partieularly sensitlve to certaln rlsks, ways ofavoiding or reducing the rlsk should be considered, including other tech-nlcal solutlons.

Key uncertainties in a BOT project are likely to be in the followingareas: .

Possibility or likelihood of construction cost overruns or late com-pletion ofthe project.

' Shortfalls in actual capacity compared to design capacity.

r Forecasts of the number of users and overall revenues at differentlevels of user charges.

r An increase in the cost of borrowing.

r Actual operating and maintenance costs.

Resldual value at the end of the concesslon period.

. Possibiltty or ltkelthood of proJect abandonment.

An important key advantage of BOT proJects is that ssme rlsks arewholly or partially transferred to the private sector, including the risk ofcost ovemrns in construction and the risk that revenues will be lessthan expected. The issue of rlsk identiflcation and management is dis-cussed in more detatl in chapter 8. In any case the quantification of thevalue of risk transfer is one of the most difficult elements of the eco-nomic appraisal process.

One way of presenting the results of a sensitivity analysis is shown intable 1. This table illustrates the sensitMty of appraisal indicators tovariations in the base case of a BOT toll-road project. Table 2 shows theswitching values for the selected varlables.


Appraisal inrl icalorFinancial

NPV IRR(thousands ol US$)' (%)

NPV(lhousands ol US$)

1 600

Economic

Base case andvariations from it

Base case20% construction cost overrunShortfall ol capacity by 10%Completion delay ol 6 monthsDemand 1 0% less than exoected

IRR(%)

1 8 . 0

l

, .

1 200880

15.613.9 1 290 15 .1 l

l a ^ { o o n l A o :I ' I , J I J J U9 1 2838840

13.01 3 . 1

1 2501 260

1 6 . 31 6 0

Area of riskConstruction costsCapacityCompletion delayDemand shortfall

Financial viability75% higher39% lower2 years25% lower

Economic viability100% higher35% lower2.5 years35% lower

i

Gompadson of options '

The final stage is to co'mpare the different options for the project. A choicebetween options not only should consider financial and economic NPVbut also should take account of uncertainties attached to the centralcase and any unquantifiable benefits, such as the impact on incomedistrtbution and then carefully and systematically assess the balance ofadvantage.


r Evaluating bids

The govemment may use a financial and economic appraisal framework(for example, the one described earlier in this ctraptir under a frar,ne-work for the government's flnanctal and economic appraisal) tp evaluatethe impact of the bids on the economlc Npv, varying its assessmept ofthe cost assumptions and revenue proJections in line with informationcontained in the bid documents. It will need to make its bid evaluationcriteria clear in the bld documents, as discussed in chapter 6. Declsionfactors will include the&!!rying,

O I11PIgg+$ inltial level of user charses and the forlqgls-plgpesedror varylng charges over time.

O The length of the concesslon period.

O @ transferred from the government aqd thet@t'

There will be a trade-off between these factors. For example, a spon-sor might be willing to settle for a lower initial use. cha.ge in return rora longer concession period or a lesser degree of risk tranlfer. It is diffi-cult for the govemment to value the trade-offs in advance and arrlve atthe combination of factors that maximizes the benefit of the Bor projectto the economy. One approach to the competitivq tender p.o"."r'*J,rldbe to specrff the concession period and risks to be transferred to theprivate sector in the tender documents and require the tenderer to makea conforming bid. This would make lt easy to compare the bids. How-ever, the tenderer would also be allowed to make non:confonning bidsthat-varied these specifications or provlded for risk-sharing between thepubltc and prlvate sector. This would allow the go*r"-*Iot to assessthe value of the trade-offs and of risk transfer u.td to validate or amendthe initial specification. The setting of the initial concession period andthe evaluation of risk transfer are discussed in more detail uetow.

The concession peliod

The govemment will need to specify an initial Boi concession period forthe conforming bids and also an acceptable range for non-co-nformingbids. Tenderers will generally prefer a long contract period to allow time torepay debts and earn a retum on equit5r investment. A short concessionperiod is likely to enhance the political acceptability of private involve-


ment, particularly where a foreign sponsor is involved. At the end of theconcession period, tJre government may be able to agree to a new operat-ing and maintenance contract at a lower price than in the proJect agree-ment and with a shorter duratlon, to allow frequent market testing. Thiscould lead to lower user charges, and if the new operator is a domesticfirm, it may-stem foreign exchange ouUlows.

However, a short concesslon period may adversely affect the mainte-nance profile during operation. The requirement to transfer the asset ina fit condttion may be difflcult to apply in practice, and there will inevi-tably be an tncentlve for the promoter to "patch and mend" towards theend of the contract period. The public sector therefore takes the riskqg! lbeferl4u4|yatue will be less than expected if the concession pe-riod is less than the economic life of the facility.

A government should take the following factors into account when speci-ffing the length of the BOT concession period for conforming bids:

I The economic life of the infrastructure facility,

. iThe expected profile of renewals and maintenance expenditure.

. The likely financing structure for the private. sector operator, inparticular the point at which loans will be repaid.

The government can make an lnlttal assessment of the likely trade-off between the BOT concesslon period and user charges by varying theassumptions in its financial and economic appraisal model. It can thenuse the model to assess the trade-offs made by sponsors that decide tovary the concesslon period in a non-conforming bid.

Cost of ilsks

The key risks faced by the parttes of a BOT scheme are described in moredetail in chapter 8. The cost of the risks is calculated first by estimatingthe cost of transferr'rng the risks where possible, for: instance to insurancecompanies or constructors and secondly by estimziting both the likeli-hood and the impact of each type of risk retained.

The likelihood of the risks can be assessed from:

. Past experience of the average and the maximum adverse variancein costs and revenues for similar projects.


Englneering esflmates of uncertainty in costtng or the potential tm-pact of adverse ground condittons, which should be contained inthe technical appratsal.

Estimates of the range of uncertainty of demand and revenue pro-jections based'on the market analysts.

Previous volatillty ln exchange rates, inllation and economic growthin the host country and forecasts of future volatiliW.

The impact of an adverse outcome on the project NPV can be as-sessed a sensitivityanalysle as descrlbed ln the secilon on sensltMty analysis. The impacton the proJect company or sponsorishould also be estlmated: thts rnightdarnage the company's reputailon or chances of securtng future work asmuch as a flnanclal penatty. comblning the probability and the impactfor each risk allows a broad estimate to be-made of-thevalue tothegovernment of transferrlng the rlsks to the prlvate sector and the cost tothe sponsor of accepting the rtsks.

The government and the sponsor are llkely to assess the cost of eachrisk dlfferently, for one or more of the followtng reasons:

r Views may differ on the likelihood of an adverse outcome. For ex--ampte' the sponsor may be more certaln than the govemment ofbeing able to control construction cost overruns butless sanguineabout political risks.

. The impact of a gtven risk wtll be different for the different parties.A large increase ln construction costs could have a catastrophlcimpact on the project comp€rny and a significant impact on its spon-sors, threatening the survival of the former and the profitabilitvand reputation of the latter.

The tender documents should outllne an tnlilal arrangement for risk-sharlng, wlth sponsors requlred to make a conformttrg uta agahst thisspeciflcation and, preferably, to prtce the speciftc rtsks in ilie tender.


r Financially non-uiable B0T ptojects

The economic,rather than financial viability of a BoT project should be

the overriding concern for the govemment. However, some projects that

offer significant net economic benefits may not be financially viable for a

priVate sector promoter under a BOT scheme. This may reflect the exist-

ence of significant economic benefits that do not generate financial re- ,

turns or large uncertainties attached to the estimates of financial costs

and revenues.In these circumstances, the government may wish to consider im-

. proving t*re rlsk-reward balance for the private promoterby pne sf lbefollowing means:

Creatittganatinna|JrametuorkJorinfrastntctwetnuesfments.Aclearlegislative and regulatory framework that sets the government's

obJectives, strategies andiong-term plans will encourage BOT spon-

sois by reducing the role of uncertainty and risk in their invest-

ment decisions.

. prouiding a financirrl contribution to reject the uider benefits oJ tte

project. The contribution may be in the form of a grant, loan or

equity share, or it may consist of public fugding for an element of the

proJect (for example, approach roads or junctions in the case of road

;cdemes). The contribuiion should not exceed "the estimated value of

, the non-monetary benefits and should be focused at the front end of

the project, where financing risk is greatest. It should be transparent

subsidY Per unit of outPut).

Re&rcing biddry risk. This could be done by limiting the number ofL tenders, clearly speciffing projebt award criteria and protecting theI) intellectual property rights of bidders. In exceptional circumstances, .

the government may consider a single tenderwhere this would clear$maximize economic benefits.

' . Shr;rlulg demand and other rlsks. In road schemes, this may beachieved by allowing a variable concession period or by providing agovernment*guaranteed income to the private operator while creat-ing an incentive to malntaln an economically efficient toll-charging

. #""'J,:1l1*::H:'#31::l;:H*xil:",'T"1T#;ll"1H:;an adequate return on caPital.


Estabtishing a regulatory autlwrlty. such an 'authority

would en-force fair competition between private sector operators and publiclyowned entitles rvithin the indugtry

houidW arange oJBOTproJects. In thts way lnvestors and promot-ere could spread rlsk across a portfollo ofproJects,

r Key diffetences between publicand arivate seetorappraisals

understanding the private sector's viewpoint, which may differ from itsown. will help the government in its relationship with potential spon-sors. There is no universally accepted financial appraisal model used byall private sponsors. In fact, there are likery differences in the upp.ou"ilto project appraisal and the evaluation of risks, costs and tenerits uymost governrnents and sponsors, and these warrant brief discussion:

. The government norrnally focuses more on the economic appraisal,while the sponsor and lenders will focus on the flnancial appraisal. Agovernment is eoneerned with the retums to the economy as awholeand the hpact of a proJect on tndustry. The sponsor ts chlefly con-cerned with the profltabiltty of the proJect company and in particularon the returns to equlty flnance, whtL the tenaeiis concerned wlththe securlty of its lendL:g and thus the debt service ratio.

r The ciovemment uses a lower dlscount rate to calculate the net presentvalue of future proJect cash flows. The government's discount rateusually reflects its ability tn, general to Eorrow at towei r"t"" ilru"private sector companies antt to raise money by taxation. The dis-count rate used by the private sector reflects the project company'sweigfited average cost of capital, that is, the opportunity cost of eachtype of capital (debt and equity) weighted by the relative contributionto the total capital of the company. The higher the discount rate, thelower the net present value for projects that have higJh up-front capitalexpenditures and long-term revenue flows. ...

:. The government calculates flnancial cash flows before tax while thesponsor and lenders are more interested in after-tax cash flow. Thegovernment is interested in returns to the economy as a.whole,


including tax revenues, and will thus conduct its analysis gross oftax. The sponsor is interested in net cash flow after tax.

The government usually carries out its appraisal in real terms (con-

stant prices) while the sponsor considers current or nominal prices.The government is interested in the real economic return, so public

sector appraisals are usually conducted in real terms' Hbwever, theprivate lector tends to use nominal cash flows, for a number of

Most private sector mtrnagers think in terms of nominal ratherthan real measures.

liability is incurred) complicates the calculation of real costs,o Interest rates are usually quoted in nominal terms.o The sponsor and lenders want to assess the potential impact

: on project cash flows of variations in inflation rates, nominal'

interest and exchange rates.

The government tends to be less risk-adverse than the private sec-tor and therefore tends to place a higher value on expected cashflow than the private sectoi. It generally has a broad range of activi-ties overwhich to spread risk and is protected to some extent againstinllationary risk by fiscal drag (the tendency of tax revenues to risefaster than inflation as allowances are eroded in real terms). Ttresponsor, by contrast, also has to face political risk, which can dra-

matically reduce the expected values assigned to project.revenues,

reflecting, for example, the perceived risk of expropriation or civildisorder.

The sponsor estimates financing cash flows as well as operationalcash flows. The categories of financial costs and revenues in a spon-sor's appraisal are the same as shown in the government's appraisat,with the exception that, as discussed above, the sponsor deductsall taX payments from the financial cash flow.'

The government takes account of costs borne, and beneflts incurred'by parties other than the sponsor.

The government generally places a greater weight than the sponsoron non-monetarj benefits and costs, such as environmental andhealth impacts.

UNID0 80T Guidelines t 4 9

191""""',i."' """"'sa!prys-asDr rnog xauuv

69t . . . . . . . . . . . . . . , . j r . . . . . . . . . . . . . . . . . . . .qcarord J ,oa q

fuauaaDuDtrl {s.u plrD uonr,',ofiD 4sla

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Chapter 8 identlfies the main risks that lnvestors and lenders are con-

cerrled with when appraising BOT schemes, especially in the context of

developing countries. It also describes some of the;ways in which inves-

tors and lenders attempt to mitigate those risks. The private sector isgenerally willil:lg to undertake those rlsks that it considers it can best

control, while seeking maximum government support for those risks it

feels itls !q4qleblqlo control. The lnnex! 9!9r{1four case-studies of

risk management in BOT ProJects'

i r Introduction

Identification and management of risks is fundamental to any project.

There is no such thing as absolute certainty in any venture. Before un-

dertaldng a project, all participants will want to identiry the risks in-

volved, as well as the steps that may be taken to manage them. Whether

an infrastructure project is structured and financed under a BOT scheme

or a non-BOT scheme does rlot alter the fundamental risks associatedwith it. The key dlfference is the parttcipation of the private sector in

BOT proJects and hence the transfer of risks from the public to the pri-

vate sector. Risks in tnfrastructure proJects are heightened by the large

capital outlays, by the long lead-times typically associated with suchproJects and-for BoT proJects-by lenders and investors having to relyprimarily, if not exclusively, on the project cash flow for their returns.

The identification and management of risks therefore plays a key role in

the structuring and financing of BOT proJects and has to be handled in

a well-organ?ed and disciplined mzrnner. This chapter presents basic

principles and techniques of risk identification, risk allocation and risk

management for BOT projects.

E


r Rislc ldentification:

It is dlfficult to generalize about the risk characteristtcs of Bor infra-structure projects. Each host country, each infrastructure sector. in-deed each specific Bor proJect has its own risk profile. The differenttypes of risks Bor proJects are exposed to may, however, be divided intotwo broafl categories for the purpose of risk identification:

' General {or country) risks, which are associated with the political,

the proJect sponsors generally have little or no control.

. specific proJect risks, which to some extent are controllable by theproject sponsors.

A check-list of general risks and specific proJect.risks for Bor projectsis set forth in table 3.

Generat (or country| risks

General or country risks refer to factors such as a country,s economicgrowth, its political environment, the tax code, the legal system and theprevailing currency exchange regime. Such factor" *itt affect demandfor the output and seMces of.Bor projects, that is, demand for power,water and transport services as well as their abrlW to meet their con-tractual obligattons, But while the operators of Bor proJects can controlthe level and quallty of a proJect's output, they are noi in a posltion toinfluence a country's growth rate, which is more a function of macro-economlc management. simllady. unfavourable inflation, lnterest or ex_change rate movements can result in rapid deterioration of a project'scash-flow if-the proJect company is unable to respond rapidry by ailust-ing the tariffs it charges.

The general risks may be divided into three mqfor categories:

. Politicalrlsks. These are related to the internal and extemal politicalsituation and the stability of the host countr5l, the govemment's atu_tude towards allowtng the private sector p.oht" fiim infrastructureprojects, changes in the host country's fiscal regime, including taxa-tion, the r-isk of expropriation and nationalization of the projects bythe host country, cancellation of the concession, and similar factors.

1 5 4 UNID0 B0T Guidetines

Failure to obtain or renew

Demand risk (volume and price)

Los or damage to project facilities

1 5 5UNIDO B0T Guidelines

couttry commerctalrisks, These are rlsks related to the convertibil-it5r of revenue from the project lnto foreign currencies, foreign ex-change and interest fluctuation and tnflation. They have their impacton the cost of finance, which ls usually high for lnfrastructureproJects.

cotnw legal risks, Bor schemes rery heavily on contractual ar-rangements and the legal framework supporting projebt financingarrangements. The risks to sponsors and lenders is that legislationthat is relevant to the Bor project (for instance, environ-.rrt.t t"g-islation or property legislation) may change after a BOr scheme

1

:l

':i

has been implemented. Such

pensated for them.of the project if the sponsors are not com-

The tmportance of these rrsks can vary substantially from country tocountry and from proJect to proJect.

:$peclflc proiect rleks

specific proJect risks, which sponsors and lenders f,ace in addition to thegeneral risks discussed above, refer to risks that are generaily withinthe control of the sponsors, such as the manag.-"rrT capabilities ofproject operators. The specific proJect risks may u'e broaaty iiutd.d irrtothe following categories in accordance with the phases of a"proiect cycle:

' Deuelapment rrsks. These are risks associated with the bidding com_petition that occurs in the,initiar stage of the Bor proces", ":g.

;"bidder's risk of losing the lender to another biddei or of faili"ng tosign the proJect agreement, resulting in the to.. oi o.rrelopmentexpenditures' For large Borprojects, development and biddin! costscan be very high, as such proJectB require detailed design, compre-hensive planning, preparation of extensive bid doiuments andlengthy clarifications.

The development risks- may arso incrude losses caused by delays inplanning and approval, whictr can be particularly acute ir: the case oftransnational proJects, where proJect "porr"or"

have to dear wrth theauthorities of two or more govemments.

r constructton/compretton ri"sks. The primary risks here are thefollowtng:


; o The actual cost of constructon may be higher than projected(cost overmns).

o Completion takes longer than projected (completion delays).o The construction of the project is not completed. :

. In the last case, funds invested in a partially completed infrastruc-ture project may be lost, while the return on investment will certainlysuffer in the two first cases. The degree of construction/completion riskdiffers from proJect to proJect. For example, it can be considerable forthe destgn and constructlon of a nuclear power plant or a dlstant off-the-road proJeet site, while it is not very high for a conventional motor-

, way in an urban area.

Operating rlsks. Operating risks result from insufficiency in per-formance, revenue income, material supply etc. and from higher-than-expected operating costs. They may be divided into six maincategories:

Associated-inJrastnrcfire nsks. These risks are associated with'facilities outside the project, such as approach roads (in a high-way project) and transmission lines (in a power project), forwhich construction responsibility lies with third parties ratherthan the project sponsors themselves. While such facilities maynot specifically be part of a BOT scheme, they are neverthelessessential to the operational success of the scheme. This beingthe case, the BOT scheme in question is subject to the riskthat the associated facilities may not be constructed or com-pleted in time, thus jeopardizrng its operations., Associated-.lnfrastructure risks can be especially high in transnationalprojects.Tectuucal risks. These include design defects and latent de-fects in project equipment. BOT projects are usually requiredto meet certain performance targets specified by the govern-ment, the relevant authority or the contracted purchaser ofthe proJecfs output. (Examples of performance targets are thequallty of water dtscharged from a water treatment plant andthe level of electricity supplied from a power station.) Design,construction or equipment defects may be important risks,particularly.in BOT projects that involve highly sophisticatedtechnologies.Demand risks. Most BOT projects that rely on rriarket-basedrevenues face demand risks related to volume and/or prices,in case the actual demand for output or sewices generated bythe proJect may be lower than forecast, thereby lowering the

UNID0 B0T Guidelines l E a

rate of return of the proJect. Unless the BOT proJect ls a local

natural monopoly or the forecastln$ models can be demon-

strated to have a htghldegree of,accuracy, the lenders will nor-

mally perceive the dernand risks as considerable.

" Supplg risks. Because they are also rnarket risks, supply risks

have two components, volume and price. Some BOT projects

face the risk of an uncertain supply of critical raw materials(e.g. fuel supply to a power plant). If the raw matdrial supply is

uncertatur or insufficlent to meet the needs of a project, the

project's ability to meet output commitments and debt repay: .ment obligations will be eompromised. In some cases, raw ma-

-i tenal-suppl-y i-s cont-rolled bi6i he-StatEor a monopoly, -

' whlch means that projects being suppliedwould be at the mercy

:HiiTJ.Tfi Hill,:i".Hn[3:T.*'#ff"''':3:J;;?on the operatlons ofthe ProJect.

ifTfff ";":,ftHil**l'3tly"."i,T"""gementrneveryprorect'H::"1lffi

"HT"#:":'-Tffiff #5:.':il::i"i"jj""li#parties to the BOT proJect that impede the performance of their '

obligatiohs, The losses include casualty losses from events such

:;.ft :'"l:i0.3*:T*l;[T:,iliJ:ffi?::iY.i"Jiff"[:?a Jorce m$eure event occurs and continues for a long period,

the concession may be terminated' Force mSeure risks mayalso be borne by key suppliers of raw materials or services

ilH;,liiHHlX''l,:;i*f:,':Tff i jilt?I";,Tilj:""::i tract are also subject to such risks. Some.force mqleure risks

may be covered by inSurance from private or government

sources. The main issue in relation to BOT projects is, there-fore, the allocation of those Jorce mqjeure events and lossesthat are not insurable.

Special risk challengos tacing B0T prcicGts in developing countries.i

All BOT project participants are confronted with a wide range of generalrlsks and spectflc proJect risks. These risks may be magnifted ln somecountries, depending on whether one or more of the following conditionsprevail:

1 5 8 UNl00 B0T Guidelines

r The local currency is convertible at fair rates and foreign exchangeis available in the country. If not, BOT projects, which generatelocal currency revenues, may not be able to meet their obligationsto foreign investors.

r The legal system is developed enough to support private and for-eign investment in infrastructure proJects, including whether con-traetual obl igat ions are enforceable on a consistent andpredictable basis.

r Data for the preparatton of btds, development of proJects and fore-casflng oFdemand are avatlable-and reliabls, -

. There are domestic contractors or operators that have recognizedtrack records and that can give creditworthy performance guaran-

, tees. If not, internationally recognized contractors and operatorsmay need to participate. ,

. There is an adequate transport infrastructure for construction ofthe project and for raw material suppliers, who must be able todeliver on a steadv and reliable basis.

Risk allocation and risk managementin B0T proiects

Atl the above-menttoned rtsks need to be allocated and managed effl-clently to ensure the success of a BOT project. There are three overrid-ing considerations when designing the risk allocation and managementstructure of a BOT project. First, it is the cost of the project in its en-tirety that should decide any particular risk allocation. Naturally, thehost government wants to transfer most of the risks to the prlvate sec-tor. The private sector, on the other hand, is anxious to reduce its expo-sure to the risks. In.any particular rtsk allocation, however, both partiesshoultl be concerncd with the cfficiency.gains and costs of the pr().ject irlits entirety. This means that a particular risk shoukl be borrre by theparfy most suited to deal with it, in terms of control or influence andcosts. In some cases, the party in the best position to financially bear aparticular risk may prefer some method of risk allocation that, in the'


interest of the project, does not reduce the other party's lncenflve.toperform ance efflclently:

Secondly, since the solutions to the risk management of a BOT projectdo not in principle rely on unconditional guarantees from any one pirtyalone, the financial structure of the proJect (also called the credit struc-ture) must meet the following requirements:

. All substantial project risks have to be identified, alloeated andmanaged.

' The proJect risks have to be managed by a combination of financial

Thirdly, the risk structure has to be suffieienily sound to cope with acombination of pessimistic scenarios for the proJect.

It follows that risk in a Bor proJect has to be allocated and managedon a case-by-case basis. Normally, however, the private sponsors willagree to bear risks that are familiar to them, such as most developmentrlsks, construction and completion risks and operating risks. The spon-sors wi l l hesi tate to agree to bear uninsurable r isks that areunquantifiable and outside their control, such as some political risksand country commercial risks, indeterminate demand risks anduninsurable Jorce mqleure rtsks. If a government silll wishes to transfersome of these risks to the private sector, it must be prepared to acceptthe consequences ofa higher cost ofservices.

The contractual structure for lisk allocation and dsk management

The basic risk allocation is deflned in the project agreement between theproject company and the government entity that awards the Bor con-cession. This agreement defines the commitments of each party, includ-ing how risks are to be allocated or shared between them.

With the project agreement in hand, the project company will pro-ceed to negotiate and sign a series of contracts with other project par-ticipants. These contracts will also define how the risks allocated to theproject company by the government will be distributed between the spon-sors and the other project participants. The set ofcontracts relevant forrisk allocation normally include the following: j,. j

. The shareholders agreement.

. Various credlt agreements with proJect lenders.


The construction contract.

. Equipment suPplY contracts.

. Where applicable, fuel and long-term materials supply contracts'

. The off-take contract with the project's long-term output purchaser,if there is one, or the tariff agreement with the relevant regulatoryauthority.

. The operatlons and maintenance contract with the proJect- €pefato+.

The combination of the project agreement and all these agreementswill define the basic risk structure of the project. How risks are allocatedamong the proJect participants is presented below'

Rlsk borne by the host govetnment

Usually, the host government will be able to devolve most risks related tothe development, constructlon, management and operation of a BOT projectto the project company. If the project company defaults in the perfolm-ance of any of these obligations, these risks become project lenders' risks.

The picture is less clear in the case of demand and revenue risks. Ifthe purchaser of off-take contracted services is a creditworthy publicutility, which normally is the case in power, water and sewerage treat-ment projects, the proJect company normally accepts these risks; thatis, the project lenders accept the risks, usually on the basis of a cov-enant by the proJect company that a reasonable debt to revenue ratio ismaintained. If the revenues are paid by the public, e.g. toll roads, air-port charges or electrictty charges, the proJect company takes a muchhigher risk on revenue generatlon, and this is then borne by the projectlenders. The lenders may seek to have part of the risk passed on to thegovernment by means o1 guarantees for a mlnlmum demand/revenuelevel or by stand-by loans. The demand and revenue risks could also bemitigated by a governmental undertaking that no alternative road, air-port or energr source will compete with the proJect for a specified period.

When a government flrst embarks on a BOT approach it may find itnecessary to provide some kind of support to the project company if aminimum level of demand/revenue is not met. In such an instance, thatis, where BOT structures .rre untested, the private sector perceives the

s.


risk as correspondingly greater. As the precedent for successful BOTschemes is established and the concept matures, a government will be ina position to reduce its support and to impose more stringent demands onthe private sector. A good example of thts is the Modcan Governmenfshighway concession programme (see case-study I ire the annex to this- chapter). When the programme was flrst lmplemented, it effecttvely guar:anteed traffic volumes (tf actual traffic volume was below that forecast bythe Govemment, the proJect company had the rtght to request an exten-sion of the concession period to cover the shortfall in traffic). once it wassuccessfully established, extensions were no longer granted automati-cally and the Government retained the right to shorten the concession-p-riod if-a ceddn rate of retffiexceedecl.

Political risks such as delays and cost increases caused by the govern-ment or govemmental authoritfes, including delays in obtaining requiredapprovals, permits and licences, are normally considered to be borne bythe government as it is the government that would ordinarily pay anycompensation. Alternatively, in some cases prolongation of the conces-sion period is provided for in the project agreement. :

As for allocating the risk of taxes, tarilfs or customs duttes beingincreased or lmposed as part of a general increase or imposttion, there isno general rule. obviously, no government will give an assurance or

; guarantee that such ta:ces or duties will not be increased or tmposed. Ifa compensation ls not provlded for in the proJect agreement, the rtsksare borne by the proJect company.

Governments may bear or share BOT risks through performance guar-antees, stand-by loan arrangements or compensatton provisions, inilud-ing assurances that:

. Certain minimum purchases will be made, at certain prices, thusassuring certain levels of project revenues.

. certain minirnum supplies of raw materials will be available, at' certain priceg, thus helping to ensure that proJect costs are pre-dictable.

Foreign exchange will be available for conversion of project revenuesto repay offshore loans and to repatriate the dividends of foreigninvestors.

conversion into foreign exchange will be at certain predetermlnedexchange rates, thus avoiding exchange rtsks.

162 UNID0 B0T Guidelinos

Governments may give such assurances to proJect sponsors to re-

duce uncertalnty surrounding the repayment of project loans' I-oan re-

payment will depend on the ability of management to operate the BoT

i"cttitt.s efficiently enough to generate a sufficient surplus for the re-

payment of project loans. The level and type of risk borne by the govern-

mint will be an important indication to the financial community of the

government's commitment to the proJect.

Risks borne by the ploiect companY

The mentrcfithe simportant factor looked at by both host governments and lenders when

evaluating the risks of a BOT project:

r Their experience and ability to urtdertake such projects.

. Their creditworthiness and commitment to the'project, i.e. their

ability to bear risks in case the project does not proceed accordingto plan.

. The experience, capabillty and credltworthiness of the partners Lhat

the sponsors choose to associate with (e,g. the prime contractor,equipment suppliers, the proJect operator, raw material suppliers)'

No matter how good a proJect ls in terms of deslgn and economic

viability, these faitors mean nothlng if the proJect is badly executed or if

the sponsors and their partners are unable to cover any shortfalls as the

project progresses. while reputation is not a guarantee of loan repay-

ment or retums on investment, financiers will nevertheless seek com-

fort in the credibility of the sponsors and their partners. l,enders will

want to know that they can be relied on to deliver the project on time,within budget and to the required technical standards and that in case

of failure they will have the ability to make good any shortfalls.

Governments and financing institutions will want sponsors to bear a

significant part of the project risks, as the sponsors' retums will be linkedto the long-term success of the project. Four kinds of risks are typically

undertaken by the project sponsors through the project company.. t '

r Constnrchon and completion rbksconstructlon and completlon risks would include responsibility for

' all proJect development costs, constmctlon cost overruns and thecost of delays. To ensure adequate management of the constructlon

UNIDO B0T Guidelines 1 6 3

l-risks, the proJect agreement normally requires that the sponsors dothe following:

Provide completlon guaranteqs, includtng additional sponsors'funds (equlty or subordlriated debtt where necessary.Make certain mlnlmum levels of equity tnvestment.Provide loan repayment guarantees during construction or someother specifled perlod of time.Maintaln certain mlnimum debt-equlty and debt servlce cov-erage ratios for the proJect company.Sign flxed-price turnkey contracts with the prlme contractor

late liquidated damages payablelevel of perforrnance is not met.

in the event that a defined

o Arrange for similar guarantees from the equipment suppliers, and subcontractors assign€d to the sponsors and thea lenders.

o Use proven technologr.o Arrange for insurance during the construction period.

If a contractor or equipment supplier defaults in performance, theconsequence is to the project sponsors.

t Operaturg rrsksThe risks of a failure to operate or maintain the proJect in accord-ance with the proJect agreement are to ue uorne by the sponsors.The.sno-n19rs may *uttug" these risks by transferring part of themto the o&M operator of.the proJect in the o&M agriement. TheproJect agreement requires that the sponsors cover insurable oper-aflng rlsks through an lnsurance package, lncludlng insurance ofloss and damage to the project faciliiles ana uatitity iisurance. Theproject lenders miry also require proceed retention accounts.To ensure that the project operator is performing satisfactorily, gov-ernment, sponsors and lenders normally require monitoring indmeasurement of its perforr4ance (e.g. quality and quantity oi out-put). This also facilitates the linkage of compensation and penaltiesto actual performance. Monitoring of Bor schemes is also neces_sary to ensure that an adequate investment programme and a de-fined maintenance schedule are followedsome lenders require the establishment of tech4tcal assistance agree_ments between the project company and equipment suppliers.

. SupplU n:sksThe sponsors normally have to bear the suppry risks, To protectthemselves from these risks, they usually ..,i.i i"rto contracts to

' 1 6 4 UNID0 B0T Guldetines

secure long-term supplies of basic inputs of the appropriate qualityand at stable prices. The supply contracts sho.uld therefore includethe following:

. Supply of raw materials, fuel and spare parts on a long-termbasis.

o Comniitments as to availability, quality and price, with appro-priate penalties for failure to meet these conditions.

o An appropriate price escalation formula to allow for such fac-

tors as inflation and exchange rate movements.o Supplies matched to proJect output to minimize the rtsk of mar-

, ket dispartty between cost and avallablhty ql lfgqgpg! "" t_!9

one hand and prtce of and demand for output on the other.

Where long-term supply contracts are not obtatnable, lenders mayrequlre addttional equlty commitments from the sponsors, as ei-ther collateral accounts or eguity subscription obligations, to en-sure that lenders' security is maintained.

Cutrerrcg and. interest rate risksA wide range of capttal market instruments, such as swaps, op-tions and futures, is now available for the management and hedg-ing of currency and interest rate risks. What these instrumentsoffer are the following:

Where there are many capital market participants, each willseek to transform its risk exposure into one that matches itsown rlsk-reward profile. It is often possible to find complemen-tary pairs of participants who can achieve their desired risk-reward proflles by swapping their respective exposures. Forinstance, one party may have United States dollar liabilities whilegenerating German mark revenues and the other, German markliabiliUes while generating United States dollar revenues. Clearly,both parties are exposed to exchange risk. If the two were tgswap thelr liabtllties, however, both would end up with kabili-ttes that matched thelr revenues and exchange rlsk would bemltigated. A similar logtc can be applted to the swapping of fixedand floatlng lnterest rates, to avold lnterest rate risk.There are market partlctpants who are willing to bet on inter-est and exchange rate movements. These participants sell ex-change rate options and future contracts to any party averseto exchange risk and seeking to lock in cerlain exchange rates.Thq parties selling the contracts take the risk that they may bewrong, in which case they incur a loss, b.ut they also have the

UNID0 B0T Guidelines 1 A (

potenflal for substanttal proftts if they are rlght. By contrast,the parties buying the contracts are fully protected, lrrespec-tive of exchange rate movements: they are protected from lossesif exchange rates move against them, but they also stand tomake no gains if exchange rates move in their.favour.

Emerging instruments for risk management in project linance

Swaps, options and futures offer proJect participants the means to re-move uncertainty from currency and interest rate movements. As such.

-theyalloul project+arti,cipants-to adjust thei+ Ask-reward proffles to bet-ter sult their own absorption capabilities

The reluctance of banks to lend in some countries without govern-ment guarantees presents a major problem ln arranglng flnanctng, Toaddress thls problem, the export guarantee ageneies of varlous coun-tries, as well as international flnancial institutions such as the WorldBank and, associated with t!, the Multilateral Investment GuaranteeAgency (MIGA)and the International Finance corpolafion (IFC), tncreas-ingly provide protection agalnst polttical and exchange risks where com-mercial insurance is very expensive and where capital market hedginginstruments are not available.

In september 1994, the world Bank replaced its extended cofinancingfacility (Eco) by bank guarantees to be used for infrastructure financing.These guarantees are designed to cover specific risks (the partial risk guar-antee) or part of the ftnancing (the partial credit guarantee). A partial riskguarantee covers risks arising from the non-performance of host govem-ment obligations spelt out in agreements with the project company or fromJorce nqieure events resulting in debt seMce default to the lenders. Theyare most appropriate for limited recourse financing as used in Bor andsimilar projects. A partial credit guarantee covers all events of non-pay-ment for a designated part of the financing scheme with the exception ofequity capltal. It typically extends maturiues beyond what private creditorscould otherwise provlde. Unlike IFC and MIGA, the world Bank requires agovernment counter-guarantee, which normally consists of an indemnityagreement for any payments the Bank makes under its guarantee.

A MIGA guarantee predomlnantly covers equlty investments and cancover debt extended by equity lnvestors. It provides coverage against po-litical risks, such as currency conver0bility, war grrd civil disturbance,and expropriation, and has specific proJect and couhtry limits on lts expo-sure. It does not enter lnto formal counter-guarantee arrangements withthe host governrnent.


' FouR cAsE-sTulllEs

CASE STUDY 1: LA UEI{TA'COIEGIO MltlTAB HIGHWAYMEXIGo CITY, MEXICo'

Glupo Tribasa S.A. is a Mexican construction company engaged in the construction ol large-scale inlrastructure prolects. lt specializes in highway construction but also engages in the

-conslrucliondolherproiecls,jneluding tunnels, drainage systems, railways, airport runwdams, water distribution systems, bridges and industrial facilities. 0n the basis of revenues,Tribasa is the second largest construction company in Mexico.

GoncessionsSince 1989, Tribasa has been engaged in the development, construction and operation ofhighways under the Mexican Government's highway concession programme. Until the end of1993, all ofTribasa's highway concessions entitled the concessionaire to request extensionsof lhe concession period in the event thattraflic volumes were below levels specified in theconcession, i.e. the Government took responsibility lor estimating trafiic volumes and borethe risk that those estimates might be wrong. Under this arrangement, Tribasa was protectedfrom downside risks by the possibility of extending the term of the concession and also hadunlimited upside potential, that is, if volumes were higher than forecast, then the additionalbenelits accrued entirely to it.However, the terms of the concessions have been altered significantly in concessions grantedsince the beginning of 1 994. Not only are extension provisions no longer included in concessionagreements, but the concession periods are subject to reduction orlce the concessions producea specilied rate of return on investment. This change effectively shifts the burden of risk fromthe Government to the project sponsors; it puts an upper limit on the concessionaire's reiurnswhile giving it no downside protection. Tribasa's latest B0T concession is for the La Venta-Colegio Militar Highway. The term of the concession is 25 years, there is no extension provisionbut there is a stipulation that if traffic volumes exceed those set forth in the concessionagreement, the term may be reduced or Tribasa may be required to pay a portion of earningsto the Government. Furthermore, the Government retains the right to revoke or terminate thehighway concession withoul compensation before expiration of its term, in the eventTribasafails to perform its obligations or to comply with the terms ol the concession or applicablelaw. lhe B0T structure for the La Venta-Colegio Militar Highway is illustrated in figure V.

tSource: Extracled lrom Public Debt 0ffedng Memorandum lor Tribasa Toll Road 1 , November 1 993


I

l@trI

j _

t t

@lllnlstry of Transport

I

Regulations of Tolls,0psrations andMaintenance

rL Concession

SupervisionDebt Financing

I

Concessionaire Financial lnstitutionsI

Il

II

IiI. t

ConstructionConlract

IJ

Investment

I r-

Operating andmaintenance Contract

II

t

I uuilnltuuuuil uNrsron [-l uoncession

Triba

r'*nsa

e lead contractor f(ume torecasts arererned with the actusor, t0 ensure that (e that a cost overrr;, lenders will be k1 budget and henc(

rg and maintenanct, revenues are gen(sd are regulated, wimd increased evdryr whenever the NCIone period is therel

Services Division F

GonstructionAs a conslruction coqpany, Tribasa acts as thextent that a fixed term and specitic traffic volagreoment, the Mexican authorities ars not conrproject. The onus is on Tribasa, as the lead sponas t0$/ as possible, since there is no assurancextension of the concessjon period. In this casTribasa to bring the project in on time and withithe project loans being repaid.

0perationTribasa has committed itself to perform operatirat a specified management fee price. In additionon the concession highway. The tolls to be charg(base) tolls set out in the concession agreements iwith the national consumer price index (NCpl) o0r more since the lastadjustment. The toll for any

168 UNt00 B0T Guidetines

)r its own projects. Io theset out in the concessional construction cost of thoronstruction costs are keptrn will be protected by anroking to the credibility ofr muimize the chances of

r services lor the highwayrrated lrom tolls collectedlh the schedule of startingsix months, in accordance'l increases by 5 per centore calculated as follows:

f-Jryryrtl : [-lryei]'I 1 + percentage increase in NPCI

'l between last adjustment dale andI Base Datel _ _ - _ _ - - _ -

i

The tol l increases may be mado without government approval, although support ingdocumentation has to be liled with the Ministry of Transport, Other toll increases above thelovels set forth in the concession agreement would require specilic government apprgval.Tribasa, however, is free to offer discounts or other special pricing arrangements to stimulatetralfic volume, subiect to the maximum levels set out in tho concession agresmenl.

CreditorsTo raise debt financing for the La Venta-Colegio Militar Highway, Tribasa offered the revenueslrom the existing toll roads that it owns and operates as security, to the extent that thoserevenues were not already pledged for other purposes. ln this way, financing was oblainedwithout recourse to Tribasa, and the obligations do not appear as liabilities on the company'sconsolidated balance sheet.

GASE-STUDY 2: DO$WE[t II{DEPEIIDEI{T POWER PROJECT,STATE OF VIRGIIIIA, UIIITED STATESs

In 1986, the Virginia Electric and Power Company (Virginia Power) solicited proposals for co-I generation power production facilities to supply power to meet its proiected needs in the

1g90s, The lntercontinental Energy Corporation (lEC) was one of the successful bidders. lnJune 1987, IEC and Virglnia Power drew up two agroements (including power purchaseagreements; or PPAs) lor the development and supply of power to Virginia Power, each for aterm of 25 years and for approximately 300 megawatts (MW) per annum capacity. In June1989, the Doswell Limited Partnership, a l imited partnership established to developindependent power, acquired the rights to develop the project from lEC.

GoncessionThe Doswell proiect consists ol a natural-gasJired, two-unit combined-cycle power generationplant using proven teclrnology. The combined capacity of the two units varies by season,between 724 l,AW per annum in winter and 603 MW per annum in summer. The original ,estimated dependable capacity (EDC) of the plant is 605 MW per annum, although thepartnership has the option, under the PPA, to deliver up to'110 per centof the original EDC(i.e. 663 MW per annum) to Virginia Power. However, the PPA also specif ies that the partnership

5 Source: Exkacted lrom Financing Memorandum for Doswell Limited Partnership, 1989


is liable for liquidaled damages in the event thal: (a) tests al commissioning indicate actualdependable capacity to be less lhan the original EDC and (b) subsequent semi-annual testsindicate actual depondable capacity to be less lhan 85 per cent of the original EDC,

Fuel lor the Doswell proiect is natural gas supplied by virginia Natural Gas (vNG) through apipeline constructed by VNG, which is in lurn connected to a pipeline constructed by cNGTransmission Corporation (CNG). CNG provides underground storage facilities for natural gasfor use during the winter months. In addition, lhere is on-site oil storage suff icientfor 15 daysof continuous operation.

Power purchase agreemontsThe power purchase price consists of four components based on the parameters of an existing214,000-kilowatt (kW) power plant in Chesterfietd County (Chesterfietd 7):The details of the lour components are as follows:

. A tixed capacity charge. This is the lixed cost of having the Doswell plantavailable to supplypower to Virginia Power, inespective of actual sales. lt is designed lo cover salaries, overheads,depreciation, interest expense etc., repay creditors, recover the investment of investors andmake a small profit, even if no consumplion lakes placo. The fixed capacity charge is calculatedto be US$ 10.2567 per kW lor the f irst '1 5 years (the loan repaymenl period) and US$ S.Og33per kW for the remainder of the concession period.

Fixed Transportation Costs

2l 4,000

A variable energy charge. This charge is designed to cover the cost o{ fuel used to generateeleckicity and is calculated as follows:

I Vaiiabte Enerstl I Enersy purchasel

I c t rarse l : l e ' ice lx


0uantity of Power Gerierated(i.e. 0ependable Capacity)

1 7 0

The energy purchase price per kilowatt-hour (kWh) is calculated monthly, using the followingformula:

ffi @-@1x11x10115-fRlThe number of BTUs required to generate 1 kWh was calculated to be 7,700. The index of 1.1refleots the fact that the actual quantity of power generated is expected to be 1 0 per cent morethan the EDC. The index of 1.01 15 reflects the fact that the pipe loss for gas transport is

and maintenance cosls are included in the energyprice and were initia!ly calculated to be 0.131 cents per kWh. They have since been escalatedannually by the GNP implicit price deflator.

A fuel holding charge. This is the working capital cost ol holding fuel in storage and iscalculated by the following lormula:

value 0l average ^^.-.,.luel inventori x Uarr! rale* + 12

' 214,000

. (The carry rate refers to the prime interest rate, as announced lrom time to time by the ChaseManhattan Bank,)

The fixed capacity and fuel transportation charges give Doswell downside prolection. To theextent that the energy charge is based on the market price of fuel, lhe partnership is protectedfrom input cost inflation. The return on investment to the partnership therefore depends entirelyon how efficiently the plant is operated. Exchange risks are not an issue in this case, since theproject is 100 per cent United States dollar funded, with all proiect revenues in United Statesdollars.


GAST-STUDY 3: SHAJIAO B POWER $TATIOII, GUAIIGDO]IG PROvIilGE, GHII{A6

Hopewell Power China Limited (HPCL) signed a joint venture contract with the ShenzhenPower corporalion on 8 March 1985 to implement a B0T power project in shenzhen,Guangdong Province. The contract provides for a cooperation period of 10 years, during whichall facilities, machinery and equipmentcomprising Shaiiao B are owned by HpcL. During thecooperation period, Hopewell Power has the right to operate and manage the power stationand to sell the electricity generated thereby, as stipulated in the off-take agreement. At theend of the cooperation period, HPCL is obliged lo kansfer Shajiao B to Shenzhen Power innormal and operational condition tor no consideration.

under the terms of the ioint vonturo contract, HpcL has contracted shajiao B's oporationaland management responsibilities to Shenzhen Power. The management fee has both foreign(United States dollar) and local (yuan renminbi) currency components. The schedule ofpayments to Shenzhen fower is US$ 0.0046675 and Y 0.0013069 per kWh for sates up to theminimum quantity (see below) specified in the off-take agreement and US$ 0.0021295 andY 0.0006102 per kWh for sales in excess o{ the minimum quantity.

Coal supply agreementA coal supply agreement was execuled on 6 December 1985 between Shenzhen power, HpCLand Citicorp Intetnalional. Under this agreement, Shenzhen Power is responsible toi Oefiueringcoal of a certain specification to HPCL at the site of Shajiao B to meet the requirements of thipower plant. The coal is to be purchased by HPCL ata fixed price of Y g0 per metric ton, subjectto adjustments for quality. lf Shenzhen is unable to supply coalas required by the supplyagreementand HPCL is required lo purchase the coal outside China, then Shenzhen is obliged to reimburseHPCL in foreign exchange for the cost of these imports. ln addition, Shenzhen must assist HpCLlo obtain all relevant approvals so that the imports can be brought in free of import duties.

Off-take agreementThe off-take agreement was executed on the same date as the coal supply agreement andbetween the same three parties, Under this agreement, Shenzhen Power is obliged to take-or-pay for not less than 60 per cent of the installed capacity of Shajiao B (the minimum quantity).Prior to 1 January 1992, the price ol electricily was Y 0o01 14ti per rWn for all sates up t0 theminlmum quantlty and Y 0.0006 per kWh for all sales above the minimum quantity. Startingfrom 1 January 1992, however, tho price for all electricity sales was unitied aiy O.6dt t ae peikWh. Shenzhen is obliged to pay for its power purchases, 50 per cent in local currency and b0per Qent in loreign currencies. For purposes of calculating the foreign currency component,

: '

5 S9urye: B<tracted lrom Public Equity 0ffering Memorandum lor the listing ol Consolidated Electric power AsiaLimited shares on the Hong Kong Stock Exchange.


yuan renminbi are converted at predetermined exchange rates, that is, all exchange risks areborne by Shenzhen. Furthermore, in the event that HPCL is unable lo meet certain projectexpenses as a result ol factors othor than an act, omission or breach by Shenzhen, the latter isobliged to make a subordinated loan up to a maximum aggregate amount of US$ 500 millionto HPCL,

The preceding arrangements effectively give HPCL the following protection:

. Downside protection by virtue of a minimum take-or-pay obligation.

' Protection against fuel price inflation by virtue ol a f ixed price.

' Exchange risks protection by virtue of partial payment for power in foreign exchange at apredetermined fixed exchange rate,

Guaranteesln addition, Shenzhen payments to HPCL under the coal supply and ofl-take agreements areguaranteed by the Guangdong International Trust and lnvestment Corporation (GlTlC), i.e.perlormance guarantees, not full repayment quarantees. To obtain this guarantee, HPCL hasto pay GITIC a fee ol US$ 20 million per annum.

$yndlcated f acllltlos agrosmontA;syndicated facilities agreement (SFA)was executed between HPCL and certain financialinstitutions, with Citicorp International as agent. Under the agreement, HPCL was granted .loan facilities of US$ 600 million and Y 11 billion and a guarantee tacility ol up to Y 52 billionlor the benefit of the turnkey contract for Shajiao B. The two loan facilities have since beenrepaid in full and the guarantee facility refinanced pursuant to a supplemental syndicatedfacilities agreement, under which Hopewell was granted a syndicated loan facility of Y 49billion, repayable in 25 quarterly instalments, The terms of the supplemental agreement prohibitthe payment by HPCL of any dividend or other distribution and the repayment of any sharecapital before the loan is fully repaid.

I Source'. Extracted from Public Equity Oflerlng Memorandum lor the listing of Consolidated Electric Power AsiaLimit€d shares on the Hong Kong Slock Exchange.

UNIDo B0T Guldel ines 173

[:'

, GASE-STUIIY 4: I|AV0TAS I P0WEB STATl0ll, METR0 tlAllllA, PHltlPPtllES?

A proiectagreement was entered'into on 16 November 19BB between Hopewell ProlectManagement Company Limited (HPML) and the National fower Conipany (NAP0COR), aState-owned entity responsible for generating practically all electric power in the Philippines.

Project agreementThe proiecl agreement entitled HPML to carry out the design, development, construction,completion, testing and contmissionin! of the Navotas | fuwer Plant and to be responsible forthe financing of the project, the obtaining of all necessary approvals and the import of allnecessary equipment. Under the project agreement, NAP0C0R was responsible for making

- tfre projectsite"vaflafieafnu@on ofalmce€ssary uflfft€|esandfofthe construction, installation and connection of the transmission line. Testirtg of the plant wassuccessfully completed on 22 March 1991. The cooperation period'is 12 years, during whichHPML owns the power station together with all lixtures, fittings, machinery and equipment.HPML is also responsible for the rnanagement, operation, maintenance and repair of the

. power station.NAPOC0R is obliged to supply and deliver, at its own cost, all fuel (in accordance withspecifications set out in the project agreement) for the power station and to purchase all lheelectricity generaled at its request. During the cooperation period it is further obliged to pay,on a monthly basis, the {ollowing: (a) a capacity fee, payable in United States dollars, baseoon the contracled capacity for each year following comptetion of the power station (as nominatedby HPML, butnot exceeding 2'10,000 kW unless NAPOC0R agrees)and a base rate ol US$3.225 per kW per month, but subject to adjustment in the event of reduction in the availablecapacity of the power stalion, during tho relevant month; (b) an energy fee, based on theamountof eleclricity generated pursuanl lo requests from NAP0COR, payable partly in UnitedStates dollars (US$ 0,003 per kWh) and partly in Philippine pesos (P 0.023 per t<WH;, *itnthe portion payable in:Philippine pesos being subject to adjustment for inflation; (c) stan-upfees, payable partly in United States dollars and partly in Philippine pesos, in each casecalculated in accotdance with formulae specified in the proiect agreement. At the end ol thecooperation period, HPML is obliged to lransfer the power station to NAP0CoR lor noconsideralion, on an as-is basis, with NAP0C0R responslble for all costs and expenses incureoin connection wilh the transfer.The pricing formula, as described above, effectively gives HPML the following protection:

Downside protection by virtue of a capacity charge.

. Protection against fuel price inflation by virtue of lree fuel.

. Exchange risks protection by virtue of capacity charge paymenl anO partiat energypayments in United States dollars.

. Prolection against inflation by virtue of indexation of Philippine peso payments to inflation.


FlnanclngA Brojeit cgmpany, Hopewell Energy Philippines Corporation, was estabiished to implementthe pio ject with four shareholders: HPML for 60,1 per centof the shares; Citicorp for 19.9 per

cent ol the shares; the Asian Development Bank (ADB) for i0 per cent of the shares; and thelnternational Finance Corporation (lFC) tor 10 per cent of the shares. Under the investmentagreements with ADB rnO tfC, eac'h also granted loans to Hopewell Energy Philippines: twoU-SS t O million loans from ADB (one for its own account and one for the account of participating

commercial banks) and one US$ 10 million loan from lFC. The agreements contain covenantsrestricting, rnte r alia, theability of Hqpewell Energy Philippines to pay dividends and to incurfurther indebtedness.


FIilAIICIAT STRUCTURIIIG OF BOTPROJEGTS

Project finanrcirry..

Npes oJ capital . . . . . . . . . . . . . . . . . .131

Finc,ncial structuring techniques ............196

Summary comments

Chapter 9 explalns how funds are mobtllzed for BOT projects, In partlcu-

lar, it descrlbes the types and sources of capital avatlable, in terms of thelevel of risk that each type of capital undertakes and the types of risksthat dtfferent provlders of capttal are wllling to bear. By means of varlousfinancing techniques and legal instmments, ilifferent types of capital arematched to different proJect risks. This process is commonly referred to

as financial structu or assembling the financial package. The finan-

cial techniques and legal instruments used in BOTtablished and commonly used in other financial transactions.

r Proiect financing

The types of financin$ available to developing cquntries have evolvedsubstantlally since the Bretton Woods Agreement (1944). Inlttally, fi-nanclng conslsted largely of bllateral and multilateral loans and grantsto governments. Commerclal lending to developing country governmentswas limlted, and to the prtvate sector even more so. Glven the choice,creditors were inclined to undertake $overnrnents rather than corporaterisks. Only when the strongest private.sector companies were able todemonstrate consistent performance over an extended period of timedid-international coriimercial lenders begin to consider lending to themwithout recourse to sovereign guarantees.

Lending against corporate assets alone represented an important step'forward for developing countrtes. I-Iowever, the ftnancin$ of new proJectsr:onllntrr:d l<l bc a problt:t-tt, slnct: c<lrporatlt: gtttrr:rntt:c:s wotrld usually lrr:required lbr loans to flnance these proJects. Companies were therelbreexposed to the extent of thelr total assets if a project in a developingcountry failed. The need for companies to shield themselves from suchrisks led to the further development of project financing' The essence ofproject financing is that creditors provide financing to a project solelybased on the merits'of the project itself, with limited or no recourse tothe companies sponsoring the proJect (i.e. non-recourse or limited re-course financin$. llpically in such financing, a separate project com-pany is established by the project sponsors to implement the project.Such an arrangement has several advantages for the sponsors:

UNID0 80T Guidelines 179

l-

It allows the sponsors to borrow funds to finance a project withoutincreasing their liabilities beyond their investment in the project.On the sponsor's balance sheets, therefore, their exposure to theproject is the amount of their equity contribution to the project andnothing more.

knders to the project assume a part of the project risks, since theyare lendingwithout full recourse and primarily on the basis of projectassets.

To the maximum extent posslble, therefore, sponsors wlll seek to avold. -An*netng-a proJeeLon anyt*rtrgotherthan anon reffi

theless, to put economlc pressure on sponsors to perform, governmentsand credltors often requlre some exposure of the sponsors'balance sheetsto proJect rlsks in the form of performarrce bonds and other liabilitvinstruments.

B0T linancing

Wlrllc tltc trsc ol'dlll 'crcrtt organlzattonal lbnns docs not alter the inherentrisk of a project, the Bor format does alter the way in which risk is allo-cated among proJect participants. To the extent that private sector spon-sorship replaces that of the public sector, the primary responsibilrty forIinancing and assuming risks is alsr! shfted from the public to the privatesector. Given this situation, private sector participants in turn will natu-rally want to minimize their risk exposure,

Private sector sponsors need to carefully analyse the financial feasibil-ity of proJects, in the light of the risks involved and their proposed distrt-bution, before submltting bids or proposals for BOT schemes. They alsohave to conslder how to allocate rtsks to other partictpants ln thelr con-sortlum. For lnstance, f the l:tttal proJect sponsors have limtted or noprevious experience tn the operation and management of Bor schemes,they will want to ftr:d co-sponsors with the appropriate operatir:g experi-ence or to subcontract the work to specialized private operators.

Bor financing, like proJect ffnancing, involves the funding of proJectson the merits of the projects themselves. But to a much greater digreethan conventional financing for manufacturing proJects, lenders will seekloan repayment securit5r from a proJecfs cash flow and the contractualagreements making up the project's securily package, rather than fromthe physical assets of the project. This is because the physical assets ofinfrastructure projects are of lelatively limited interest to lenders. Theirownership by the private sector is usually for a finite period, after whichthey have to be transferred to the host gou"--.rrt. Also, most infrastruc-


ture lixed assets are only useful as built on a specillc slte. It is usually notpractical to dismantle infrastructure facilities and then sell their partspiecemeal. BOTfinancing, therefore, is essentially contract financing, whichfocuses on the viability and security of a given project's revenue stream.

In effect, BOT financing is a specialized form of project financing.Some of the more common features of BOT financing are as follows:

r It involves the financing of a discrete venture that is more oftendefined by its revenue stream than by its products or markets.

. It involves several interrelated contracts with third parties, such aswhich

' are crucial to the credit support for the project,

. Project loan repayments are secured by proJect cash flows' as speci'fied in contractual agreements or as indicated by demand forecasts,rather than by proJect assets. The enforceabllity of these contractsand the reliability of demand forecasts are therefore of greaterimportance to lenders than the ereditworthiness of the BOT spon-sors per se.

. Similarly, project sponsors will rely primarily on contract enforce-ability (or guarantees) to minimize their exposure to project risksand uncertainty.

Because a web of contracts is the backbone of a BOT project, spon-sors, banks and financial advisers tend to be involved in the negotiationof project documents at a much earlier stage than'is normally the casein conventional financing schemes.

The basic financial flows that are relevant for IIOT projects are indi-cated in figure VI.

r Types ol capital

Financing, or capital* is requlred for the implementation of all projects.BOT schemes €rre in large part a means for a government to mobilizeprivate financing for infrastructure projects. Broadly speaking, there arethree types of capital available to all projects: equity, debt and mezz-anine

E


oiuiolos ,Lr,

capital. Each plays a speclflc role tn project financing and has its own rlskcharacteristics. The return on each type of capital is determined largelyby its risk characteristics.

Equity capital

Equity is the lowest-ranking capital of all in terms of its claims on theassets of a proJect. It represents the funds inJected by the owners of theproject. Normally, all other proJect obligations must be sattsfled beforeany distributions can be made to equity investors. If a proJect fails, there-fore, all other clalms must be met before any clalms can be made byequity lnvestors. MoreoVer, lf after all other obllgauons are met, the valueof the remalning assets ls less tllan the initial equity capttal of the proJect,

0ividends

-t

I t tt|l

tl ltues I

ILI users I

t

0ividends

182:


I

the investors will bear the loss. Equlty investors thcrcfore bear a higher

, degree of risk than any other providers of capital. For this rea3on, equitycapital is also referred to as risk capital. However, if a project proves to be

hghly successful, then the residual value of assets, after all obligations. are met, will certainly exceed the initial equity capital of the project. This

surplus will accrue entirely to the providers of equity capital in the form ofc.pit"t gains. Thus, while equity lnvestors bear the highest risk, they alsostand to make the biggest gains if a proJect is successful. In a BOT project,the flxed assets wlll be transferred to the host government at the end ofthe concession period, ordfurarily at no cost, so the equity investors' re-tum on Arvestment will come only from revenues generated dudng thatperiod. Thus. the terms of tJre contracts must compensate these investorsfairly for being the biggest risk takers in the project.

Debt capital

In contrast to equity capital, a project's senior debt has the highest rank-ing' of all capital. Senior debt has first'claim over all the assets of aproject and must be repaid first, according to a predetermined schedule.Only after the claims of senior debt are satisfied can the claims of othersbe considered. As such, senior debt bears the lowest risk of al[ capital.Correspondingly, the returns to senior debt are usually limited to just

the interest payments on the loans, irrespective of how successful theproJect may be, that is, lower risk is balanced by lower returns.

All things being equal, equity investors would prefer a debt-equityratio as htgh as possible, while creditors would prefer a debt-equif;y ratioas low as possible. A higher debt-equity ratio reduces the expcsure ofequity invCstors, while increasing the potential returns to their capital,whlle a lower ratlo increaseg the certainty that loans will be repaid andhence lowers the risk to creditors. However, investors' exposure ln aBOT proJect will depend not only on the amount of equity funds theysubscrlbe initlally but also on thelr contractual commitments. In somecases, one reason why project sponsors want to have as high a debt-equity ratio as possible is to retain funds for other potential projects.Frorn the standpoint of a proJect company, however,.the higher the debt-equity ratio, the less sound its financial structure and the more vulner-able it would be to a deterioration in the business environment.

There are no hard and fast rules as to the correct or best debt-equityratio. This changes from sector to sector and from country to cotrntry.Suffice lt to say that the higher the risks, the lower should be the debt-equity ratio. But whatever the ratio, care must be taken to ensure that itis prudent in the light of prevailing project and market conditions.


According to experience in project financing, only few cases exceed an8O/2O ratio; proJects exposed to market rtsks tend not to exceed 60-65per cent debt leverage, while power proJects with firm take-or-pay ar-rangements may reach 70-80 per cent debt leverage.

Meaanlns Gapltal

Mezzanine capltal ls a more flqdble lnstrument than elther pure equityor debt, The key characteristic of mezzantne capital is that it has bothdebt and equity features and, as such, a risk proflle that ls somewhere

.- bet-ween de$+subordinated loans and preference shares. Both have the characteris-tics of debt, in that regular payments of interest and/or capital are in-volved. However, payments are subordinated to senior debt and need' only be made when project funds are available. When they are not avail-able, mezzanine financing is treated like equity and no payments aremade; to that end, mezzanine financing provides projects with an addi-tional equity cushion. However, when funds are availablei;, rnezzaninepayments take precedence over any distributions to equity capital, suchas dividend payments. Thus, while mezzanine financing is'subordinatedto senior debt, it is still senlor to equity capttal, and the returns paid tonrezzanine capital are deslgned to reflect this order. For bearlng greaterrisk than senior loans, mezzanlne capttal will be rewarded with poten-tially higher returns. Thls is achieved in one of two ways: higher interestrates than the proJect's senior loans and/or partial participation in theproflts or capltal gb.tns of proJect equity (partial to reflect the fact that itbears less risk than pure equity). Partial parttcipatton in capital gainscan be achieved by providing holders of subordinated debt or preferredshares with share options, convertible rights or warrants,

"o ihat they

can subscribe for shares of the project, usually at a nominal price. Thismechanism is commonly referred to as an "equity kicker".

For project sponsors, the advantage of mezzanlne flnancing ls that itenables proJects to be flnanced wlth more debt and less equity and yet,lf the mezzanlne financing ls properly structured, not have to bearlhefull burden of higher debt service in.the early years, when the proJpctcash flow is tlght. Therefore for the s.m" .*o,rnt of equity invesimlnt,the sponsors are able to retain a higher shareholding interest in theproject, whibh $ives them higher returns on their investment if the projectsucceeds' In this regard, it is worth noting that projects rely or,

"*p""ta-tions of higher future cash flows to attract mezzanine ftnancing today.Mezr,arturc financing is also used by equipment suppliers and construc-tion companies to factlitate their participation in the project. euite oftenthis participation is financed out of their contractual profits. For the


project's senlor credttors, mezzarrlrr;e flnanctng lmproves the credltwor-thlness of the project by provldlng an addlttonal equlty cushlon. Finally'it is a way for the providers of mezzanine financing to enjoy near-equityreturns on their investments without taklng the full risk of equity capi-tal. Ulttmately, however, a proJect's capital structure, that is, its mix ofdebt, mezzanine and equity financin$, will be dictated by the readinessof investors and creditors to advance their own funds, in view of theirperceptions of the risks involved.

Sources of financing

Debt, equity and mezzanine capital are usually provided by differentsources. Where a single source provides more than one type of capital, thedifferent types of capital may be handled by separate departments.

EquitC capitol prouid.ers

In the first instance, equity capital for a project will come from the projectsponsors or other investors that have an active interest in the project.This would include giovernments {to the extent that they wish to partici-pate ad investors), contractors, equipment suppliers, purchasers of out-put (e.g. utility companies that have a vested interest in the project'soutput) and entrepreneurs. Equity investment by these parties will alsosubstantially reduce, lf not preclude, the chances of them losing interestin the proJect. Additional equity, if needed, would be sought from pas=slve sources, such as institutional investors (e.g. pension funds, insur-ance companies, mutual funds) and possibly the general public throughlocal or lnternational capital markets. InstitutiOnal investors and indi-vidual market investors are passlve investors in the sense that, unlikeproject sponsors, they are not norrhally involved in the promotion anddevelopment or the management and operation of the projects in whichthey invest. Their capital is used to top up the equity requirements of aproject (i.e. the shortfall that cannot be met by sponsors).

Several specialist equity funds focusing exclusively on infrastructureinvestment have emerged in Asia and Latin America. This is in directresponse to the massive demand for infrastructure construction andfinancing in these regions, arising from their higher economic growthrates. Such funds differentiate themselves from other funds and institu-tional investors in that they tend to be active rather than passive inves-tors. Because they specialize in infrastructure, these funds are generallyprepared to take a substantially higher equrty interest in projects thanthe more passive dlversified investment funds and institutional inves-

-l


tors. They also tend to have management teams that have a specializedknowledge of infrastructure projects and that typically play a more ac-tive role in structuring the projects they finance.

Commercial6cnks crs a source of debt and mezzo;ninefina;ncing

Commercial banks are the most traditional source of debt financing. Toa lesser extent, they are also providers of mezzanine capital. However,one key characteristic of commercial banks is worthy of note. The sourcesof funds of purely commercial banks (as compared to universal banks,

in$ are primarily short- to medtum-term floating rate deposits. To avoidproblems of interest rate and term mismatch, most commercial bankloans are prlmarily short- to medium-term floating rate credlts (nor-mally three- to five-year terms and rarely longer than seven years). long-term credits in excess of seven to eight years account for a fairly smallpercentage of a bank's asset portfolio, while equity investments are neg-ligible to non.eldstent, elther by choice or as a consequence of regula-tory restrictions or concerns about lender liability.

For this reason, the activities of commercial banks are focused prlmarilyon eamlng a margin between the interest rate they.receive on loans and theinterest rate they pay on deposits, with little or no motivation to earn capi-tal gains from equity investments. itreir operations essentially revolve aroundthe creditworthlress of their borrowers and the security of their loans. Muchstress is put on prudential lending and actions aimed at ensuring loanrepayment. If the creditworthiness of borrowers or the mortgage providedon loans is less than satisfactory, commercial banks will seek assurancesfrom more creditworthy third parties, such as guarantees frorB parent com-panies, govemments or quasi-govemment agencies.

In this sense, commercial banks are on the whole focused on shorterterm and less risky credits and are not partictrlarly well suited to financ-ing infrastructure projects, which are generally long-term. For these rea-sons, sponsors are increasingly looking to sources other than commercialbanks to meet their long-term funding needs and using commercial banksprimarlly to meet thelr shorter term funding needs, such as worklngcapltal and constructlon flnancing; once construcflon ts completed, thelatter is replaced by longer term or permanent financing.

An attractive feature of commercial bank credits is their flexibility.commerclal banks are generally more willlng (than instttuilonal inves-tors, for instance) to tailor loan structures tliat meet the specific needsof clients. Also, in the event of default, rather than simply forcing bor-rowers into bankruptcy, commercial banks are prepared to work withthem to consider ways in which their operations and repayment sched-

1 8 6 UNIDO B0T Guidelines

ules might be restructured, so that operations can continue and the

loans eventually be repaid. As a consequence, notwithstanding the short-

term nature of commercial bank credits, they continue to play an impor-

tant role in project financing and at any one time will still account for a

large portion of the senior loans of a project.in ippraising a project, commercial banks carefully consider a number

of interrelated issues:

r commitment to the proJect of the sponsors and other maJor parttcl-

pants, in terms of investment and personnel. As already indicated,finaneing lnstitutions wlll want as much as possible to link the

returns accruing to the proiect sponsors with: the long-term suc-

cess of the project.

The achievabiltty of the proJect's budgetary, completion and techni-cal targets, as any slippage will have an adverse effect on the eco-

nomic viability of the Project.

' I ' l tc cxl lcr lcncc i l trcl t : i . rpatt l l i l l t :s ol l i ruJct:t . l l lal t .rgcrl l ( :r t t i r t i l t r l l l t : -

menting this type'of project, as they will be crucial in ensuring that

the projecfs time, budgetary and technical targets are met, if they

are indeed realistic.

The reliability of the assumptions on which the input supplies and

demand proJections are based, as this will determine the degree of

confidence in the project's cost and revenue targets.

The strength of government support to help the proJect succeed, itsunderstandtng of the private sector's profit motives and lts atti-tudes towards risk sharing.

Commltment at the hlghest levels of government vdll substantlallyincrease the confidence of the financing institutions that the gov-

ernment will do its best to ensure the project obtains all necessaryapprovals and is successfully implemented.

While they are prepared to be more flexible, commercial banks willnevertheless want to retain the integrity of their security. To do so, theywill usually impose stgicter and more comprehensive covenants {restric-tions) on borrowers than would bond investors. These coven€rnts, con-tained in the project credit agreement speciSing the debt financin$ andloan security structure, give comm€rcial banks a substantial degree ofinlluence over the implementation of the project. Some of the more com-mon covenants are as follows:

EtrUNID0 B0T Guidelines 187

The project must be operated in accordance with good practice.

It must obtain and maintain appropriate permits, approvals andconsents.

It must comply with project contracts, budgets and plans, whichmay not normally be materially changed without the lender's writ-ten,consent. This mechanlsm allows the lenders to retain a sub-stantial degree of control and involvement in all stages of the project.

Appropriate lnsurance policies must be arranged for.

The borrower must undertake not to pledge any assets of the com-pany !o third parties other than as specifically contemplated by thecredit agreement ("negative pledge" clause).

knders' consent is required for all capital expenditures and otherinvestments, unless they are specifically set forth in project budg-ets that have already been approved by the lenders.

Dividend payments are restricted if the company is in default on itsloan agreements.

.Dividend payment levels are linked to ffnancial raflos.

Dividends mustbe repaid to the project companywhen certain eventshappen, such.as payment defaulti, failure to meet required flnan-cial ratios or failure to maintain required reserve accounts (-callback" provision).

The proJect company may be requlred to create a cash reserve rocover unknown conflngencies.

I*nders may regulre that the reserve be putln place before the proJectstarts operation, or that it be built up from earnings after the com-mencement of operations but pefore any payment of dividends.

The project's equity funds must be drawn down before loan fundsare drawn down. ,:

Tukirrg on other debt may be restricted. This limits hire purchase,leasing, borrowing and guarantees and inhibits future fundi:rg with-out the lenders' consent to finance additional works or variitions.other debt may be permitted in some cases, if it is subordinated in

UNID0 B0T Guidetines1 8 8

a way that strips the subordinated creditor of aII its rights, so thatsenior creditors may act almost as if there were no junior creditor,or as if the junior creditor's capital was quasi-equity, i.e. mezzaninefinancing.

A key area in which lenders want to exercise control is control of theproJect tn default. knders require rights to step into the shoes of thedefaulttng or insolvent parties and manage the proJect. The key aim ofdefault clauses is to provide the proJect with an early warning system incase of emerglng difflculties and to allow lenders to halt furtherdrawdowns, refuse release of dlstributions to promoters,/sponsors and

Export credlt ogencies cs cr source of d.ebtfinaneing

An important source of long-term credlt is export credit agencies (ECAs).As lenders. ECAs have the same concerns anrl reqrtlrcments as commer-c l i r l l r : t r r l t s : r r r r l wor r l< l i r l so l l r : s lgn i r l ( ) r l ( : s . lo l l r r : r ' r ' r : r l i l i rg r t : r :u r r : t t l . l l ow-ever, there is one imp.ortant dill-erence: tsCAs are usually State-owned,and their primary objective is the promotion of their country's exports. Asthe terms offered by ECAs are usually substantially more generous thanthose df commercial banks and may be subsidZed, e4port credits aremuch sought after and highly suited to the financing of long-term infra-strueture projects. The mairt drawbacks are that they are usually tied tothe purchase of equipment from the ECAs country and usually requiregovernment guarantees. Meanwhile, some ECAs, such as the Export-lm-port Bank of the United States and the Export-Import Bank of Japan,recognizlng that developing countries are shifting away from sovereignborrowing and that project ffnance for infrastructure development is gainingimportance, have established financrng lines on a limited recourse basis.

Bltateral ornd multllateral orld agencies cs a source oJ d,ebt,equlfu rrnd mezzanine financing

In addition to the preceding sources of capital, many developing coun-tries can also access financing from bilateral and multilateral agencies,such as that provided.-by the United States Agency for International De-velopment (USAID), the Canadian International Development Agency(CIDA), the Overseas Development Administration of the United King-rdom (ODA), the World Bank, the Asian Development Bank (ADB) andthe European Bank for Reconstruction and Development (EBRD). A listof such agencies is contained in a UNIDO document from-1983.8

.r&brbt*--


r

Although it is obviously not an up-to-date list, it should still prove use-ful. Funds from these agencies are provided for very long terms (up to 2oyears or more), but most provide the funding exclusively to governments,or with government guarantees only, especially where subsidized andgrant funds are concerrred. In the case of bilateral agencies, funds mayalso be tied to the purchase of goods and services from the countryproviding the funds.

To promote growth of the private sector, some agencies also providedebt, equity and mezzanine fturancing for private sectsr projects, includ-lng lnvolvement in Bor proJects. such agencies include the Interna-tional Finance corporation (IFC) of the world Bank Group, the private

- €eetorDepartment oF.4DB;ttrelVterchantTlanl<tngDepaftmenfof EEIRD.the commonwealth Development corporation of the united Kingdomand the overseas Private Investment corporation of the united states.while funding for the prlvate sector is usually provided on commercialrather than subsidtzed terms, lt is also usually provided on an untiedbasis and for longer terms than commeictal sources of funds.

Iltstitutiano.l inuestors qs a. source oJd.ebt, equitg otndmez.zanineJinancing

Institutional investors are non-bank financial institutions such as in-surance companies, pension funds and investment funds. Institutionalinvestors distinguish themselves from commercial banks in that theymobilize long-term contractual savings (i.e. monthly contributions tolife assurance policies and pension plans are normally made over manyyears and cannot be withdrawn freely) as opposed to short-term depos-its. By virtue of the long-term nature of their funds, many institutionalinvestors are able to provide long-term debt (10 years or more), mezza-nine and pure equity financing. Institutional investors are therefore animportant source of long-term funds for large infrastructure projects.

As providers of long-term capital and, more particularly, equity arramezzanlne financing, tnsiltutional lnvestors are prepared to look more atthe long-term prospects of a proJect than merelyat its short-term repay-ment capabilities. In this respect, the risk-reward profiles are.marteaiydiff€rent from those of commercial banks. Nevertheless, institutional tn-vestors are dlfferent from proJect sponsors ln that they are not normallyinvolved in the promotion and development or the management and op-eration of the proJects in which they invest, and they aie therefore not

Financial Resources lor lndustrial Proiects in Devetoping Counlries, Industrial Investment and Financing Series,vols. l-lV (Pll6l/Rev.2).

thviap

- t h

In

finHcalrnagapriin

' tia

entio


;

normally prepared to bear the development and construction risks of a

project. To attract institutional or individual investors from the world's

major financial centres for equity investment in the infrastructure projects

of developing countries, a number of equity funds have been established.

These infrastructure equity funds allow investors to mitigate risks by

investing long-term capital in a diversified portfolio of infrastructure com-

panies and projects in developing countries and to seek higher returns

inan tfrey could hope for with comparable investments in industrialZed

countries. some funds can provide a mix of financing, such as equity,

subordinated debt, completion guarantees and bridge loans to cover the

constmction Period.

Role oJnationol o;nd regional deuelopment banks

As indicated in chapter 8, there is a difference between the financial

appraisal and the economic appraisal of BoT projects. The former looks

.i it "

financial viability of proiicts from the standpoint of proJect spon-

sors, investors and commercial lenders, while the latter looks at the

economlc viability of proJects from the standpoint of national costs andbenefits and the best use of a country's resources. It is conceivable,therefore, that a proJect that ts economically viable is not financially

viable and vice versa. Examples of such divergence are infrastructureprojects that are critical to the economic development of a region but

which governments decide to implement on a non-tariff basis or for which

they deCide to charge user fees that do not fully cover operational costs.

In such cases, the economic benefits of the projects would be high butprivate sector interest in the projects would be limited, as there would

be no prospects of earrr-ing'commercial rates of return on their invest-

ments.To bridge the gap between economic and finaricial viability, public

sector intervention and support are called for. The establishment in thelate 1940s of national and regional development bhnks, or developmentfinance institutions (DFIs), was in part an attempt to brid$e this gap.However, the view in the l95Os and 196Os was that since one could notalways rely on the private sector to implement projects beneficial to thenational interest, it was necessary for the State to step in and fill thegap. In this context, DFIs were seen as necessary substitutes for theprivate sector, where economic and financial divergence existed. Eventsin the 1980s and 1990s, however, have altered this perception substan-tially. Today, the view tends to be that the private sector is more efficientthan the public sector in implementing and operating projects' Thus'rather than substituting for the private sector, DFIs should.create anenvironment that would be conducive to the private sector's participa-tion. In situations where proJects are clearly in the national interest.but

UNtD0 B0T Guidelines 1 9 1

a

Capital markets

The nee4forlong-term eapttal to flnance |nfrastructurgFro1ects tn devel-oplng countries is enormous. As indleated above, instttuttonal investorsare an tmportant source of long-term capital. Outside the project financearea' institutional investors also invest heavily in the p"UUc securitiesTTkgF

(international capttal markets) by way of investment in market-able debt and equify securities. Inasmuch as

-got schemes are typically

one-off projects, for which special-purpose compzrnies are estabrished,capital for these schemes is substantially limited to the more conven-tional sources of proJect finance, such ai direct investors, commercialbank credits and export credits. It is much more difficult to obtain invest-ment-grade credit ratings for special-pulpose companies with no operar-ing records. This in tum makes it more difficult for them to issue marketablesecurities and to tap the world's largest sources of long-term capital. Nev_ertheless, independent power producers in the united-states and even insome developing countries are tapping the capital markets direcily byissuirxg bonds. The key to accessing flnanctng from the capital marketshas-been ilre sponsors' ability to bring togethir reputable and extremelycreditworthy project participants through all phases of the project cycreand hence to construct strong and htghry rated security paciages.

are not financially feasible, DFIs might provide performance guaran-tees, subordinated loans, low-interest loans and equity capital to meetfunding gaps. Through such intervention, the retuin on private sectorinvestments could be enhanced and private capital mobiliied. However,to ensure that benefits are maximtzed, subsidGs and support;;;H;;designed to preserve the private sector's incentive to perrorm and toensure that the threat of penalty for non-perforrnance is not removed.

Maxlmlzlng th'e beneJtts Jrom bllateral, mulfilateral and exportcredit agencgJunds

Bilateral source-s of financrng, tnclulting export credits, are normaily themost attracilve funds avairable to a Bor proJect in terms of lower i.ri..."tand longer loan periods. Howevei, such funds are generalty avaitaute ontyto promote the exports of thecountries provrding tf,e funding. This meansthat the use of bilateral funds may resurt in the purchase"of equipmentand technologr that is not necessarily the most appropriatelor the bor-rower. Moreover, the lower cost of the funds may ue ons.t by t igt .. prigesfor the equipment and technologr.


Notwlthstandtng the ltmltattons of bllateral flnanclng, tts benefits canstlll be ma:dmtzed lf the increastngly competitlve forces of global marketsare carefully exploited. If a sector is of particular tnterest io the intema-tional eommunity {power and telecommunications are good examples),then lt may be possible to promote keen competition among equipmentsuppliers from difierent countries and thereby obtain the most favourableftnanclng condltions. For lnstance, an invitation to bid for the supply ofequipment could reqgire bidders to arrange financing without sovereignguarantees. If equipment suppliers are sufficiently attracted by the project,they could be motivated to provide their own corporate guarantees in placeofsovereign guarantees. Such corporate guarantees may be acceptable toEC4q qq4ltlaleralggelqles !q the place qf gqvemnlsnt guarantses-lty_ iearefully sequenclng the cholce of equipment and flnancing arrangements,'It may be posslble to transfer some credtt rtsks from the borower countryto the equtpment supplters, while ensurlng that the prices paid for equip-ment and Eervlces remaln compeilUve. Indeed, lf the proJeet ts well struc- :ture$. wlth a good securtly package, lt may even be posslble to attractarport credtts on a llmlted or non-recourse basis. The provision of exportcredits wlth corporate guarantees or on a limited or non-recourse basis tssttll very rare, but thelr emergence ln recent years is extremely significantand polnts to the posslble dlrection of future developments. Nevertheless,it remalns true that whenever a party to a BOT project is asked to bearrtsks that tt cannot fully control, an additional cost will normally be im-posed to compensate for undertaking those risks.

As for multilateral flnancing, some fairly strict rules apply. Apart fromftnanclal viabillty, proJects are also requtred to meet certaln minimumsocial cost-benefit standards.e For this reason, it generally takes longerto process multllatcral loans than prlvate sector lohns. To thc ertentthat multilateral agencles see themselves as playing a catalytic role, theywlll also set ltmlts on the ma:dmum percentage of total project cost theywill flnance and use their own participation in the project to mobilizeadditional funds from third partles. There are three ways in which thelmpaet of multilateral agencles can be maximized and the mobilizationof thtrd party funds factlitated:

r ln supportlng a proJect, mulillateral agencles are ln effect puttingthetr own reputatlon, or stamp of approval, behlnd the proJect. Thtsmay be sulllclent to attract addlilonal prtvate sector ftnanchg for

' j.7'

9 For a discussion of social cost-benofil analysis see two UNIDo publications, Guidelines lor proje;! Evalualion(United Natlons publicatlon, Sales No. 72.11.8.11) and Guide lo tuacticat Project Appraisal: Social Benelit-Cosrfmlt1is.11 leveloOiltg Counttus (United Natlons publicatiori, Sales No. 78.11.8.3), and two books by t.M.D. Liilte.and J. A. Mirrlees, Social Eenelil-Cosl Analysis (1 986) and P/oiec t Appraisal and Ptanning lor Devetoping Counties(London, Heineman Educational B00ks, 1974) 'i


t:

r Where multilateral flnanclng ts not avallable or not used, multilat-eral agencles can still facllttate the flow of capltal lnto emerging mar-kets by provldlng political rlsk insurance. In April l9gg, MIGA wasestablished as a member of the world Bank Group, wtth the prlmarypurpose of enhancing "the flow to developtng countrles of capital andtechnologl for producilve purposes under condlflons conslstent wlththeir development needs, pollctes and obJecttves, on the basls of falrand stable standards for the treatment of foretgn lnvestment". MIGAachleves thls by provtdtng Insurance coverage for the following:

Currency transfer. to protect agatnst the tnabtllty of lnvestorsand lenders to convert and.transfer local currency tnto foreignexchange. jExpropriation, to protect against dlrect or tndtrect acts by hostgovernments that reduce or ellmlnates ownershtp of, controlover, or rtghts to insut'ed lnvestments,War and civll disturbance, to protect against damage to,destruction of, or disappearance of tangibil assets, inct-udingthat arising from politically motivated acts of sabotage andterrorism.B;;;;;;"ontract, to ensure enforcement of arbttration awardsand Judicial sentences for damages arlsing from the breach ofcontracts by host governments.

The above coverag€ encourages foretgn tnvestment by lncreaslng a for-elgn lnvestor's conlldence that lte rlghts are protected. such lnsurancemay possibly also be used to enhanci the credit.rating of a project, oftenabove that of the host country. such credlt enhancements would facllitatea proJect's access to the tntemaflonal capltal markets, slnce many tnstt-tutional Investors are restrlcted, by regulailon, from lnvesflng ln the debtsecurities of companles with low credlt railngs.

i

the proJect, The multllateral agency that has probably been the mostsuccessfll tn ustng lts own parilclpailon to moblilze thlrd panyfunds for prtvate sector proJects has been the IFC, Apart from en-couraging the lnllow of addttlonal equtty capital, tt has also deviseda syndicated loan structure to attract more debt financing fromcommercial banks. Thts is done by a two-part syndtcated loan: an Aloan for IFC's own account and a B loan for the account of commer.cial banks particlpailng in the syndicate. IFC does not guaranteeany of the lenders tn the syndicate but puts ttself forward as thelender of record for both the A and B loans. Thts reduces both thechances of the loans betng rescheduled and the coSt offunds.

UNID0 B0T Guidelines1 9 4

-t;,

A third approach, thus far used only for projects funded by thepublic sector, is co-financing. Under this arrangement, multilateralagencies provide limited guarantees to private sector lenders to at-tract longer term funds. For example, while S-year loans may bereadily available from commercial banks, a project may require 1O-year loans. To attract longer term funds, a multilateral agency mightoffer commercial banks a repayrnent guarantee for the last two yearsof a loan (t.e. years 9 and 10). This may then be sufficient to inducelo-year loans, with the comrriercial banks talrtng on the additionalrisk for years 6-8.

Ifiaximizing local cunencg funding

The use of foreign exchange funds to finance infrastructure projects re-sults in exchange risk exposure for infrastructure projects, in that mostof them generate little or no foreign exchange revenues. The mobilDa-tion of local currency funding is, therefore, an important aspect of BOTfinancing. However, this may be difficult in some developing countries.If capital,, on attractive terms and for the required.amounts and in thedesired currencies, is to be mobilized, new mechanisms and structures '

need to be found. To date, the financial markets of. developing countrieshave been characterized by the dominance of commercial banks, a nar-row choice of savings instruments and interest rate distortion in thecredlt markets.

As a flrst step, new ftnancial lnstruments need to be lntroduced andmore flexible financial policies adopted to promote the development ofboth the bond and equity markets. To this end, careful use of existinginfrastructure facilities can play an important catalytic role. For instance,financially sound utilities, such as powei companies, can be restruc-tured as corporate entities that would be suitable for listing on localsecurltles exchanges and that would issue debt and equtty securitles.Owlng to the relattvely steady and predtctable lncome stream of publicutilities, bonds issued by such entities are considered to be high in quality

and low in risk and are much sought after by institutional investors.The issue of these bonds raises long-term capital for public utility in-vestments, and their proliferation would deepen the ilomestic bond marketand introduce tools for the effective implementation of monetary andinterest policies (e.g.:through open market operations).

The transformation of public utilities into corporations and their list-ing on securities exchanges would allow them to move beyond issuingstraightforward bonds. Restructured utility companies should be able ,to lssue mezzanine capital instruments, such as low-interest bondswith warrants, convertible bonds, income bonds and other sophisticated


financial instruments. The equity element compensates investors for thelow interest rates. The low interest rates on these tnstruments reducethe front-end pressure on proJect cash flows. As a utiltty company es-tablishes a track record,.its international credibtlity is enhanced. Thiswill enable it to gradually access international capital markets, includ-ing the raising of equity capital through the issue of new shares by therepackaged utilittes. Indeed, as BOT schemes come to the end of theiroperating periods, instead of merely being transferred back to the gov-ernment, it may be more beneficial to governments, the private sectorand the general public for them to bb listed and sold off, either partiallyor in full. Increasing the supply of securltles in the domestic market

- furtherpromotes tAe develOpmentdfthalmarkef arul also lnc-reases theefficiency of savlngs mobilgation,

I Flnancial structuring techniques

The challenge of flnancial structuring is to establish the appropriate mixof debt, equity and mezzarrine financing for a project that, while optimizingthe use. of financial resources, also ensures a sound financial structurefor the project.

Gomponents of project Gosts

In decidtng on the type of capital and sources of financing to be used, itis important to flrst tdenttff the main components of proJect costs, in-cluding financing costs, so that the needs and risk charaeteristics ofeach can be matched by the approprtate funding. The main componentsof proJect costs are normally as follows:

' Pre-investmentcosts. These are the costs incurred by proJect spon-sors ln'developing the proJect concept and preliminary proJect de-sign.

' Biddtng and. procurement-relsted costs. A Bor concession can beawarded through either compeilflve bldding or direct negotiationwith sponsors. In both cases,;the government agency responstblefor awardlng the concesslon has to carry out an outllne study of theproject to collect lnformailon needed for the bidding documentsand to prepare themselves for negotiations with the sponsors. The

r96 UNIDO B0T Guidelines

bidders and sponsors also have to undertake extensive design andanalysis work to prepare their bids and to have meaningful negotia-tions with the government.

r Project deuelopment costs. On the basis of the preliminary projectdesign, the project sponsors have to further develop and refine theBOT scheme during the bidding and post-concession award period.

Constnrction costs. This is the main component of expenditure inany proJect. It includes the construction of the entire BOT facility,including the purchase and installation of equipment.

Operating costs. These are the costs involved in operating the BOTfaeility upon corripletton of construction.

Terminationcosts. At terminatlon, costs may or may not be involved.If the proJect agreement requires the BOT scheme to be transferredLn sound physical and ftnaneial condttion, then any shortfall needsto be made good by the proJect company prior to the transfer. If thetransfer ls on an as-is basis (see case-study 4, the Navotas I PowerStation, in the €rnnex to chapter 8), any investments required tomake good the facility will be for the account of the agency takingover the facility. A third possibility is that the transfer may involvea cash payment by the government agency taking over control ofthe BOT scheme.

Sequencing the financial package

Having identified. the components of project costs as described above,appropriate financing for each can then be arranged, in the followingtypical sequence:

. Pre-investment and. project devebpmenf cost As initiators of a BOTscheme, or winners of a competitive bid, the pre-investment as wellas the proJect development costs ls borne by the proJect sponsors.Until such tlme as the proJect ls constructed and operational, thepre-investment and proJect development activitles are non-produc-tive and may nev-er generate a rgturn. As such, they are funded byrisk capital from the proJect sponsors and counted as a part oftheirequtty contribution to the proJect.

. BiddW and,proarementretatedcosts. Duringbidding and procure-ment, each of the parties takes care of its own costs. The govern-


ment bears the costs of the outline study and preparatton of biddocumentation, while the sponsors bear the costs of preparing theirbids. The government may fund its costs as part of normal givern-ment expenditures, while sponsors finance their expenditures withrisk capital, which would again courit towards their equity contri-bution. Sometimes arrangements are made for the costs of bids tobe parttally borne by the government or the winnhg bidder.

Construction costs. At the start of construction, the proJect com-pany should be established, with all the necessary debt, equity andmezzanlne financing already finalized. The funds would be drawndown in the following s€quenee:

o As a first step, the equity funds of the sponsors are drawndown.

o Commercial bank loans are drawn down next, although ln someof the more creditworthy developing countries, debt and equityare sometimes drawn downprorata. In highly developed econo-mies, the drawdown of debt linancing may even precede thedrawdown of equity. :

o Simult€rneous with the above two drawdowns, bilateral andECA funds would be drawn down, as required, to pay for thepurchase of tied equipment and services.

" Project risks are considered to be htghest during the construc-tion phase, when expenditures are highest and before projectrevenues begin. Traditionally, institutional investors have beenreluctant to undertake construction risks, so that during con-struction, the proJect company will have to rely on equity fi-nancing from the sponsors and funds from commercial banks,bilateral agencies and ECAs. This is true unless guaranteesare provided, either by the host government or the sponsors,to persuade instttutional investors to advance their funds. suchguarantees may also be requested for commercial bank or ECAfinancing during construction.

o By the en{ of construction and start of operations, when projectrisks are s'ubstantially reduced, long-term debt, equity.rri *""-zanine financlng from instituttonal lnvestors is drawn down torefinance or take out the short-term debt of the commercialbanks and to provide the proJect wlth long-terrn or permanentflnancing.


Operatlng costs. Once up and running, the BOT facility will requirewgrking capital for its operations. For this purpose, internal fundsof the company may be supplemented by short-term loans fromcommercial banks.

The sequencing of the ftnanctal package is tllustrated in table 4.

r summary Gomments

In arranging limited or non-recourse financing for BOT schemes, it isevident that the actions and responses of the government, sponsors,contractors, operators and suppliers must all take into considerationthe perceptions and concerns of the financing institutions as they willdetermine the shape and form of security required and the financingavailable to the project. The views of the financial institutions will alsodetermine the mix of debt, equity and mezzanine capital to be used. Thecreditworthiness and financeability of BOT sehemes will depend criti-cally on a set of consistent and interrelated agreements between theproject parties that adequately address the aims of the sponsors and theperceptions and coneerns of the financlng institutions.

While the main aim of governments, as far as BOT schemes are con-cemed, is to attract prlvate capital to meet infrastructure investmentneeds and to off-load risks and the burden of financing, they must takecare to do so in a way that, whtle providing a sufficiently attractive re-turn to. private investors, will also protect the national interest. Simi-larly, thiy must nelther expect the private sector to bear unreasonablerlsks nor allow them to abuse monopoly situations that may arise inBOT schemes. ProJects should be structured so that the risks and ben-efitb of the government and the private sector are properly balanced andthe project becomes a wln-win undertaking for both sides. i

The key is to focus on those attributes and characteristics of BOTschemes that are needed to attract sponsors and lenders, while design-ing a regulatory framework that allows government sufficient, but notexcessive, control and ensures that private sector behaviour is not det-rimental to the national interest. For sponsors, these attributes andcharacteristics may be summarized as follows:

r A clear set of rules and regulations that govern BOT schemes: what. is penhitted,and what is not; what will be regulated and what willnot. To ensure transparency, a number of countries have passedlegislation specifically to regulate BOT schemes.


Acliul$

Pre-investment anddevelopmenl cosls

Iype & Sourcs ol Financing

Risk capital lromproject sponsors

Bidding and procurement Risk capital from projectsp0ns0rs

supp0rtgovernmenl

Financial structuring anddevelopmenl of security package

Equity capital fromproject sponsors

Agreements with institutional andother investors

Equity capital frominstitutional and otherinvestors

Agreements with equipmentsuppliers

Long-term Loans from exportcredit agencies forequipment purchase

Agreements with primecontractor and subcontraclors oncosl of construction

Short-term loans fromcommercial banks to financeconstruction

Financing reestrucluring ascompletion ol constructionapproaches

Long{erm Loans from non-bank linancial institutionsand specialist investmentlunds

Financial closingSlart of construction

Drawdown ol equity and loanfunds

0peration Working .eapital f rom theproject company and short-lerm loans lrom commercialbanks


An appropriate sharing of risks by the public and private sectors.

Rules and regulations that permit an adequate rate of return forthe risks that project sponsors are asked to assume, i'e, an appro-priate balance between risk and reward'

For lenders, they are as follows:

Sdtisfactory coverage of all costs incurred up to project completionand the achievement of stipulated performance without further re-course to the lenders.

Sufficient recourse to creditworthy parties if the project is not com-pleted, is abandoned or never achieves the stipulated performancelevels.

ProJect revenue source that is reliable and creditworthy, with pric-

ing features that assure coverage of debt seMce and operating costs.

Reliable system for ensuring that project revenues are available andallocated in a timely manner to service debt and that such revenueswill be in the curency of the debt service, or easily converted intosuch currency, at an exchange rate that will not make the projectunviable.

Designing a security package to mobilize financing for a project is aniterative process. This work, usually undertaken by a financial adviser(e.g. a bank or investment banking firm), is based on the adviser's under-standing of the regulatoryframework, what the sponsors wish to achieve(in terms of cost, return on investment, degree of recourse etc.) and whatis acceptable to the financial communit5t (in terms of risks, securiiy, ratesof return etc.). As the stmcture is developed, a dialogue is establishedwith the financial community, so the acceptability of different structuresto that community can be tested. The structure is then adjusted in thelight of responses from the financial community and the process repeateduntil a security package acceptable to both sponsors and the financialcommunity is found.

$ typical security package is shown in figure VIL IT illustrates thecontractual arrangerlrents involved, the interrelationships between the .various project parties and the flow of funds into the project. While thestructure will vary from proJect to proJect, the basic principles and ele-ments underlying the structure are similar for most BOT schemes.

Finally, it is important to note that the set-up cost of BOT schemes canbe quite high. Fiist, BOT schemes €re a fairly recent phenomenon, at


least in developing countries, so many of the parties involved are unfamil-iar with what is required to implement them successfully. There ls, there-fore, substantlal cautlon on all sldes. Secondly, the contractualarrangements involved irn BOT schemes can be fairly complex, and theprocess of contract drafting and nego$aflon with govemments, public sectorcorporations, credltors, contractors and raw matertals suppllers can betime-consuming and costly. Thus, before participattng in BOT schemes,sponsors must be prepared to commlt substantial financial and manage-rial resources to tnltial proJect deflnition, bid preparation and contractnego$ailon.They must also look at BOI schemes as buslnesses that haveto be managed over the long term rather than merely as a means to win

nstruction-contracts afil increaSe equipment sales

202 UNl00 B0T Guidelines

compleilon

l- F*-*il - F;:J ['T':] I'j.:f rnrr*o,ou,, rql]itv 1L Agreement --l Investment I

. Equrty * | ill - lnsurance Iiporily a Inv€stment llj I lil |

tFinancialsupport lli I lli | [------l

I lll I lli | | GREDIToRS I+ { !+ i l t J t l

Equity

| -i PRoJEcr L-- ro'n' :J

flow ol funds

TrPolitical Risk,

Physical Damago,Loss of P.rofit Protection

I

IGuarantee

GOUERIITElIT\l rru|l|rn||l i(f-- Exoort

Proiect 'l

I Creditsnirl?irlirt

urcu'(D i- ExPonTl

l l I l l I cREDtT Il l I l l l AGErcrEs Il l l l t l - - - - ' - - - - - lconstructi'n -J | ",,1^,., I I rqhnrent i

I contract -l

m'3'Ty"tr'Jl1['*1 'd;ilffiil"1+ +

F^*r*--l tr--.'-':l [ftT";-l E'*'lc0xrnAcronl I

orr*rr ll ffi;Iil llcorsuHrns------r------=---r------ ----r--- "_------T------

Construction hrlormance Pdco & Supply Cost Infladon & PerformancsGuarantss Guaranlees Guarantsss Exchange Guarantess

, i , RiskProtectionI J I

- i--"- J

O . . . . . . O . 1 i . . . . . O

- - +. risl{rewardmechanisms

. . ] .risly'rewardpackaging

{-)contractualrelalionships


TWO GASE.SIUIIIES

CASE-STUIIY 1: TATE'$ CAIRI{ TUtlllEL, H0llc l(Otlc

The financing for the Tate's Cairn Tunnel Company (TCTC) comprised shareholder equity ofHK$ 600 million and.a term loan lacility of HK$ 1.55 billion provided by a consortium olbanks, arranged by the Bank of Tokyo, the China Developmenl Finance Company (Hong Kong)

. antrtfirFuji Bank In implementing the proiect, shareholders'Tq[irtywas drdwrrdown firStlofund the initial 15 months of construction work, with the lerm loan facility being utilized tocomplele the prolect and to cover the operating expenses during the initial years ol operation.Income is generated through tolls, which are payable according to vehicle type (in all, thereare nine individual vehicle classifications), on an ascending scale, from HK$ 4 for private carsto HK$ B for two-ule heavy goods vehicles, with an additional H{($ 5 being payable for eachadditional axle; Subsequent toll increases.during the 30-year franchise for the project aresubiect to government approval. '

TCTC expects to receive modesl periodic increases in income during the franchise period,wilh royalty payments to the Government being levied at 2,5 per cent ol gross operatingreceipts for the first live years of operation, rising to 5 per cont alter that. lt is expected thattunnel operating costs will be between HK$ 55 million and HK$ 60 million per year, themajority of which is for salaries and vehicle expenses,Repayment of the term loan facility is to be achieved within 12,5 years from the date thetunnel is first opened to the general public. lt is expected that dividends will be paid to theshareholders within seven years, depending on certain events. Growth forecasts prepared byTCTC based on low-, medium- and high-growth scenarios all show dividends payable withinseven years of opening. Attached to the lacility provided by the banks are a number o{ termsand condilions requiring the bonower, TCTC, to provide guarantees against such items asconstruclion costand time ovenuns. Since the project was completed well within both criteria,the financial undertakings of TCTC have been discharged with remarkable ease.

CASE-STUDY 2 : GHAllll EI TUtl]lE[, FRAilCE-UlilTED tfl tcDOtt

0ne of the largest, mosl visible and contentious B0T schemes to be implemenled in recentyears is the channel Tunnel between France and the united Kiqgdom. Following the signingof a treaty between France and the united Kingdom on 14 February 1 g86, four major agreementswere set up within the contractual framework. The financial structure of the projecl has anumber of salient features.


The concesslon contract

,ThecontractisbetweenEurotunnel,theproiectconcessionaire,andtheGovernmentsofFranceand the United Kingdom. lt gives the concessionaire the right to construct, own and operatethe proiect for 55 Years.

The rallway usage contract

The railway usage contracl was signed on 29 July 1987, the date of ratification of theconcession, between Eurotunnel and the national railways of France and the United Kingdom.It covers the terms agreed with the national railways of France and the United Kingdom for theoperalion olsplvqlrtlllaf lratlqlfpqgh llE!qn!ql.IhqIq]lwqyqpqge qo4tractq!oys th ugqof up to half the tunnel caPacitY.

The construction contract

The conlract for a B0T proiect is generally awarded on a lixed price, lump-sum, turnkey basisThis was not the case with the Channel Tunnel. Instead, the construction contract betweenEurotunnel and Transmanche Link, the contractors, conlained three separately priced piecesof work: a lump sum for the British and French terminals and the fixed equipment in thetunnels; a target price covering the tunneling work itself; and a provisional sum with respect tothe rolling stock, with the lump sum part of lhe contract accounting lor only about 40 per centof lhe total contract price. For B0T projects in general, however, the larger the share accountedlor by fixed price in lhe construction contracl, the greater the comfort ol the banks.To begin with, proposals lor the Channel Tunnel were submitted by a consortium of 10contractors and 5 banks. This consortium later split up, with the banks forming the nucleus ofthe banking syndicate for the proiect. The contractors, meanwhile, formed a group calledTransmanche Link and negotiated the construction contract with Eurotunnel. The constructioncontract covers all design, engineering and construction work. lt is in many ways a performance-related contract, since at the time of its negotiation only an outline design was available;

The credit agreement

The fourth major contract is the credit agreement, which was entered into between Eurotunneland a syndicate of 21 5 banks on 4 November 1 987. The core group of these banks had beenpresent when the original.project proposal was submitted in 0ctober 1985. An underwritinggroup of some 50 banks negotiated the credit agreement before syndication. The agreementallows for an 1B-year loan life and is linked to the concession contract, the railways usagecontract and the construction contract. lt places a number oJ duties on the borrower assccialedwith these other contracts. Most of the negotiation for the credit agreement took place during1986 and the first half of 1987, in parallel with the equity funding programme for the pro ject.Funding for project work, up to the end of 1986, was provided by the original group of banks

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E Introduction

A BOT project involves a number of important contractual arrangementsamong the participants. A brief description of the main contracts fol-

lows, more or less in the chronological order in which they are usually

established.fheGt in import-nce, alfiough not nec-ssarily in time,G ttre pr{ecT

(or concession) agreement. As the only truly unique document in the BoT

contract package, it will also be discussed separately in chaptei I L The

other contracts in a typical BOT package €rre commonly used in one form

or another in all sorts of other contexts throughout the commercial world.

Nevertheless, in a BOT project all the contracts must fit together into an

integrated whole. Together, they deftne the respective rig;hts, obligations

and risks of each party. The provisions of the web of interrelated contracts

underlying a BOT project must be consistent and complementaly. For ex-

ample, Jorce mseure, choice-of-law and dispute resoluuon clauses should

be.consistent throughout all contraets to the maximum extent possible.

None of the contracts Ar a BOT proJect exists in isolation. All are lnterre-

lated and must be effectively coordinated.

r Gonsultant agteements

If the host government has no expertise of its own in the field of BoT

arrangemenis ana rehted matters, it may need to recruit outside con-

sultants to help identiff and define the project and put together its re-quest for proposals. In this situation, from tfre point of view of the hostgovernment, the first set of BOT contractual documents will normally beagreements to hire the outside consultancy, Three kinds of expertisewill usually be involved:

l l

. Technical expertise in the relevant industrial sector (e'g. powerplants, ports, roads, telecommunications).

UNIDO B0T Guldelines

a

r Financial consultancy, for knowledge about potential sources offunding, financing structures and instruments, foreign exchange,capital markets, feasibility studies, and various other matters thatlenders will require as part of the security package.

r International business legal counsel to help the host government' shape the legal framework for the BOT proJect, draft or revlew nec-

essary documentatton, and help establish the contractual docu-ments wtth the BOT proJeet sponsors.

The baslc lssues to be addressed ln the consultant agreement are thes€€pe of worJc, qualifieations an4 expertenee of the matn eonsultants;type of consultancy contract, pricing and payment provisions and pro-fessional liability.

Consultants must be chosen wlth care. Host governments usuallyorganize a roster of consultants, rating them in terms of their generalqualifications and reputation, adequacy for the project and experiencein the country or reglon.

Consultants are usually retained on the basis of a time-based fee forservices, which can be hourly, daily or monthly, plus out-of-pocket ex-penses (these are known as time-based contracts). For some assign-ments afixed retainermaybe appropriate (known as lump-sum contracts,percentage contracts or cost-plus-flxed-fee contracts). In some cases asuccess fee may be approprlate.

The host government should establlsh procedures to review theprogress of consultants' work in relation to the agreed-on terms of refer-ence and schedulq. It should retain the right to terminate consultants'arrangemeRts tf it.becomes dissatisfted wlth the service being renderedor iJ the services are no longer needed.

Host governments should be aware that technical asslstance and ca-pacity buildtng are avallable from btlateral and multilateral agencies,including UNIDO. Such asslstance could be funded through loans, grantsor trust-fund agreements.


r Prellminaty Gonsortium agreementl

From the point of view of the tnitial sponsors of a BOT project, the firstimportant contract will be the one they agree among themselves, usu-ally referred to as a preliminary consortlum agreement or a joint ventureagreement. Tlpically, the tnitial sponsors will enter into such an agree-ment in order to respond to a government request for proposals or topropose a BOT proJect that has not been solicited.

Ttre agreement among the sponsors will provide for an initial sharingof the substantial costs requlred to do feasibility studies, to hire outside

; advisers;Jo?repare tenders and ts do st]+e+ pre-liminary dweloprnentwork. Thts preliminary agreement will commit the parties to various un-dertakings, in principle, subject to the negotiation of more definitive agree-ments. One critlcal commitment, of course, is to make specified amountsof equtty investments in the project company when formed. The partiesmay also agree at this stage to.provide additional support in the form ofstand-by equity or stand-by subordlnated loans, if these should be even-tually required as part of the financtng package.

A prelimtnary consortlum agreement wtll also indicate the parts ofthe proJect that some members of the consortium intend to provide (e.9.construction, supply of maJor equipment, operation and maintenance).However, the agreement should provtde that the proJect company will befree to negotiate with other provlders if the consortium member is un-able to provide the services or goods in question on an arm's-lengthbasis, at competttive market prices.

The agreement should also provide a mechanism whereby those witha maJority economic interest in the consortium can drop one or more ofthe particlpants in certain circumstances (for instance, if the construc-tion price offered by the construction contractor rnember of the consor-tium is clearly uncompetltive). The extent to which, ahd the circumstances '

in which, the costs of a member dropped from the consortium are to berelmbursed by the other members should be spelt out, as should whether,and on what terms, a member may drop out voluntarily. As noted ear-lier, if confidential proprietary information is to be shared among theparticipants, then either the preliminaqr consortium agreement or anancillary agreement should contain appropriate contractual provisionsto protect the confidentiality of the information.


-

n Proiect eompany agteementsBy the tlme the project compapy ts formed, the ftnal consorflum oftenincludes other parties in addition to the tnitial sponsors, In a BOTscheme,the proJect company at that stage may include a number of acilve andpassive sponsors, such as contractors, equlpment and material suppli-ers, a host government agency or utillty, operators, portfolto lnvestorsand institutlonal equity investors. The contractual agreements amongthe flnal consortium members will expand the preliminaq/ consortiumagreement and will establish long-term bturding commitments amongthe parties. Many of these commitments will be included in the formal

company statutes, partnership agreement etc.). others may be set forthin separate agreements among the consortium members (e.g. a share-holder's agreement).

The precise juridical form of the proJect company will depend on thecompany laws and on the tax laws and foreign investment laws of thehost country and the home countries of the various sponsors.

Public limited liability companles, private limited liability companies,partnerships of varlous lijinds (normally with speclal-purpose, limited-li-ability companies as partners) and Joint venture companies with eithercorporate or partn'ership characteristics have all been used in the Borcontext. A limited'ltability company ls often the preferred vehicle. Theorganlzatlonal documents wlll contaln btndtng commitments for tJre eq-uity eontributlons and stand-by support requlred of each participant anbwill provide for board representation, voting control and transferability ornon-transferability of shareholdings, admission of addiuonal equity .in-vestors, withdrawal of investois and a number of other mattbrs.

r The project (or concession) agreement

The project agreement is central to a Bor proJect. tt is normally preceded,however, and to some extent determined by the provisions setlorth in thegovernment's request for proposals, in the sponsor consortium's bid andin the award that the host government might issue to the winning bidder.

The project agreement will set forth the rights and obligations of thehost government and the proJect company (see chapter t tJ. The obliga-tions might include the ones described next.


Host gouernment

The host government will typically do the following:

' Authorize the project company to be engaged in the project for theperlod of the concession

Providetheland,easements,airr1ghtsetc.requiredforprojectorpromise to exercise power of eminent domain if required.

Provldd, whenever necessary, access roads and utilities for proJect(to the-degree not lncluded in proJect company obltgationsl' : '

Agree not to authorize competing projects in case such projects'would undo the economic proJections on which.project feasibility isbased.

Set forth the amount and method of payment ior the project (if it iscontract-based) or determine the amount and method of chargingthe public (if market-based). In the case of contract-based revenues,there may be a separate off-take contract (it may be with a differentgovernment agency) covering the sale of the project's output and:the arnounts and method of payment.

Provide for inflation adJustment, foreign exehange convertibility andexchange rate protection to the degree necessary.

Proiect company

The proJect company will typlcally do the following:

r Desi€ln, develop, flnance, construct, complete, test, commission, op-erate and maintain the proJect according to specific destgn and per-formance criteria.

Prolcct t l tc envlronrncnl. throttgh appr<lpr ' late t tst : ol-prt l l t t l l r ln <:<ln-trol equlpnrent artd cnvlronrncntal ly sount l <:r l r tstrut : t lon atrdoperation techniques

Provide periodic reports to the supervising government agency andgiye it access to the project for inspection purposes.


Pay liquidated damages to the govoirnment for delay or fallure tocomplete the proJect or to meet e4pected performance. The proJectcompany may seek ln return a bonus payment for early completionor better-than-proJected performance.

Provlde lnsurance coverage for the proJect, parilcularly thlrd parryItabtlity.

Provide tratntng and employment for local employees and sub-contractors with a vlew to maximizing technologl transfer andcapabllity building.

Include specified amounts or types of local content in the project{e.g. manpower, englneertng and other seFrices, equipment, rawmaterials) to promote the local economy.

Transfer the project in good working order to the host governmentat the transfer date.

Off-take agleement

For a Bor proJect to be "bankable" lt must have at tts heart a sufficlenilycertaln revenue stream. The proJect agreement may itself spell out theterms under which the Bor proJect compzrny is expected to earn itsrevenues. [n some cases, for example tn a power plant proJect, the rev-enue stream will be: embodied tn a long-term power off-take contract orpower purchase agreement with the potential consumer of the power tobe generated (for example, a government-ownecl power distributton com-P:rrry). l , l t r ' l r sr .<. lor. r . i r r ' l r r .orrrr l ly arrr l l l r t l r : r :c l r :acl t prol t : r : l wl l l l r i rvr: l lsown prlclng lbrnrula lbr an oll-take contract, but some parameters willbe fairly constant.

Normally the government will guarantee a minimum payment, usuallyin the form of a capacity fee, payable on a take-or-pay basls, that is,payable for a certain amount of capacity, as long as the project companydemonstrates that the plant can operate at that minimum capaclty, whetheror not the government actually takes the electrlcity. The lenders to theproJect will want to make sure that thts mtnimum take-or-pay payment issufficient to keep the proJect gohg (t.e. capable of operating at the targetmtnlmum capacity) and to service the proJect debt. If it is not, they nor-mally tnsist on other forms of credlt support to cover any shortfalls.


A power off-take contract would also normally provide for an energ/ feeon a different basis, for power actually generated and sold. The pricingformula here normally takes account of the variable or marginal coststhat the proJect company has to bear to generate electricity, with a smallprolit factor. The combined capacity fee and energy fee should be de-signed to do three things: to assure the lenders that sufficient revenueswill be available to cover proJect debt service; to assure the equity inves-tors that, if they bulld and operate the project as planned, they will re-cover thelr lrrvestment and earn a reasonable return to compensate themfor the equity rlsk they are taldng, which should be based on expectatlons .as to revenues that are agreed between the host goverrlment and the in-

. vestors; and to afford a reasonable sharing ofthe benefits betweerr theinvestors and the host government if the proJect is more successful {forinstance, if it is able to generate and sell more power or to do so moreefiiciently) than had been expected.

Careful attention to these details in the project agreement and in theimplementing off-take contract can avoid a situation in which a projectcompany is able to earn unreasonable windfall profits. If such contin-gencies are not properly foreseen and dealt with in the off-take contract(and elsewhere), the equlty investors could end up earning excessivereturns, meaning that the host government will end up paying morethan it needed to for the project.

An off-take contract is appropriate for any project providing goods orservices that can be delivered on a long-term basis to an identified pur-chaser (power, water, telecommunicatlons and even, in some cases, tolltransportation facilities). fu example of the latter is the Channel Tun-nel, where long-term user agJeementswere established with the nationalrailroads of France and the United Kingdom.

In other cases, such as a toll road or metro rail system with market-based revenues, the appropriate government agency will commit itself tothe level of tolls or fares that may be charged and the monopoly con-ferred by the concession. Issues such as variable rates of return basedon actual levels of traffic or passenger usage will need to be addressedby both the proJect company and the government to assure a reasonablerate of return commensurate with the risks undertaken, to guard againstunreasonable windfall profits and to provide a fair sharing of benefits.

I[

*3i&ia.'... I


I Gonstruction agreement

knders are prepared to look primarily to the revenue stream of the BOTfacility once it is operating. But what of the period before start-up? Whatis their security? How do lenders analyse what is known as the comple-tion risk? Here, they look primarily at the construction agreement.

Most BOT proposals and projects are done on the basis of a lump sumor a fixed-price tumkey construction contract, knders will look primarilyto the project company for cost, schedule and completion guarantees dur- :

'

ing the construction period, The project company, in tum, will try to real-locate as much ofltris dsk-as possible to the esRstruetisn eoRtr?etor or, -where appropriate, into the insurance market.

The construction agreement for a BOT project will be discussed inchapter 12. ExpertencJitr negotlating construction contracts shows thattt ls crltlcal to focus on rlsk allocatton ln as flodble and realistlc a way asposslble. All parties want to minimize their completion and performancerisks. Yet risks cannot be eliminated, and they all have a cost associatedwith them. "Someone" must accept (or share) every element of risk. Thechallenge is to diversi$ the risks and to allocate each risk to the partybest able to manage it. Risk allocation and management should be ana-lysed together.

Cases in which a contractor offers to bear virtually unlimited risksmust be viewed with skepticism. The host gorr.rn*.it must carefullyassess the contractor's ability to undertake this risk as it can proveentirely illusory.

r Equipment supply contracts

If the proJect requires substantial heavy equipment in additton to theconstruction itself, the project company, either directly or indirectlythrough the construction contractor, will negotiate with various equip-ment suppliers for the supply of such equlpment. A power plant, forexample, wlll need bollers, turbines, generators and othlr hrgJ pieces ofelectrical equipment. An urban transit system wtll need engines, pas-senger vehicles and track. Each type of equtpment will be the subject ofcontracts separate from the construction contract.

Equipment supply contracts will vary little from those entered into ina traditlonal infrastructure proJect. For this reason, they are not dis-cussed further in the Guidelines.


0peration and maintenance conttact

In many BOT projects, the project is not operated and maintained by theproJect company itself but is contracted out to a firm experienced in theoperation and maintenance of the particular type of facility. The firm thattakes resporlsibility for this may be one of the equrty participants in theproject company. The operation and maintenance (O&M) contract willdeline parameters for operating efficiency. It usually ineludes penaltiesfor failure to meet these base case efticiency levels and bonuses for ex-ceeding them. Maintenance standards are specified as well, Host ilovern-mentsshould require theprqiect company tojncludejn ttre O&M agreementpiovlstons that promote the employment and tratntng of local citlzens andthe transfer of technologl.

As noted earlier, it will be essential to insure that the rights andobligations of the parties to the construction, equipment and O&M agree-ments are defined in a manner that is consistent and complementary.Disputes, for example, should be handled in a single forum under anagreed-on law. Ordinarily, these disputes can only be resolved equitablyby having all interested parties present to state their position at onetime in one place. The important thing is for the project to be able tomove forward.

The operation and maintenance of BOT projects will be discussed inchapter 13.

r Insurance Gontracts

A BOT project requires extensive insurance coverage, including casualty,third-party liability and, often, business internrption insurance. The in-ternational insurance market has developed several innovative forms ofinsurance specifically designed for BOT proJects. It will be up to the hostgovernment, and to a certain extent the lenders, to decide whether thecost of such insurance is justified (it will, of course, be added to the totalcost of the proJect and eventually paid, directly or indlrectly, by the hostgovernment or local consumers). It may be more rational in many casesfor the host govemment to provide a stand-by loan commitment to coverthe sarne risks. In any event, insurance professionals must be consultedbecause increasingly sophisticated and creative coverage is becoming avail-able as experience with BOT projects accumulates.

t , .


I

r Finanoing contraets

The finaneial "engineering" of a Bor project can either be relativelystraightforward or exceedingly complex. The degree of complexity willdepend on the dilllculty of financlng the proJect, the nature of the risksinvolved, the sophistication of the capital markets in the country in whichthe project will be located, the degree of equity commitment the spon-

: sors are prepurred to make; the degree of support being provided by thehost government, the availabllity of hedging instruments for foreign ex-change risks and many other factors (see chapter 9).

the baslc construcilon loan and may provide the permanent financing.The two loans may be contalned ln a stngle loan factlity at the outset ormay be structured as separate financinginvolving different lenders. Thefinancing at each stage may involve several dtfferent levels of senior andsubordinated debt. since there are fewer risks to the lender once con-structlon is completed and the operational phase begins, it is not unu- ;sual to see different lenders willing to participate in the perrnanenrfinancing and thus to have, for instance, funds raised by long-term notesissued to insurance companies, pension funds and the like used to re-pay all or part of the initial cons*uction loan when construcilon ls overand operation begins.

Nornrally, there will also be commitments for stand-by loans oradditional stand-by equlty, which are sometimes.backed by letters ofcredit or bank guarantees obtained at the sponsors' expense, to covercost overruns or delays during construction or revenue shortfallsduring operation. The sponsors will:in turn seek to have these eventuali-ties covered by liquidated damages in the construction and o&M con-tracts. The contractual provisions to pay liquidated damages are normallybacked by performance bonds. Insurance might also be used to

"ou.ithese eventualities.In host countries where strong capital markets or institutional inves-

tors exist, part of the financing can come from notes qr debenturesoffered to local investors. some Bor proJects have included either directloans from the local government for part of the proJect cost or stand-bycommitments to make subordinated loans in, for instance, the eventof Jorce mqleure, where no other proJect parilcipant is wtlllng to coverthe risk. ::

There is no absolute rule as to how much of the project costs will becovered by debt ftnancing and how much by equity. on the equity side,the original equity of the project sponsors will already have been defined!_t!. agreements relating to the formation of the project company. someBorprojects, however, have contemplated additional equity being raised


from outstde investors, etther at ftnanctal closhg or as part of the per- \manent financing at completion of constructlon. At the latter point, asuccessful BOT proJect begins to resemble a publlc utllity and can there-fore be made attractive to investors as a stable, relatively safe invest-ment. Particularly where the local capital markets are sophisiicated andlarge enough, a BOT project may well contemplate raising additionalequity during the operational phase. If such equity is an essential partof the financing package, there should be a commitment from an under-writer to place the equity.

r $ecurity package

The lenders to a BOT project wlll normally require fairly elaborate secu-rity arrangements.

Firstly, proJect revenues are usually paid not to the project companybut lnto one or more escrow accoults: ryt ent.Theescrowagent-i6-jr-tgs-"q.asr@thatareETG[?f iEii?Grstothe project. It ls Ilffiys independent of the proJect company. Paymentsare made from the escrow accounts according to stipulated priorities.The lenders ri6rmally insist that a speciglCSbl4ggrvg-Cgele$/ie.colntbe estab_lished and maintained sufficient t9- pa.y -debt g_gryic._q.{o{ g mi_ni-muin perio.d(sfimo'iil6s or lcingei) 66io re iny distributio ns can be

-mid e

to equity investors.Secondly, the benefits of the various contracts. entered into by the

project company (for example, the turnkey construction contract, per-formance bonds, supplier warranties and insurance proceeds) as well asthe other assets of the company will normally be assigned to a trusteefor the benefit of the lenders.

Thirdly, the rights and obligations of the various lenders among them-selves will be spelt out in an intercreditor agreement.

Fourthly, lenders will normally insist on the right to take over theproject from the original sponsors and investors in the case of failure tomeet a defined financial and technical benchmark. well before the bank-ruptcy stage, and to bring in new contractors, suppliers or operators tocomplete or operate t[e project.

Fifthly, numerous policies insuring against a variety of risks (fo.r gx-ample, political, fire and other casualty, Jorce mqJeure, delayed comple-tion and liability) will be secured.

Finally, commercial lenders, export credit agencies and multilateralfinance agencies may request measures of government support to

IE;


:

protect the lenders against any substantial general or country riskover which the proJect sponsors have little or no control and that couldimpact the project's viability or cause it to fail.

In chapters I l-13, the key features of the profect, construction anclO&M agreenrents are presented.

;

220 UNIDO B0T Guidetines

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. Main featules and functions

contracts known as "proJect agreements", "concession agreements" or

"inlplementation agreements' have become the main legal instrument

for the arTangement of BOT proJects. The provisions of these contracts '

(ln the followtng subsumed under the term "proJect agreement") will vary

il-pending on th- typaof id-ras-rucfure f'aciliff anct the tegal €md eco-

nomic conditions of each country, The rnaln features and functions of

project agreements are, however, similar irrespective ofthe type of facil-

ity .t a the country concerned. The three most important functions are

dlscussed below.Firstly, the proJect agreement is the basic contract between the host

government (or agovemment entity) and the proJect company authorizing

the proJect company to construct and operate the project, usually for a

specifidperiod oitime, and establishing the parameters of the concession.

Ii stipulates the tariffs and terms of payment under various conditions

and defines the perfOrmance standards to be met by the project company

in the construction, operation and maintenance of the project in ques-

tion. The project agreement ls.the document that identifies the risks asso-

ciated with the proJect and allocates them between.the government and

the pnoJect company. It speciftes the support to be provided by the govem-

*..rt, ihe supervision mechanism required by thb government and the

actions to be taken if certatn eventualities occur during the life of theproJect. Finally, the proJect agreement stipulates the terms of the transferof the proJeet at the end of the concession period'

secondly, the partlcipation of third parties in BOT arangements is

closely coupled wlth the content of the project agreement. L,egally, theproJect agreement is a contract between the government and the proJect

company. Yet, because the performance of third parties such as finan-

ciers, constructors, suppliers, purchasers and O&M companies and the

spre4d of rtsks between the various actors is esgential for the implemen-.tattori of any BOT proJect, their concerns will have to be met in the project

agreement as well. First and foremost, the project agreement has to pro-

vtie for the financidl, "o--"rcial

and se"nrity terms needed to make

the proJect capable of being flnanced (bankable).

Thirdly, the proJect agreement is used as the tool for coordinatingand lntegrat|rg the varlous financial, construction and operation con-

tracts constttuting the contract package required for a BOT project (see


chapter 1o). In other words, it is used as the centre of the complex webof contracts, usually of a transnatisnal character, that ts needed for thepackagtng of Bor infrastructure arrangements and that deftnee the par-tlcular BOT proJect.

r The legal natule ol a project agleement

-- As already indieatedJse majority of eountr{es applying{he Bgtrschemeto infrastructure proJects have used the proJect agreement as the mainlegal instrument for the complex Bor arrangements. some countries,however, owing to their legal and admi:nistrative traditions, have grantedBor proJects by an admlntstrative act known as a concession authori-zation or by an authorlzation llcense. The authorlzaflon may be brief,referring to a mandatory concesston legislaflon, or may be as detailed asa proJect agreement, depending on the legal and administrative systemof the country concerned.

In any event, the dlfferenee between the legal nature of a proJect agree'ment and the legal nature of an authortza0on should be clearly per-ceived. where the contract form ls used, tJre government is acflng ln acommerclal capaclty such that general contract law and commercial laware appllcable to the Bor arrangement. By contrast, accordlng to mostlegal systems an authortzatlon or llcense ls characterized as an admin-istratlve act governed by the admtnistrative law of the country,

Thls difference between a proJect agreement and an administratlveauthortzation may have a numbei of pracucat consequences. For exam-ple, in general an admtnistrattve authortzation or a llcense is revocableor can be amended by the govemment at wtll without the consent of theproJect company; by contrast, a proJect agreement, as a contract, typi-cally will only be alterable if so provided for tn the agreement or by com-mon consent of the parties. The enforcement by the proJect company ofan administrative act may also be more uncertainthan the enforcementof a contract, depending on the administrative system and legal tradi-tion of the host country. These aie signtficant issues in terms of thebankabiltty of a Bor infrastructure prolect. It is further assumed thatthe contract ls a more flextble legal instrument tharr an administrailveact for coordinating the complex and transnational structure of mostBOT arrangements. :

For such reasons. the proJect agreement with its legal nature of acontract ls preferred as the key legal document for Bor arrangementsworldwide. t

224 UNID0 B0T GuidellnesIr

. ilegotiation and negotiability

It is usually assumed that the provisions of a project agreement are nego-tiable contract terms and that most project agreements accordingly arethe end products of a negotiation process between the government andthe proJect company. Such assumpti,ons, however, are in need of somequalification.

As discussed in chapter 6, national and international laws and regula-tions normally require the use of competitive biddingas the procurementmethod in order to achieve effIciency, falrness and transparency in theprocurement process. Wtthln the competlttve blddtng approach, the scope

- fqr negotiathg the terms-oflhe proJect agreemenlmay be very ltmlted.Usually, the government dra.fts the conditions and terms of the projectagreement to be entered into with the successful bidder. The draft of the :project agreement, supplted to the prospectlve bidders as part of the bld-ding documents, constitutes the basis for tender preparation, the evalua-tion of the bids and the risk analysis. The govemment usually makes itclear in the instructions to bidders that a responsive bid must conformwith the draft of the project agreement. Unless this is done, each bid maybe submitted on dlfferent contractual terms. which will make it difficultfor the government to compare and evaluate the bids.

Prior to tender and during the evaluation stage, clarification of con-tract terms may be requested. The bldders may also be entitled to sub-mit firm, alternative bids. But no negotiations will take place at those

t stages. Indeed, negotiation wlth bidders during the tendertng proceed-ings, including negotiation of contract terms, is prohibited by most in-ternational bfdding rules, as diseussed in chapter 6.

. There have been exceptions to the strict exclusion of negotiation of con-tract terms within the competitive bidding method. Some national bidding

: regulations permit negotiation of non-substantial contract terms duringthe evaluation process. Such negotiatons, however, have usually been lim-ited to understandings and reservations made by the bidders in their bids.

In any event, the use of the competitive bidding method for BOT'lnfrastructure proJects severely limits the possibility of negotiating theterms and conditions of a proJect agreement. Where competition amongthe bldders is tough or lf a government lnsists on avotdtng delaysln reachtng the proJect agreement, the eontract terms prepared by thegovernment are not subJect to real negotiations unless the government, inthe biddingdocuments;''has clearly allowed eertain terms to be discussed.

;- Where applicable law or lnternational rules do not require a competi-tive bidding procedure or the government chooses not to adopt such aprocedure, the government may conclude the proJect agreement by a

, negotiatton approach. Even tn this situation, it is not correct to say thatthe terms and condltlons of the proJect agreement are negotiable con-

' tract items in the widest sense of this expression.


For one thing,,the parties must take into account the different typesof relevant mandatory laws and regulations in the host country, usuallyof a technical, administiative, fiscal or other public nature, such as in-frastructure sector laws (electricity sector lawi or communication sectorlaws) and laws relating to envlronmental protection, safety standards orforeign exchange. The parties must also take lnto account mandatorvrules in other countrles if those rules are relevant to the performance dfthe proJect. Thus, the law of the country of the suppliers titecrrnotogrmay regulate tJre contract terms upon which tectrnotogr can be trans-ferred under a proJect agreement.

Furthermore, when negotiating and drafting a project agreement, the

viously coneluded and lmplemented agreements in order, for example,to facilitate the financing of the Bor proJect in question. These are allissues which in practice limit the negotiability of the terms and condi-tions of a project agreement within a negotiation approach.

Generally speaking, it may be to the advantage of most Bor projectsto limit the scope for negotiation of the terms and condttions of pro;ectagreements. The experience in rqgard to negotiation of proJect agree-ments has clearly shown that negotiations may lead to torrg delalas inreaching the agreement and therefore add to the project cost, both inreal terms and in terms of lost opportunity.

r The diuercity of project agreements

Project agreements are diversified with regard to their content, their struc-ture and the wording of the provlsions, They range from huge, complexcontracts, tailor-made for a particular lnfrastru"Lrr" proleci (for exam-ple, the expressway agreements ln Thalland, the power

-contracts pro-

posed for Pakistan and a great variety of transnaflonal agreementsinfluenced by multinational ftnancial agreements) to straightforward andto some extent standardized contracts for each infrastructure sector. asin China's BOT programme.

Nor have the proJect agreements been static. Although the Borconcept is a relatively new approach to the financlng and operationof infrastructure projects, the proJect agreements havJchanged some_what in accordance with new experiences, the involvement of iew infra_structure sectors and the legal traditions and market positions of thecountries adopting BOT schemes.


::1

. , iittl{!'l

j On the whole, however, there is less variety in the content of projectagreements than mtght be expected. Whlle the proJect agreements lnuse today may differ considerably from earlier ones in structure and inthe drafting technique applied to the contract provisions, they containlargely the same categories of provisions.

Some proJect agreements, ln partlcular in Asia and ln South America,appear to havebeen strongly inlluenced in regard to structure and draft'ing technique by the Anglo-American legal tradition. This means thatthe contracts are very detailed and comprehenslve and sometimes struc-tured in a way that may be difficult to follow. This style may be due lessto legal tradition than to an attempt to cover the many regulatory needs

. supplement national legal frameworks that are considered to be less- '

than-adequate for supporting BOT arrangements. As pointed out in chap-ter 4, the comprehensiveness of any proJect agreement will to a largeextent depend on the legal framework of the country in question. If the

framework is conducive to BOT projects, the drafting of a project agree-ment will be relgtively straightforward. In countries with legal systemsthat are less supportive of or less transparent to the BOT approach, theproject agreements must try to be more-or-less self-sufficient.

r Some guldelinos for sttuctutlng anddrafting ploiect agleements

Addressees for the plolect agleement

For the reasons stated above, proJect agreements are usually draftedby the government or a go\/ernment entity. Before drawing up a projectagreement, the government may find it useful to identiff the main ad-dressees for the agreement. Clearly, most project agreements are firstand foremost addressed to proJect managers, financiers <lf the projectsand offtcials supervtsing the implementatlon of the proJects-and not tocontract lawyers alone. The proJect agreement accordingly should pri-marily be drafted as a management tool for these actors to help to bringabout.the financial, c.onstruction and operation managemeht disciplineso ess'ential for the success of BOT arrangements. This means that theproJect agreement should be structured primarily with attention to theperformance standards and the projected implementation stages of theBOT project in questlon, placing the more juridical and usually hypo-thetical provisions in the background.


:

Recognlzlng the proJect manager, supervlstng ofliclals and flnaneiersas the main addressees further implies that thJ drafttng technique ap-plied-to the contract provlslons should be as pre,cise and

"t-,*"y.bt. ""possible. For example, it is advlsable to avotd using legal concefts suchas "reasonable", "materlal", "negligent" or "best endeavour" in the ftnan-cial, construction and operation provisions of a proJect agreement orlong, casuistic enumerailons followed. by phrases like

-"incluling but not

limited to...". short sentences, surveyable secilons and a logtJal refer-ence system will also help to make a proJect agreement more manage-able to the addressees in a BOT proJect.

A framework fol project agreements

It is not possible to recommend a model for proJeet agreements thatwould be suitable for all types of Bor proJects regardless of the infra-structure facility, the countr5r rn question and the legal system. The struc-ture described in thts secilon is only meant to bJa framework for thecategories of provisions commonly found in proJect agreements. pJinaturally identifies the parties and defines the basic i..-s.of the Borconcession. Part II, following in chronologtcal order the implementationphases of the proJect, deflnes the rtghts and obltgations of the partiesfrom site acquisrtion, through design, construction, testing, operationand maintenance, to the final transfer at the.end of the coricessron pe-riod. Part III comprtses what may be termed the general obltgations ofthe parties, that is, provisions applicable to all phises of a Bor pro3ect(compliance with law, environmental protection, lenders' security provi-sions and so forth)' Grouping such provisions clearly simplilles ttre prqectagreement, Taken together, parts II and III of the agreement may serveas a contractual flow chart for the management and supervlsion of theprojected implementaflon-of a Bor proJect. part IV deiines and regu-lates the consequences of changed ctrcumstances, breach of contractand other situations only hypothetically relevant for a Bor arrange_ment. Depending on the legal traditions of the contracting parties, theremay also be chapters on assignrnent of the project agrelment (part tqand some miscellaneous provisions at the ."a or a piqect agreement,including provisions on dispute resolution (part M).

2'28 UNID0 B0T Guideilnes

:

I. THE BASIC TERMS OF THE GOTICESSIOI{

1. The partler, recltals and definltlons

A project agreement normally begins by identifying the parties lo lhe agreement and thecapacity in which they are c0ntracting, Certain recitals 0r "whereas" provisions lypically follow.They provide background and context for the later substantive sections of the agreement.These two initial sections are usually followed by a Definition of Terms. lt is advisable tocoordinate the Definition of Terms with lhe use of those terms in the context of the contract.provisions. Theoretical delinitions or definitions transferred from previous conkacts may causeproblems of interpretation and clarity.

HItr

2. Granting the concession

The fundamental rtghls-alE-qllgq!-glls both of the government and of the proiect companyshould be described early in a project agreement. They are the main rules ol the agreementand provide a clear-cut background for the understanding and interpretation of the exceptionprovisions lound elsewhere in the agreement.

3. Gondltlons precedent

0ften, a number of events musl take place before a projectagreement can become effective.These "condltions precodent" are frequently listed after the provlsion granting the concession.They may include the following:

o There is evidence that both parties are properly organized.o , There is evidence that both parties are authorized to contract.o ' Necessary permits and licenses have been obtained.. Financing is in place...o All other conditions necessaryto start construction have been properlysatisfied orwaived.

It is often the case that the effective date of the project agr'eement (which determines, amongother things, the commencement of the concession period) begins when the parties certifythat all conditions precedent have been satisfied or may be deemed to have been satisfied.


II. IMPTEMETITATIOII OF THE PROJECT

1. Construction ol proiect lacilitles

This comprehensive section will normally include-as a minimum-the following provisions:

" Land acquisition and use.This provision regulates

Acquisition of the proiect site and the necessary rlg!!91-{9y- Allocation of the cost 19r the acquisition.- Pioie-ct company's rights to own or usg-llqglgUhe land'

Cqnc[llons ol the site.Clearance of the site.

Normally the government is in the better position to acquire or expropriate the site in thepublic interestat a fair price, which would be beneticial from both the costand time standpoints.Whether the prolect company should own or lease the land required for the proiect may be ol

some importance tor the lendersl security arrangements (mortgage arrangements).

Qbtainment ol approvals and licenses required lor the performance of the construction work'

ol equipment and materials.

,, De.sign. Thc proicctagreement will deline the lollowing:

Dcsrgn arrti spccittcati0n criteria to be lollowed by the proiect contpany when preparing

the design lor the Proiect.The partiesl rights to review and approve the design,and design criteria.Procedures lor teview, change and approval ol destgns'

- Rosporrsibility lor deliciencies in the design ol the prolect'

The design drawtngs consist olthose incorporated in the government's.tender documents'

thc ntore delailed design drawings submitted with the proiect company's winning bid and'

;iril;iriy, ;h;tever ad''ditional diawings are necessary to complete the proiect' while the

governm;nt will reserve the right to review and approve the design drawings, the proiect

io*puny will remain sotely risponsible for their quality and contents. Approval by the

gouttnnirnt does not relieve the proiect cgmpany of its responsibility for the design of the

proiect.

a cilnsttuction. The proiect agreement should place tull responsibility for construction

cost, schedute and cgmpletJon with the prolect company. lt should deline the !lm:e i6'lthe commencement ol the construction, the construction mileslones and th9 quality ol

the construction work, including what documents, laws, regulations and standards are to

be iollowed. Specific provisions should be dra{ted to cover such subiects as the {ollowing:


- Definition of the qualily system for quality assurance.- Content and timing of construction plogress reports.- Government rights to access tor inspection and testing.- Clearance of the site on completion of construction work.

For projects as large and complex as most infrastructure proiecls, unloreseen construction issuesmay arise during the performance of the work. lt may therefore be a good idea to provide in theproject agreement for design changes to meet the evolving requirements of the constructionprocess. Further, it should be accepted that in case of a dispute the parties must continue t0perform their work pending later settlement of the dispute. Compliance with the constructi0nschedule is essential to any B0T arrangement. A provrsion on continualion of performance

tr TeSlljng-aMarceplanvo! qlnstuction. Provisions on test procedures and acceptance ofconstruction work and deliverles of goods are part ol most larger industrial contracts.Such provisions will setforth the procedures and the programmes for testing the facilily

; to confirm that it meets its design and other standards stipulated in the project agreementand applicable laws and regulations. Such provisions should specify the following:

- Notice of testing. ' :- Joint inspections and tests,- lssue of certificate ol completion.- Deemed certificate of completion.

Responsibility of the parties. '

It is internationally recognized practice that the testing of construction work and the issuanceof a certificatlon of completion does not relieve the project company olresponsibility fordefects0r$lgl_s_[tE@ffixittiilrvolk. -

lf the performance testdiscloses minor defects that are impractical or unreasonable to requirethe project company to remedy by repair or re-delivery, the project agreement may provide forthe lack of conformity to b_e remedjed-hy-taill -q[_reductions or by g cla!m for compensation.The amounrof tq!!yt!ll-re--.ucfionoverifi-e-conrusiion period should, iipossible, be calculatedby the use of appropriate mathematical lormulas. ,

" DsbilL-sgmplgllgn. Penalties for delays in construction work for which the projectcompany is responsible are spelt out in this section of a project agreement, To collectsuch penalties, the government is entitled to draw upon a perlormance bond submittedby the proiect company.

One issue to be addressed is the consequences ol delayed completion owing to acts oromissions of the host government in contravention of its obligations under the projectagreement. The majority of projectagreements appear to provide for extending the concessionperiod to compensate the delay. This solution may not be satisfactory to a project company

EIn


athat has to pay principal and interest under the financing documents as of the agreed completiondate. To meet lhis situation, the government may consider a provision that compensates theproject company for the incremental linancing costs.

Another issue here is the question whether to offer a bonus to the project company for earlycompletion: there is no clear answer for B0T projects. Motivating the prolect company in thisway would, however, serve to reduce the delay risk lor the lenders.

2. 0peration and maintenance

(like the provisions on transfer of the project at the end of the concession period) lorm a separatemain part of the project agreoment. This is simply a malter of preferenco, In any case, p00r orineflicienl operatlon and maintenance of the project facility can cause the performance ol theproject and the revenue generated by il to fall below projected levels. lt can also cause prematurewear and tear on the project facility and its components. The project company can, to someextent, mitigato this risk by qntering into a long:terrn0&M-conlaqtwithanjxpedencednpentor.The provision defining the right of the proiect company to selecta qualilied 0&M contractor andthe government's rlg!! t0_ap!revclhff0nlracl0r:n@ inthis sectign-o!a.ploiqEt_agreement. ln addition, specific provisions should be drafted in theproject agreement to cover such operation and maintenance subjects as the following:

" Operationparameters.

" Maintenance and repair standards or targets.. Schedule and substance of periodical overhauls of the project facility.o ofld moniloring.

" Toll/lariff lormulas and adiustment of the lormulas.

" Toll/tariff collection syslem.o Operation and maintenance bond., Project company's failure to maintain and repair and the government's right to carry out

maintenance and repair.o Services lo users of the project lacility.

To attain high operation and maintenanco standards and sustain a high quality of service tothe users, it is advlsable to set performance standards or output targets rather than to demandparticular operation, maintenance and service programmes or methods in a project agreement.The government may also consider paymenl mechanisms that encourage improvements inthe quality of service.


3. Financial management

The way in which expenses and revenues are to be incurred, recorded and disbursed shouldbe precisely specified in a proiect agreement. For example, in a toll road B0T proiect, suchprovisions may include the following:

, The toll structure., Toll col lection.

" Method ol toll adiuslment. :

" Cunency protection lor a variety of currency risks, including convertibility, availability offoreign exchange, devaluation and repakialion.

o Financialstatements.

" Ac-qounting.o GoIffient's rights in the evenl of proiect company's default under the financing

documents.

The pricing structure in a B0T proiect should not only reflect the risk transforred to the proiectcgmpany, lt should also, as far as possiblo, provide an incentive for the proiect cgmpany tooperate the project well.

4. Transler

A check-list f or transfgrisques to be considered when drafting this section in a proiect agreementis provided in cnapted 1 4, |vhich deals with the transfer of the prolect at the end of the concessionperiod. 'J

III. GEIIERAT OBTIGATIOI{S THROUGHOUT THE COIICESSIOII PERIOD

The $rovisions in a pioject agreement that must be observed during all phases of theimplementation of a B0T proiect may be organized in three seclions: first, the generalobligations of the government; second, the general obligations of lhe project company; andthird, the general obligations common to the government and the proiect company. Thisorganization of general obligations is lollowed, for exnnple, by the United Nations Conventionon Contracts for the International Sale ol Goods.

: '

1. Genera! obllgatlons of the government

The general obligations of the government should include essential provisions on the protectionof the project company against the consequences of changes in the laws and regulations of

Itr:


o Ta and dutfincsntives.

the hosl country that would adversely and materially affect the projoct company, The risk ofchanges in laws and regulations, inherent in any long-term contract, is of particular concernto lenders to a B0T project,

Another important general provision may define the government's ongoing obligation to assistthe project company in obtaining and sustaining permits and approvals and to othemiseslreamline the bureaucratic process assoclated with the project's implementation.

The general obligations of the government may further include provisions on the following:

" lmport and export permissions.

, Safety and security protection., Employmentpermits.o Access to public utilities.

" Performance guarantees for public sector entities that are parties to the construction andoperation of the project.

o Protection trom competition,

The latter issue wiil have to be settled case-by-case. The main point is to balance the projectcompany's need lo protect the expected revenue flow from the project with the need to meettuture demands and changes.

2. General obligatlons of the prolect company

The most essential generalobligation of the project company is that it must comply with thelaws and regulations of the host country during implementation of the project.

Another important project company obligation during design, construction and oper:ation ofthe project has to do with elytlglrnjlbl_Uglecljgll. Normally the project company and itssubcontractors are required to take all reasonable steps to ensure that the environment isprotected throughout lhe project. 0bligations to curtail harmful environmental impacts shouldbe identified and spelt out in the project agreement. Compliance with non-material changesin environmental laws and regulations during the concession period may be included in theproject company's environmenlal 0bligations.

Other ongoing obligations of the project company may include the following:

" Compliance with safety standards. :o 0btainment and reneryq!_ olrpp_ggl-s_qnd permits,o Uru of .orputitiuI@ rtry rj, gglyiqgs and goods.. Protection dFldbo GI

--_l--r:--""* '

. Erlglgyrngnt anO tEin-i1ggt ngllonalpgrsonnet,, Technology lra-nSfer, i


. Some egltgati€+s-s+e,emmilflienls arccommontorlhe4arties-Eorcxamplc ,lheforce maieure

. provision difines in which unforeseen and unavoidable events eithei party is entitled to suspend

r its obligations under the proiect agreement. 0ther provisions 0n common obligations maycover the following:

o Project company's responsibility for 9U!.q9$Egl0llSnd their erulayeg$'o Proiect insurance to be obtained.

lf the prolect in question is to be connected to existing inlrastructure, as is the case withroads, power plants or railroads, the proiect agreement may require that the proiect companyminimize disruption to users during construction and maintenance. AfteMards, the maintenanceand overhaul routines of all connected facilities must be coordinated.

3. Common obligations lor the governmont and the ptoiect company

, Rights to proiect documents, including ownership of design and drawings.

" Conf identiality as to information and documents obtained., 0bligations to cooPerate., Warranty against improper payment.

i

IV. BREACH OF COilIRAGT AIID OTHER FAITURES TO PERFORM

Strict adherence to contract terms relating to the performance of obligations is particularlyimportant in B0T arrangements, as a tailure by c"" party to adhere to the contract terms mighthave serious financial consequences for the other party and for the lenders. Infrastructureprojects usually involve vast sums of money al every stage of proiect implementation; moreover,the non- or limited recourse nature ol financing for B0T projects makes the investors particularlyvulnerable to defects, delayS or other failures to build and operate the proiect. lt is thereforeadvisable lo prepare and agree upon precise stipulations in the project agreement deliningrhe obligationsto bu qglqr9qgd$c-colsequentel9lataUlsl0let&tnthose-ohligations.

This part of the project agreement should deal with some of the remedies lhat may be availableunder the contractto the government or the project company if the other party fails to performits obligations under the project agreement or under the law applicable to the pro ject agreement.It should be noted that usually a project agreement entitles the relevant lenders, upon theoccurence of a default under the linancing documents, to exercise the rights (and obligation)of the project company under the proiect agreement. Most proiect agreements also requireprovisioni to be included in the f inancing documents to the etfect that the government shallbe given the opportunity to cure a detault by the proiect company.


1. Gontract temination

The project agreement should provide lor termination when the government or the projectcompany is in substantial bre [dltle qgry.act or where the contract cannot be per{ormedfor a s_u,bltantiqlp_eriqd lqt realQts ol force majeure. Provisions on lump sum payments to bemade to lhe project company in case of termination of the contract are usually found togetherwith the provisions giving the right to terminate the contract or in an appendix to the projectagreement. The level of payment will depend on the reason for the termination, that is differentsums to be paid lor termination due to breach of contract by the governm ent,by lorce majeureor by the project company. Upon payment of the compensation, the proiect facilities arereturned (transterred) to the government, in principle in accordance with lhe transfer provisions'of tfie prolecTajrlernent TnElerminali6trseTtiOn olaFf0iect agri-eemeilTh.Uld thns cover athe following:

The government's right t0 terminate the project agreement.The project companyllg[!-to terminate the proiect agreement.Termination notice.Riqh"!:Ii1-l|lgrjgns of the parties upon termination,Compglgtlqgpayments.Notice to lenders. :Rights of lenders.

Certain host countries may insist on reserving for themselveslhe right to take over (buy out)the project company's assets at any time after the construction of the proiect. The terms forthe government's takeover of the project and thus the termination of the proiect agreementmay be specilied in a buy-out provision in the proiect agreement. The payment to be made tothe project company in case of buy-out may be stipulated to the same amount as that payableon a termination for breach of conlract by the government.

2. tiability for breach ol contract

Provisions on liability for breach of contract usually supplement compensation by the liquidatedAEgggl$idlieilin.the delarand p-enally.-qlau$Qs a! the proJ-qct agreement, In thoFensethat they compensate for losses caused by failures not specifically covered by liquidateddamages and penalty clauses. A contract section on liability for breach of contract may includeprovisions on the following:

o Terms and conditions lor compensation.Exemptions lrom thd obligation to pay compensation.

, Benefits gained from failure to perform.

" Duty to mitigate the loss.o Currency of damages.

l -

I '

I'l o[ .


It may be decided to exclude, mutually, liability for consequenlial damages in cases where

the party in breach of contract has not been guilty of gross misconduct.

, . ' / , -i Tqt:n'o'' 'J

. 3. Liability for personal iniury and damage to the propetty of third persons

The construction and operation of infrastructure projecls may result in personal injury to

.employees or users of the proiect facilities and other third parties or in damage to their property.

, The legal issues surrounding damages to be paid to third persons are to a large extent basedon the law of the host country and not on the contract. The government and the proiect companymay, however, wish to provide for an interhal and final allocation ol such liability risks between

o Terms of hold-harmless or cross-indemnill arrangements.

" Liabi!!!y101 envirgnq-en!{ dqmage.o Mutual notification ol liability claims.o Exemption from liabiliti for consequential damages to the other party.

The parties may also wish to provide for liability insurance coverage against such risks,transferring the ultimate responsibility for the injuries and damages {o the insurance c0mpany.

, " t , ! . I { ' * 1 bc , \ L r . ' ' i r r

V. ASSIGIIMEIITS AIIII PUBLIG SECTOR CHA]IGES

A project agreemenlshould ensure that a party cannot assignlh_e c-qltla,c!9l,aly ess,ential ';-'-part of it without consent from the olher party. Pro ject companies and their financiers may bebonfirneO"tnat tne p-uOtic entity with wtrlCn they are dealing could be privatized, restructuredor dissolved or that it migtrtundergo some other maior change of status during the concession i "

4. -.peiiod. In that case the project company may wish to include adequate assignment provisions 1 I t' ' .'..in the project agreement and assurances from the government that a new or surviving entity {. -.'will become fully liable-and will be able-to perlorm lhe contracting entity's obligations.

vl. illscEtlAtlEous Pnovlslolls

Depending on the legal tradition of the contracting parties, there may be some additionalprovibions in a proiect agreement covering such issues as interpretation of the proiectagreement, res0l!!g!jl!l!p!!es and Frocedural matlers. International lenders to a B0T projectin developing ,cffitries uSai-ty expect thEprolffigreementto be governed by the law olaneutral iurisdiction and for disputes to QgSJllgO qy intern_ationai ar-bitration. These issues arelikely to cause some ditficulties in international commercial contracts.


UII. APPETIDIGES

Finally, it is customary lo add appendices to the project agreement covering issues thatnormallyrequire detailed regulation and specification. The following appendices are found in manyprojecl agreements:

. Project description and specification,o Necessary licenses, permits and approvals," Description ol land and rights of way for the project.o Preliminary design criteria.o Procedures for the government to approve theproiect company'S proposal for design

enang€s_o Procedures for the government to request design changes and additional work.o Environmental impact assessmenl and environmental performance reporting system., Ouality system.o Programme and procedures for testing.o Project operation parameters.

" 0peration and maintenance crileria., Tariff/toll rates and tariff/toll revision formula.o Specilications for the tarif7toll collection system.o Training programme.

" List of initial shareholders and percentage interests.o Insurance.o List of pre-approved contracts." Rights and obligations of the parties upon termination;' o Form ol bonds (guarantees).c, Overseeing and monitoring rights of the government.tr Form of legal opinion of counsel lor the project company.o Form of legal opinion of counsel tor the government.

There is often a provision that if the contql!oJ lhe nain bqdy olthe project agr€ement conflictsIith !!*S!gpeloices, then the main bodfbr'9yaits. Such a prwision sh-outd not, however,be used in a B0T projectagreement, where the technicar specifiqptions, li0gnq^ia[nsuwg!ts0:lpglrn3llgflIl ltgyp [een se! ou!14-491e!9!?iL]! the appendices tran in trre marn body0 t tn e as ree m e n t@!!9.!!qqqqjn d i ces e q ua | | y i m p g lqD


. $tandaldized agreements

lleed fol standadized agreements

The case-by-case approach to preparing complicated -ploject agreements

tends to add substantially to proJect costs because of the time needed to

One way forward would be to stand4t4i4q. !he*Plgigg!-#L9.-qme.gts as

far as po"Jibl", at least at the country and/or the sectoral level, and to

modernize them to reflect later BOT experience'

Arguments against standardization examined

Reservatlons have been expressed about standard conditions for proJect

agreements. It is argued that the BoT market is so unique and the ap-

plicable laws ln the host countries sovarled that standardDed contracts

iiurr" ro place there. lnstead, tailor-rnade proJect agreements with de-

tatled ahi speclftc conditions related to each BOT project are required'

Another argument against standardized agreements is thet it might be

diflicult to identiff common contract provisions because each contract-

ing;party, as well as the financiers of the project, [l:--ili own contract

""'it^"rgaawillyanlbJdd-Uil,projectagreemenf,

-iiiiftedanAStruc-

turedinQg_l"Jlqf !lg*,q-q_q#o.To som-6-extent,These arguments are valid. Obviously, the content

and comprehensiveness of a proJect a$reement depends on the applica-

ble legal framework of the country in question' This does n6t, however,

pr.u"nt-th?:-diff6io-pment and application of national standardized agree-

ments. Nor can it be disputed that the specific conditions of a project

agreement must be adJusted to the characteristics of each infrastruc-

ture sector: that ts why countries that use standardized project agree-

ments have developed them for each main infrastructure sector.

otherwise it is somewhat difficult to accept the argument that BoT

proJects are so unique that standardized agreements cannot be used' In

Ithir "o*tnercial

areas involving large-scale proJects, large investments

m,


and high risk, standardized contracts have been used for a long time.roThe current use worldwide of these standard contracts is evidenee oftheir practicability and their balanced conditions.' Nor is the argument for tailor-made proJect agreements supported by

the analysis in this chapter. As indicated above, the underlying similari-ties of the project agreements in use appear to be far *or.

"t.iking than

their differences. It is also debatable whether the differences in cultureamong financing institutions should prevent the application of stand-ardized project agreements. on the contrary, financing institutions nor-mally welcome standardized documentation.

In short, the Bor approach ls hardly so unique as to make the use of

: Adyantages

The development and application of standardized project agreements, pref-erably for each infrastructure sector, might become a corneistone tn a coun-try's Bor strategr. This has been the case, for e<ample, in china, where the .authorities have developed a standardized proJect agreement for each in_frastructure sector where the Bor approach is to be used. The potentialadvantages of standardized proJect agreements include the following:

' Experience shows that the costs of BOT proJects and the time neededto prepare and develop them may b. r.d,r"Ld considerably by usingstandardized project agreements and other standardized prolectdocuments.

The comparison and evaluation of bids is greaily facilitated if thebids are based on the same well-known contractual terms.

standardized proJect agreements may facilitate the financing of BorproJects since the financiers will be familiar with the content of theagreements.

The nation-wide use of standardized project agreements allows thegovernment to plan, control, monitor and supewise private sectorinfrastructure proj ects,

ro For example, the General Conditions for Supply and Erections of Plants and Machinery for lmport and Export(prepared under the auspices 0f the United Nalions Econ0mic Commission for Europe) and t'he c0nditions of c0ntractfot works of civil engineering conskuction and for electrical and mechanical worki lprepared by the FddCrationinlernationale d'ing€nieurs-conseils).

2 4 0 UNIDO B0T Guidetines

\E

r The application of standardized project. agreements keeps privatecompanles'with ample resources and experience from exploitingtheir advantage when negotiating with national or local authorities.

r Subcontracting and the negotiating of other project-related con-tracts, including the construction contracts and the credit agree-ments, are greatly facilitated by the use of standardized projectagreements.

. Standardized project agreements are usually more carefully pre-pared, resulting in a higher contract quality than case-by-case

. -?roJeet agreements;whiet+a+e oftend+a ed underlimeeonstrair+ts-

The use ofstandardized project agreements does not, of course, pre-clude adding special conditions to a project agreement if they are needed.Indeed, since they are likely to stand out from the familiar standardizedprovisions, the special conditions would more easily attract the atten-tion they deserve.

Itrafting considerations

The basic framework described in the preceding section and the catego-ries of contract issues identified may help with the drafting of standard-ized proJect agreements. TWo other considerations should also be takenlnto account when drafting standardized proJect agreements. Firstly, theprovisions should be likely tg gain_the ?Lp_lgy* .-ol$" till*ilglio n".Inotherwerds,thestandar{tZgd_plqlS_qlgggnq{tgsbgg_l.9F.p_tankable.The bankability of a BOT irrFastructure project depends, ofiourse, on anumber of factors that cannot be regulated in standardized agre-ements,such as qd$.lSgU.es, the 1ar!g-olretu.rn, the project's tecbniqal{easib-ilityand the offer of incentives. However, certain provisions-those on legalchanges anci othei p*oliUcal risks, on foreign exchange and currency is-sues, and on land rigfits, Jorce mqjeure, lenders' security-are clearly ofinterest to prospective lenders to BOT infrastructure projects.

Secondly, the standardized project agreement should be drafted soas to make the obligations balanced and mutual. Some of the projectagr'eements in use in developing countries may unpecessarily tilt in fa-vour of the proJect companies, even taking into account poor credit rat-ings and/or market situations. On the other hand, a standardizedcontract that tilts decidedly towards the government may discourageserious sponsors. In the end; neither situation can be satisfactory to


. t_

:

either party. Even if imbalanced agreements are signed, they will not beconducive to the atmosphere of trust and cooperation that is essential to.good contract performance.

International institutions,wl6-Erc;4d knowledge'and experience lnthe Bor approach, includtn$ uNIDo, Tban help government authoritiestc draft standardized proJect\aglggrrdnts.

242 UNID0 B0T Guidet ines

- -

9 9 e " " " " " " ' " " " " " ' r r ? " " '

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INltllllUCU il0|lCnUISl{oC tHI

r lnttoduction

The format and terms of a BOT construction agreement are similar tothose of conventional agreements for the construction of industrial ortnfrastructure facilitles. The BOT contractor faces the same commit-ments and rlsks as the contractor for a conventional project. In a BOTscheme, however, the re agreemecomplex framework of ottrer contracts, in particular the project agree-ment, and the different lnterests of the participants may va4r consider-ably from the relationship tn more conventional schemes.

The construction agreement is one of the principal contracts thatputs the proJect company, the equity investors and lenders, and the

host government at risk. They will all be concerned that it provides ad-equately for tlmely and wlthtn-budget construction, as well as for a fa-cility whose performance meets the agreed standard of performance.The sponsors need to be assured that delays and cost ovelTuns are strictlycontrolled and that the risk of their occulTence is borne by the construc-tion contractor.

Any material breach by the contractor could render invalid the pre-investment feasibllity studies and proJectlons used,to confirm the viabil-ity of the proJect. Because the financing is structured on a limited ornon-recourse project finance basls, lenders to a BOT prbject take a greaterinterest tn the construction agreement than lenders to a conventionalproject. They will be concerned that cost and time overmns could jeop-

ardize the senricing of the debt and the availability of revenues to covercontingencies.

Although the constructlon risk is normally allocated to the projectcompany and in tum to the construction contractor, the host govern-ment also has an trterest in how that risk is managed. There may wellbe political and other eonsequences of delay in the construction of antnfrastructure proJect. The host govemment will try to prevent any cir-cumstances (cost ovetruns or technical defects) that would place com-pletion and/or operatton of the proJect at risk and perhaps require it tooffer financial and other unexpected support to the proJect company.


The construction agreement is one of many important eontractual ar-rangements among t}le participants in a Bor proJect, and it must be draftedso as to be consistent and harmonized with those other arrangements.rr

r Contracting options

Typds

The Bor construction agreement usually takes the form of a turnkeycontract, which gives the contractor responsibility for completeness andfunctionality. There are three principal alternatives for pricing turnkeycontracts:

I Lump sum (fixed price).

. Cost plus (reimbursable cost plus fees).

' Measured unit price.

r Comblnatlons of these.

The most common and favoured strategr in Bor projects is the fixed-price turnkey contract.

Lump swn(ftxed. price)

The contract form with the madmum certainty for the project companyand lenders ts the lump-sum, or fixed-prtce, turnkey contract. It piaceiprimary responsibility upon the contractor to properly and accuratelyprice the works, including the risks and contingencies inherent to allcontracts. The contractor agrees to perform the entire contract scope ofwork for a fixed price established at the time the contract is entered into.which is final and binding and not subJectto escalation or adjustment ofany kind other than those specifically provided for in the clnstruction

" A comptehensive trealmenl of the contractual issues that may have to be dealt with in a construction agreement iscontained in the UNCITRAL Legal Guide on Drawing Up International Contracts for the Conslruction of IndustrialWorks (United Nations publication, Sales No. E.BZ.V.10).

UNl00 B0T Guidelines

agreement or eventual change orders. The requirement to commit to aprice at an early stage when it is difficult to calculate a reliable estimateof construction costs exposes the contractor to a much wider spectrumof risks than in the other contracting approaches, discussed below.

Lump-sum turnkey contracts are frequently used in situations thatrequire competitive bidding, complete design and specifications prior tocommencement of the work and lirm budgeting and financing.

Another feature of lump-sum turnkey contracts is the incentive to buildwithin a certain time. Since the project company can e€urr revenue onlyonce the facility is commissioned, most construction agreements give con-tractors time bonuses for early completion but also call for liquidated

rmposed-ifrhrworlrlgnot esqpleted lyllrcggteed d ate.Such lncenttves cdn mean that less time is required for construction'

For example, in the Tate's Cairn Tunnel proJect in Hong Kcng' the con-tractor used imaginative construction methods that allowed it to openseveral excavation faces and to complete construction three months aheadof an already tight schedule. Early completion of construction can alsoincrease investor confidence and enhance the project's public image.

Use of the lump-sum contract method does, however. somewhat limitthe ability of the proJect company to strictly control the proJect. If theproject company attempts to dictate the way in which the contractor

"urri.* out the work, whether through instructions or change orders,

the contractor may have to be paid an additional fee or given more timein which to complete construction.

Several variants of the lump-sum (fixed-price) strategr have been used'Hopewell Holdings of Hong Kong undertook to build the coal-fired powerstation at ShaJiao, China, under a fixed-price turnkey contract estab-lishing one-source responsibility. It then negotiated a turnkey contractwith a consortium of equipment suppliers and contractors for a fixedprice, ftxed sahedule and mutually agreed qualrty terms. The proJectcornpanies for both the Sydney Harbour Tunnel and the Dartford RiverCrossing (United Kingdom) entered similar arrangements.

Depending on the complexity of tlie works, different contracting strat-egies may be combined. One example is the Channel Tunnel construc-tion contract, where the project sponsors company, Eurotunnel, assumedthe construction risks and arranged a stand-by facility for cost overruns.Approximately half the inshore construction work-the terminals in theUnited Ktngdom and France and the flxed equipment ln the tunnels-wasunder a fixed price contract, while the tunnelling works were on a targetcost basis and the rolling stock was contracted under a provisional sum.


Cost plus

cost-plus turnkey contracts are usually the form of contract most pre-ferred by contractors as they involve the least risks. The contractor per-forms the specified work and is paid his costs, plus an additional amountfor proflt. A number of variations of the cost-plus contract edst:

r cost plus a fixed-sum fee, in which the contractor is reimbursed forthe cost of its work and paid a fixed sum as its profit or fee.

' cost plus a percentage of the cost, in which the contractor receivesa sum to cover percent-age of that cost as its fee. This type of contiact is said to provtde theleast incentive for the contractor to reduce costs, since higher costsresult in a larger fee.

r cost plus incentive fee, in which the contractor.is reimbursed forthe costs of its work and the fee is a percentage of the differencebetween actual costs and target costs if there is a saving.

A cost-plus approach is normally undesirable in a BOT project be-cause it requires fixing the cost of the whole project at the outset inorder to address financing, rate of return and other critical issues.

Measured unit price

This type of contract requlres the contractor to perform the work in ex-change for a fee established by measuring the Lntire contract work atscheduled prices. Like cost-plus agreements, this approach also hasdrawbacks in the context of BOT projects.

Gonflict of interests

The Bor method of financing creates certain potential conllicts of inter-est between the project's participants. This is particularly true in thecase of the contractor and the supplier of equipment.

In some Bor projects the contractor and malor equipment strpplierare investors in the project compErny. In such ca""" thi investment ismade with the intention of directly winning the construction contract orthe equipment supply.contract. The contractor and the equipment sup-plier will thus wish to avoid competitive bidding and will instead want tonegotiate a risk-free contract, taking their profit from the construction

t

in

ofm

oncol

finto

. T op


contract. Non-competition and risk-free terms are not in the interest of

the host government, the lenders or the sponsors.on the other hand, as investors in the proJect company, the contrac-

tors are interested in ensurin$ that the project is completed on time and

wtthln budget and that tt operates at or above the deftned performance

level, so they wlll therefore want quality equipment'It is essential ttrat such conllicts are recognized and rlsks allocated at

an early stage in the negotiatlons between the project parlicipants.

Contract terms

Whtle the project company may propose a particular contracting strat-

egt, it is often the requirements of the lenders and the host govemment

that dictate the project procurement strategr and the minimum terms

in the contract.

I*nder requirement:s

Lenderrs usually requlre that the construction of the project is procured

on a lump sum (flxed-prlce) turnkey basts. They want to ensure that the

construction contractor is committed to a defined scope of work, to a

firm price for the construction works and to a stipulated time in which

to carry out those works. Appropriate EILe$y and -liggated damage

p rovisi-o ns wi I I be re qu i red a-s a! .1! cgnti.-y .e. l@ eaillb r.

To ensure that the contibitoi iJ not pri"eniea or'hindeieii-TiomTom-pleting on time and wlthin budget,,lenders also seek to limit the project

company from changing the scope of works. In this connection, the role

of any project management organization appointed to oversee the work

must be clearly defined. The clrcumstances in which the contractors

may claim relief for/orce mqjettre should also be limited, clearly defined

and coordinated with the project agreement.l,enders usually require that contractors bear project risks for com-

pletion and performance, In addition to penalty provisions for late com-

pletion, they will also seek penalty clauses linked to the operationalperformance of the facility. The interests of the lenders usually coincide

with those of the host government and sponsors in so far as all theseparties would like to encourage more than just base-line performance'I Bonds and guirantees will also be sought by the lenders. Examples

of such requirements include performance bonds, retention bonds and'where the contractor is a subsidiary of another organization, guaran-

tees from a parent company or ultimate holding company. In addition,lenders will wish to confirm that the contractor has a proven track record


of competency and experience in all areas relevant to the proJect, as wellas the financial ability to carry out and complete the works.

Ilost gouernment requirements

Initially, the host government will wish to see that its BOT strategr frame-work and tts procurement rules and standards for the construcilon workshave been fully complted with. Of particular interest will be the extent ofinvolvement by local companies and services ln the constructlon phase,as a BOT scheme is one way to transfer technologr and build capabtlities.

The hest govemment, shares the sponsersrinteresfirhavingthe ry istrucflon completed within specificatlons, budget and time. The failure ' ato do so will ultfmately reflect badly on the government; with both flnan- acial and poltttcal conseqUences. s

Since its overall requirements to be'followed by the construction works irand contractors are defined tn the project agreement, the host govem- oment will want the construction agreement to be in complete harmony swith the project agieement. ;

c

' Key contractual issues

Iiming

Keeplng to the planned schedule is of parilcular lmportanee in BOTproJects, as the commencement of the commercial operation gives theproJegt company the revenue needed to seMce the debt and eam theexpected return for the equity investors. The timtung must be realistic.While some addltlonal tlme for contingency should be written lnto theproJect planning to allowfor delays outside the parties' control, a carefuland independent revlew of the constructlon schedule is essenflal.

For a BOT proJect. as for any complex construction proJect, the discl-pline of scheduling is at the heart of budgetary control. An achievableschedule should be presented by the contractor, demonstrating the or-der in whlch he proposes to carry out the works,.Construction workshould be scheduted, monitored and revlsed to mtnlmlze or eliminatethe impact of any delays.

Incentives for the contractor to complete on time can take the form of abonus for early completion and a penalty for late completion. Liquidateddamages provisions should reflect the loss llkely to be suffered bv the

pd

dol:

I?

fcttaIs

'l

a

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cS


project company in the event of a delay. They should cover at least the net

debt service and other fixed costs for which the project company is liable'

Other options to penalize delay include acceleration provisions. If the

delay falls within the contractor's sphere of responsibility' then the costs

of accelerating should be borne by the contractor. A formula for calcu-

lating the costs of acceleration, where the delay is butside both parties'

control, should also be Provided.

QualitY

A quality assuEance+rocr:dul'c should bc dcsr:ribcd in tlrc'

agreement. The standard of quality expected should be clearly defined

and the design parameters set out in a functional specification. Such a

standard is often related to a particular industry code or norrn. It should

includb relevant health, safety and environmental considerations. Use

of materials that comply with the specifications and that are of a certain

standard should be required' '

Provisions should also address the situation where workmanship and/

or materials fail to meet the required standard or quality. The sponsor

will want a procedure to identify and remedy defects as soon as practi-

cable and at no additional cost to the proJect.

Pelfolmance

It is crucial that a BOT facility functions properly and that certain per-

formancg parameters, including quality and quantity of products and level

of output or off-take, are attained. Since failure of the facility to perform at

the projected level means the loss of revenue to the project company andthreatens its ability to pay interest, loans and equity returns, operationaland performance guaranteds are usually requested from contractors. Suchguarantees are often supplemented by availability $uarantees, whichspecrff the duration of a planfs operation'

Pricing and payment

The construction agreement should clearly define the scope of worksand the liability parameters. Costs of risk management the contractorwill be responsible for are added to the costs of construction.

Constructionworks are usually paid in instalments. Terms-of-paymentclauses are important to ensure that the contractor is not overpaid throughstage payments. The payments should be llnked to the value of work that

UNID0 B0T'Guidelines 251

has been carried out. A specified percentage of each instalment paymentor retainer amount is usually withheld in an escrow account pendingsuccessful completion and teqting of the facility. If the contractor is be-hind schedule, the contract mechanism should permit withholding moneyuntil it catches up. There should be a procedure for certifring the progressand the value of work carried out before payment is made.

Subcontncting

works may be subcontracted for a number of reasons, including the need

the lower cost of local contractors. The right to subcontract should nor-mally be subject to the approval of the host government and the projectcompany. similarly, the procurement of maJor items of equipment by sub-contractors should be monitored by and subJect to the approval of theproJect company and, dependtng on the proJect, the hqst government,Provisions covering the liability of the contractor for the failure of its sub-contractors or suppliers are important as there will often be no directcontractual link between such third parties and the project company.

Host governments should encourage subcontracting as much as pos-sible in the country, provided that local companies are competitive andreliable. The project agreement will usually define the overall require-ments for subcontracting.

Availability of spare parts

A general obligation should be placed on the construction contractor toprocure sufficient spare parts for the project. It should require the contrac-tor to compile an iriventory of spare parts that need to be maintained.

Just as they enbourage local subcontracting, host governmenrs mayencourage the acquisition of spare parts locally. The project agreementand the construction agreement have to be harmoniied so as to care-fully allocate the responsibility for spare pafts between the contractorand the O&M operator.

Claims by the contlactol

If the contractor undertakes to construct a facility on a lump-sum basis,it assumes the pricing risk of not having taken into account all thatis necessary to carry out the work. In a turnkey project, this includes


risks connected with underestimating the work involved after the de-

tailed design has been finalized.However, claims for additional payment and/or for extensions to the

time for completion have to be met by the project company to the extent

that it, or others for whom it is responsible, change the siope of the

work from that forwhich th'e Qontractor tendered. The right of the project

company to lchange orders or to lnstruct the contractor to execute the

work in a particular way should be carefully defined in the construction

agreement.The project agreement should dictate the limited circumstances in

which the project may be changed and by whom. Host governments

change the works can materially add to the cost of the project.

Given the limited equity of the project company and the restrictionson the drawdown of funds, the proJect agreement may arrange for theavailability of contingency funds, normally in a stand-by or resewe facil-ity. Nevertheless, the p{oject agreement and financing agreements ar-elikely to apply very stringent conditions on the circumstances in which

such funds can be drawn.The construction agreement should provide for a mechanism to deal

with any type of claim by the contractor. Procedures and deadlines for

notification of a claim must be spelt out. Such a contractual rriechanismshould provide for the deferred settlement of claims arising during con-struction, presewing the rights of the contractor but allowin$ the project

to continue to completion.

r Security

In many jurisdictions, physical assets that are firmly attached to landbelong to the owner of that land, often the host government in infra-

structure projects. If the project fails, the assets therefore revert to thegovernment and the right to build and operate the project'is revoked.Thus, the conventional form of security available to lenders is valuelessin rnost BOT projects. In such cases, other more appropriate clauses orguarantees must be provided. The conqtruction contractor shoulcl beobliged by project sponsors and lenders to procure a variety of bonds tosecure his performance,

Generally speaking, a bond is an undertaking to make payment oroffer some form of assurance in the event of defaults or circumstancesaffecting the schedule, construction or quallty of the facility. Bonds can

UNIDO B0T Guidelines ? q ' l

be issued by banks or suret5r companies in the form of a bond, guaran-tee or stand-by letter of credit. In BOT proJects, bonds will usually con-stitute payment obligation in favour of the project company. Five typesofbond are used: :

Bid (or tender) bond, which compensates the project company witha certain proportion of the contract price if the winning bidder de-cides not to proceed.

Performance bond. which should ensure that if the contractor de-faults the bondsman procures completion by another contractor at

proJecr company.

Retention bond, which may be issued in lieu of withholding a per-centage of each instalment payment to the contractor. It may becalled in the event the contractor fails to remedy defective work ormaterials.

Advance payment bond, which ls recommended as security against,for example, the non-delivery of equipment or the insolvency of thecontractor in cases where the contractor has been paid, in advanceof carrying out any work, to purchase equipment that is to be manu-factured but installed at a later date.

Malntenance bond, which aims at securing the proJect companyagainst defects that could incur during the start-up or maintenanceperiod, as specified in the construction agreement.

The bonding and guarantee situation under the BOT contractualframework is complex. It may take one of the following forms:

Unconditional on demand or first demand, executed without proof ofdefault, i.e, no conditions are attached to invoking the security.

Conditional, commonly executed if there is proof of the requisitefault. Failure to meet any of the conditions will mean the bondis forfeited.

Documentary, executed on demand but the demand lncludes ameans of certiffing the grounds for calling the bond. In general,such bonds are issued as undertakings to pay upon presentation ofspecifled documents.


An undertaking from the parent or ultimate holding company of thecontractor should be required if the contractor either is, or is employing, a

subsidiary company of a larger organization. Also, there should be a joint

and several ltability provision if the contracting organization is a joint ven-

trrre or consortium. This will permit redress against all or any of the mem-

bers of tJle consortium in the event of calling the bond. Finally' the bond

should be of long enouglr duration to cover all liabilities of the contractor,and any amendment orvariation to the construction agreement should not

serve to waive or reduce liability under the bond.

TE


OPERATIO]I Al{D MAII{TENAilGEGOI{TRACT

Introdtrction ......259

Cttoosirg an operator ,.........260

Operation and maintennnce risk allacation ........ ;.. .. 260

Operation oJ the Jacititg ..............

Maintenance oJ the factLitg ........... ........264

TechnologE and training

Compensatton . . . . . . . . . . . . . . . . . . . . .266

, . , ' , , ' , , ' . ' . ' . , 2 6 7Ftnancial records and budgets ..............,.

D r s p u t e s . . . . . . . . . . . . 1 . . . . . . . . . . . . . . . . . . . . : . . . . . . . . . . . . . . . 2 6 8

Termination ......268

Summary . . . . . . . ; . . . . . . . . . . .

EXE

r lntroduction

Once the construction of the BOT project is complete, the facility is readyr to be put to its intended use. Whether it is a toll road or a power plant,

someone will have to carry out and oversee its day-to-day operation 1nd .

maintenance. Most sponsors retain an experienced company to do this

choice of the operator and the elaboration of the terms and conditions of

the operation and malntenance (O&M) contract will be key factors in the

success of a BOT Project'The o&M contract is the agreement that deflnes the duties and re-

sponsibillties of the proJect company and the operator with regard to

day-to-day operation of the facility. A typical o&M contract addresses

the following issues:

r Scope of the operator's services.

I Projec:tcompan-\"s responsibilities.

. Warranties and guarantees.

Compensation.

Access to books and records.

Insurance,

Liability and lndemnification.

Defaults and remedies.

Term and termination.

Dispute resolution.

Choice of law.

!IE


The interests of the sponsors, host government and lender will beaffected by this contract, and it will generally be executed only afterthose entities have approved the provisions regarding each of the issuesimportant to them.

It is critlcal that the o&M contract provislons be conslstent with andcomplementary to the provislons of the other Bor project contracts. Forexample, dlfferences among dlspute resoluilon procedures ln the vart-ous contracts can breed chaos when problems arise and parties to dlf-ferent contracts blame one another, only to discover there is not a singleforum where the dtsputes can be resolved.

r Ghoosing an opetatol

selection of the right operator is the single most important decision thatbears on the successful operation ofa Bor proJect. The operator shouldnot be a generalist but should have the skills and experience needed tooperate the proJect successfully. As it is usually advisable to choose anoperator that has a vested lnterest in the proJect's success, the operator isvery often an lnvestor tn the proJect company. Thls ownershlp tnterestprovldes an added flnanclal tncenflve for the operator to perform its serv-ices in an exemplary fashion and gives the operator a fiduciary responsi-bility that would otherwise be lacking.

! 0peration and maintenancerisk allocation

There are various financial and other risks that inevitably arise through-out every proJect (these were discussed in detail in chaptlr g). One of thepurposes of the project contracts is to apportion those risks among thevarious participants so that each party knows who is responsible inevery situation that might arise during operation. The o&M contractallocates certain risks to the operator and others to the project com-pany. Insurable risks are transferred to insurance companies. The task.of course, is to determine who bears what risks.

.The project, and the relative strengths and knowledge of the partici-pants, largely determtne which party is able and wllling to bear a given


risk at the lowest cost. For example, it ls more than ltkely for the projectcompany rather than the operator to take the risk of t}re facility beingdestroyed by a natural disaster. Even though the risk rvill most likely beplaced with an lnsurance company, the proJect company built the facilityin the first place and is in a better position to understand what would beinvolved in rebuilding it, On the other hand, the operator may have moreknorvledge about the supply of materials needed to operate the facilityand may be in a better position to evaluate the risk of not being able toperform if those supplies are intermpted. Risk allocation is usually themost difficult and the most important subject of the negotiations betweenthe project company and the operator when drafting the O&M contract.

them. All insurance policies should name the operator, the project com-pany, the host government and the lenders as.insured parties. The poli-cies should contain language requiring the insurance company to notiffall additional insureds at least 3O days before cancellation of the policyfor any reason. The O&M contract should also contain waivers ofsubrogation to protect the interests of the various parties and to ensurethat the risk is clearly on the insurance company that assumed it.12

, The party bearing the risk often bears the burden of indemni$ring theother party for losses that are the indemnitor's responsibility. The O&Mcontract should preeisely set forth the terms of such indemnificationobligadton, including, for example, the degree to which consequentialdamages or defence costs are to be covered. This obligation is part of theweb of contractual rights and responsibtltties underlying all BOT con-tracts. There are circumstances where the proJect company mi$ht haveto indemniff the O&M operator. For example, if the proJect companytakes steps that make the O&M operator's costs higher or that preventit from earning certain performance bonuses, indemnification maybecome an issue.

In short, risk management is an important aspect of the O&M con-tract, and the parties must ensure that all operation risks are allocatedfairly and clearly.

'2 ln some projects, the partles may consider force mafeure insurance. This is specialized insurance that guardsagains! the risks of some natural disasters, strikes or other eventualities lhat are excluded lrom standard liabilityinsurance policios. The value of this insuranco may or may not be equal t0 the damage ot defencs cost, and carefulconsideratioh should be given to the needs of tho proiectbelore deciding l0 putchase ot forgo this coverage.

E"'

UNID0 B0T Guldollnes 261

. 0peration of the facility

Gonsistency of opelation commitments

The O&M contract must carefully set forth how the proJect is to be man-aged. Wlthin the framework of the underlying concession and the fi-nancing agreements, the project company will have assumed certainobligations regarding the facility's operation and maintenance. Accord-ingly, great care must be taken to ensure that all the operation respon-sibilities undertaken by the proJect company are either transferred to

deliberately left outside the O&M contract, with adequate provision inother parts of the overall proJect plan for their accomplishment.

Competing interests of the palties; peilormance guarantees

The host govemment and the lenders must approve the O&M contractbefore lt can be implemented, and theywill want to be assured that thetrconcerns are met. The host goVernment is concerned primarily withwhether or not the proJect will operate as planned (for example, whetherit will provide the power that the country needs or whether the road willcarry traffic efficiently). The host government will also be concerned thatthe project should comply with all laws, including environmental andsafety laws. Although the project may be exempt from some legal re-quirements by virtue of the project agreement, it would be unusual forany significant legal requirements to be waived.

The lenders are concemed primarily with whether or not project rev-enues will be sufficient to repay their irrvestment with interest. The spon-sors, in addition, want to assure themselves that the proJect revenuewill be sufficient to provide a reasonable rate of return. To satisff them-selves of this, the sponsors and lenders want a minimum performancelevel set in the O&M contract, Performance specifications could take theform of a minimum operating capacity or minimum output of electricalpower (which the host government would probably have to guarantee topurchase on a take-or-pay basis) if tfre proJect is a power plant or amaximum percentage of lost revenue from missed or uncollected tolls ina toll road project.

The proJegt company, operator, host government and lenders mustagree on any performance guarantee, based on the financlal needs ofthe proJect and the feasibtlity studies. Once all this information is com-piled, the financtal rnodels will dictate the mlnimum acceptable level ofperformance from the lenders'perspectlve. The proJect company, which


is expecting a reasonable return on its equity, will want a higher level ofperformance. The operator, on the othdr''hand, wlll naturally want toprovide only the most mlnimal performance guarantees. Eventually' theparties will have to agree on a realistic perforniance guarantee based onthe underlying realities of the project and reach an acceptable compro-mise to their conflicting interests.

0peratol's acceptanoe of the facility

After completion of construction and initlal start-up and testing' thethe facilitv as meeti

the required performance guarantees of the construction contractor andshould also have the responsibility for obtaining and managing any war-ranty work as a result of defective construction or equipment' It is usu-ally in the best interest of the proJect to have the operator involved fromthe outset. However, the operator's representatives must be pre'sent

during start-up and testing as well as during the punch-list phase of theproject. The operator is going to have to use the facility to perform speci-fied functions, and it is in the best position to determine if the facilityhas been completed in a manner that will allow it to do so'

Substantiue opelational concelns

Three maJor concerns for the operation of the facility are (a) the supplyof fuel, utilities and other materials, (b) the demand for the product orservice and (c) the delivery of the product or servic'e. For example, for acoal-flred power plant, the operator will need a steady supply of coal tofeed into the furnaces to produce the power, a market for the power anda network of transmission lines for distribution. The loss of any one ofthese components would render the project lncapable of performing itslntended function. Although lt may be advisable to require the operatorto keep enough coal on hand to avoid shutdowns due to supply delays,the operator'cannot be responsible for keeping the railroads, the ship-ping companies and the mines that supply the coal operating smoothly.The operator, on the other hand, must remain knowledgeable about de-veloprirents in the supply and transportation sectors so as to anticipateand minimize disruptions caused by problems in either sector. It willmost likely not be responsible for malntaining demand \Mithin the powergrid or for the grid ltself. These responsibilities wtll rest with unrelatedthird parties or the host government, or they will be waived in the case of

Jorce mqjewe events. Often, demand will in effect be guaranteed by thehost government's purchase agreement.

ErE,

_ " l

UNID0 80T Guidelines t o5

For a toll road, supply ls of less concern than demand and dellverv.The key demand questlon for a road is, who is responsible for attractingusers? The operator might be responsible for marketing, but unless itscompensation is tied to increased use, it would not have as much incen-tive as the project company to perform this function. with respect todelivery, the toll road operator will be responsible for keeping the road ingood repair and collecilng tolls.

The o&M contract will detail the operator's responsibilities for the equip-ment installed at the facility. scheduled or preventive maintenance,as well as minor repair work, is likely to be entirely the operator's re-sponsibility.

If the project company wlll purchase equipment that requires vendormalntenance agreements, these should be negotiated ln consultailonwith the operator and then asstgned to the operator. such an assign-ment will keep the proJect company out of potential disputes betweenthe operator and the vendor and wilt preserye the integrity of the o&Mstructure whereby the proJect company can look to the operator alone tohandle such problems. If, lnstead, a vendor under contract to the proJectcompany is made responstble for the proper functioning of equipment, aproblem can arise if the performance guarantees cannot be obtainedbecause of defaults by the vendor. From the perspective of the projectcompany, it is imperative that the operator should have as much re-sponsibility as possible for the proper technical operation of the facility.

The structure of the O&M contract with regard to (a) responsibilityfor equipment failure or replacement and (b) capitat improvements (suchas upgrades to take advantage of new technologr) must be carefullynegotiated. If the operator is to take the risk and responsibility for thosioutlays, it will expect more compensation than if they stay with the projectcompany. For example, in a toll road project, it may well be that instal-lation of an automatic vehicle identification system is an attractive in-vestment for the proJect company because it will streamline access tothe road and increase the number of users. The operator would, how-ever, have little tncenilve to make such an lnvestment from its own fundsunless lts fee were to lncrease as trafflc usage lncreased.

The operator wlll have the duty to keep the road in good repalr, be-cause its useful ltfe u/ill normally be much longer than the term of theo&M contract. The maintenance standards to be applled throughout


the proJect lif€ must be carefully defined. It may be that existing stand-

ards set forth in the country's infrastructure (e.g. highways) statutescan simply be incorporated by reference. Alternatively, there may be

reference to well-recognized industry standards. But in all cases, the

O&M contract must deftne clear mainten€rnce standards against which

to measure the O&M contractor's performance.The issues of maintenance and capital improvements are critical to the

condition of the facility at the end of the concession period. For a toll road,periodic maintenance as called for in the relevant oristing statutes may be

all that is needed. By contrast, as the turbines and generators of a powerplant reach the end of their useful life, the typical O&M contract would bedrawlng to a close. It may be better in this situation to have the host gov-

emment upgrade the facility after transfer, or to inluse tie project wltn

fresh capttal and carry forward wtth a new O&M contract. The operator's

obllgatlon to the project company under the O&M contract, and the proJect

eompany's obligation to the host government under tl-e proJect agreement,*r-,Jt b. carefully coordlnated with respect to capital improvements, refur-bishment and upgrades that go beyond normal maintenance.

TWo other aspects of maintairring the facility desewe brief mention. First,

it will be the operators duty to keep appropriate business records and logs

and to generate reports for the project company, host government and lend-

ers. Secondly, the O&M contract should grant the proJect comparry the

right to inspect the facility and its business records,'and it should extend

this rigtrt to the representatives of the lenders and the host government. Inparticular, the host governmentwill want to periodically inspect the project

to ensure that it is being operated and maintained in accordance with the

applicable laws and regulation. The project company should exercise its.ight of irt"pectlon frequently enough to ensure compliance with dl appli-cable agreements and legal and other requirements.

Because it is important that the operator be responsible for performing

the O&M obltgations that the proJect company has undertaken in theproject agreernent (except to the degree tJrat adequate provision has beenmade elsewhere for the proJect compurny to perform such obligations), it isadvisable for the O&M contract to refer to the other project documentsthat set forth the O&M obligatlons of the proJect company and for thoseagreements to be attached to the O&M contract. The operator shouldthen agree to be bound to the project company to the same extent tJ:eproJect company is bound. This will reduce the chance that the obliga-tions of the proJect company are construed as broader than those trans-ferred to the operator in the O&M contract'

Em


. Technology and training

It is important to deal with technology issues in the O&M contract. Theseissues include the ownership of proprietary data, protection of tradesecrets and restrictions on transferring technolos/. For many projects,computer software programs will need to be created to run the equip-ment that automates the facility. The host government will want to re-tain the right to use that software after the concession expires and theoperator will want to retain the right to the software so that it may eithermodiff it for use on otJrer projects or sell it to other companies. Both

exclusive licence to use and modiff the software. If the host governmentwants to modi$ the soft'ware, howeven, it will need access to the sourcecode. Tfpically, the source code will be kept by an escrow agent and therights of the government or the proJect company to the source code willbe heavlly negotiated. This access, as well as access to other trade se-crets of the operator and any s'ecrets of the government, project com-pany or lenders, should be protected by appropriate licence agreementsand confidentiality agreements.

Because as much local labour should be utilized as possible consist-ent with meeting the facility's needs, the operator should be required bythe o&M contract to train the local workforce to operate the factlity. Thescope of such a mandate can vary wtdely, depending on the complexityof the facility and the needs of the host govemment.

r Gompensation

There are various options available to compensate the operator for itsservices. They include flxed price, cost plus a fee and performance-basedcompensation.

In a fixed-price contract, the operator will receive a flat fee for provid-ing its sewices. whlle this option represents the lowest risk altemativeto the proJect company, it ls usually appropriate only where both scopeand magnitude of the seMce to be rendered can be predicted with someaccuracy and are unlikely to fluctuate.

A more common arrangement ls a cost-plus-a-fee contract. Here, thefee is elther a fixed percentage, a percentage iled to performance or acombinatlon thereof. The cost portion could include all the consumablesnecessary for the operation and maintenance of the facility, as well as


the costs of any third partlr contracts being administered or entered intoby the operator, and the cost of the operator's employees, The exact feepercentages necessary to compensate the operator adequately will varyfrom proJect to proJect. In some instances, as with a coal-fired powerplant ln,a country ln which the government already owns extensive coalresewes that will be made avallable to the plant free of charge, the costof the O&M contract would be much lower than if coal were purchasedat market prices. Of course, the work necessary to operate the facilitywould be the same.

The fee can also be tied to specifted criteria to create a performance-based lncentive for the operator to provlde the best available service. Fee

ages for poor performance. These arrangements are particularly usefulwhen the operator is an equity investor in the project compurny with asignificant stake in the success of the project.

However the compensation is stmctured, it is important both that theoperator should be given an opportunity to make a reasonable profit andthat the contractual language should protect the host government fromhaving to pay windfall profits for operation and maintenance of the project.

r Financial records and budgets

Careful linancial reiords must be kept of the lncome and expense tor theoperatlon and malntenance of the proJect, The operattng budget must beprepared and approved at least annually; ltshould show all maJor catego-ries of expenses and that the proJected revenue wilf be sufllcient to coverthe necessary outlays. Often, the lenders require that project receipts beplaced into an escrow account, to be disbursed only in accordance withspecified terms. This arrangement prevents the equity partners of theprojept company from betng paid out prematurely and assures that fundsare available to cover all project expenses. The operato.r must be requiredto comply with the provisions of the project documents concerning thecollection and dlsbursement of funds and should be required to make itsdetailed records, books and accounts available for review, audit and copylngby the project company and the'lenders.

EItri

UNID0 B0T Guidolines 267

rr Disputes

There is one overriding goal that should be sought in any O&M contractdispute resolution procedure: the ability to resolve the dispute quickly,without disrupting the operation of the project. Various decisions madein the O&M contract can affect this goal. First, the parties should decidewhich law will govern the dispute. When dealing with the many entitiesinvolved in a BOT project, often from different countries and often doingbusiness in a third country, the choice of law becomes important. All theagreements in a BOT project should be governed by the same law. Thelaw setecfef-will usually@Hleast well understood by the key participants. The minimum require-ment should be for aJurisdiction with well-developed commercial laws.Secondly, a precise dispute resolution procedure should be set forth.Usually. binding arbitration will be designated after consultation andmediation have been exhausted.rs

Since most BOT proJects are highly specialized facilities, it is usuallypreferable to set up a hierarchical dispute resolution process of negotla-

. tion, followed by medlation and, flnally, blnding arbltratlon.' Thirdly, all the parties to the BOT proJect should agree to be made a

party to dispute resolution proceedings, thereby precluding the neces-sity for multiple proceedings and ensuring the fastest possible resolu-tion of the problem. Finally, both the operator and the project companyshould be obligated to perform their respective duties despite the exist-ence of a dispute, in order to prevent the dispute from disrupting theproject while the resolution process is under way.

I

r Tetmination

The O&M contract will end either at the explration of a specified term orupon termination by a party. Its duration and terms should be suflicientto allow all the partles to attatn their contractual goals. The proJect com-pany will always have the right to remove the operator for cause. In somecarefully defined circumstances the operator may be removed wlthout

r3 Litigali0n is not a preferred r0s0lulion process, Litigation in eithor ths local courls of the host government 0r thoseof some olher interested jurisdiction requires the participants to educate a judge or a jury on technical issues lo amuch greater degree lhan would normally be necessary wilh induslry-kn0wledgeable mediators or arbitrators.

268 UNtD0 B0T Guidelines

cause. The mechanism for compensatin$ the operator in these circum-

stances must be clearly defined. ln the case'of replacement without cause,

the operator typically would be entitled to some sort of payment to com-pensate it for its unrealized return on its investment in the contract. In a

default termination, the operator would only be entilled to payment for

work pioperly performed and would often be subject to either liquidated

damages or for any increased cost owing to its faulty operation and main-

tenance of the facility. The operator will usually not have the right to

terminate the agreement without cause but will be able to terminate for a

material breach by the project company that is not cured within a reason-

able perlod of time.the

various remedies, cures and timetables to which the parties must ad-

here. Although the possibilities for material non-performance by the

operator are too numerotls to list, they will usually be tied to failure toperform the actions necessary for the safe and reliable operation of the

project. The project company will usually have far fewer material obliga-

tions, the most important of which will be to compensate the operatorand not to interfere with project operations. Depending on the duties of

the parties set forth in the o&M contract, however, the project company

may have a number of responsibilities material to the successful opera-

tion of the project, and the iu.ilrr." to perform any of them could be grounds

for default. The O&M contract should provide that written notice ahd an

appropriate opportunity to cure must be given before the opposing party

has the right to terminate.The lenders or the host government may also have the right either to

terminate the operator or cause the project company to do so. The me-

chanics of these provisions should be incorporated into the O&M con-

tract, along with a description of the rights and obligations of the parties

after termination. It is imperative that any and all confidentiality agree-

ments, as well as the dispute resolution and indemnity provisions of the

agreement, remain in effect after termination. Finally, the effect of ter-

mination on any performance bonds, warranties and insurance policies

should be detailed

E summary

The O&M contract is a critical part of the BOT process' It should, in prin-

ciple, be drafted well in advance of its intended use. :lhe operator shouldbe brought in as early in the process aS possible, preferably as an equity

HTE


investor in the project company, and should be consulted on all dspects ofdesign and construction thatwill affect its ability to operate and maintainthe facility. Care must be takenito ensure that the O&M contract is con-sistent with the other project documents and satisfies all legal require-ments. If any obligations are intentionally omitted from the O&M contract,the project company must be sure to provide for their accomplishment,either by itself or by an entity other than the operator. i


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.The meaning of ttanslqr

An essential element of a BOT project is that at the end of the conces-

been the most popular approach to privately financed infrastructureproJects tn developing countries. One reason is that many countriesconsider it a matter of national interest, strategl or security that infra-structure should remain under public owrrership and control. Manygovernments have tended to view their resort to the prtvate sector asan exceptional measure, taken only to develop, flnance and bulldlnfrastructure proJ ects.

The BOT concept permits prlvate sector financing and efficiency to beapplied to infrastructure proJects, while at the same time allowing thegovernment to retain strategic control over the project and ensuring thatthe project is transferred back to national authority at the end of theconcession period.

The fact that the Guidelines focus on BOT projects should, however,not be taken to mean that privately financed infrastructure projects mustbe done orrly on a BOT basis. Other variants-particularly build-own-oper-ate (BOO) proJects-have also been used. Nor does the transfer of existingBOT projects to the host government necessarily mean that the projectmust remain in the public sector. On the contrary, once the host countryhas acquired ownership and control of the project from the ori$inal projectcompany, the host govemment will have a number of alternatives otherthan oyntng and operatlng the proJect ltself. It mtght, for instance, issuea new concession for the proJect on new terms. A new concession wouldcover only operation and maintenance of the project, so it would cost lessthan the original BOT proJect and would run for a shorter period.

A self-evldent but posltive feature of the BOT concept is that hostgovernments wlll have flexibility and a choice to make at the timeof transfer. E

ET


. The end of the concession Period

The length of the concession period is a function of the economics of

the proJectl The idea is to give the proJect compgl the opportunity to

eatn enougtr from the proJect to accomplish the following:

r Pay interest on the proJect debt'

. Repay the ProJect debt.

r Repay the equlty lnvestment of the proJect sponsors and any other

equtty lnvestors'

r Pay a reasonable return (tncluding a reasonable profit) to the equlty

tnvestors to compensate them for the use of thelr capital and the

risk ttreY wlll have undertaken

The period of the concession is normally set to allow the proJect com-

panytotuildtheproJectandoperateitlongerroughtoaccomplishtheseio,ri go"t". It will be-limited by certain factors. Normally, it will not be

short"er than the duration of the debt ftnancing; it will not be longer than

the expected economic life of the proJect assets and it will also not be

longer than the normal time horizon of equity investors' who generally

expZct to recoup their investment in full, together with a reasonable

prorit, within 2o-30 years. This is because potenttal profits beyond that

period must be so heavily discounted to arrive at their present value

that they are generally disregarded' However' the charges or fees to be

;;h ;y in. p,iutr" o, con",.rmers (e.g. toll road users or power purchas-

ers) must alio be taken lnto consideratlonwhen decidlng the concession

; perlod. A short concession perlod may result rn htgh charges to the pub-

itc, whtch could be polttlcally unacceptable. The optimum concesslon

perlod wlll balance these needs. :- Ig th" case of..;brce mqewe or of breach of qontract by the authorlties

that, for lnstance, causes a delay in the constructlon, most proJect agree-

ments provtde for an appropriate extension of the concession period as a

remedy to the ProJect comPany.

r The terms of ttansfet

The proJect agreement provtdes in detail the terms of transfer, whichmay include the followlng:

. Conditions for and tlming of the transfer or, possibly, the renewalof the coneesslon.

r Scope ofthe transfer.

r Mdtntenance and monltoring schedule prior to the transfer date.

. SupPlY of spare parts after the transfer.

r TYansfer of lnsurance and contractor warrantles.

I

Technologl transfer.

Traintng of local personnel needed for the further operation of theproJect.

Environmental compliance.

Definition and allocation of transfer costs.

lWarranties

Passing the risks.

Cancellation of contracts and assignments.

Removal of obJects owned by the project company.

Rclease of maintenance bonds.

. Transfer procedure-

The BOT project agreement normally provides 'that at a reasonable.tlme before the transfer date the proJect company and the host govern-ment wlll get together to work out arrangements for the transfer. It mayln some cases set forth ln conslderable detail the scope of transfer, suchas the improvements, bulldings, machinery, equipment, fixtures, fittingsand spare parts that are to be transferred. In other cases, it may providethat the proJeet will be transferred as is.

,,J


The normal solutlon regarding malntenance has been for the hostgovernment to require that the proJect assets be maintained in good

. working order during the life of the concesslon, normal wear and tearexcepted, but up to some minlmum standard of quallty. The host gov-ernment and the proJect company stipulate in the project agreement theminimum quality standards that need to be met at the time of transfer.Normally, the project company ls not reQutred to replace maJor pleces ofequlpment unless such replacement was specifically foreseen ln theproJect budget at the outset.

The proJect agreement and, possibly, the O&M contract should makeclear prectsely what standards of maintenance, reliability and perform

trans@appropriate monltoring procedures need to be included, usually lnvolv-irtg lnspection and certiflcaUon of the proJect to assure the host govern-ment that the contractual standards have beeh met when the transfertakes place.

; As a rule, the proJect agreement will speciff, under the technologrtransfer provision, that an approprlate number of copies of plans, as-built drawings, blueprints, operatlng manuals, instrucuons and com-puter programs (including licences to use such programs, whereappropriate) are to be turned over to the host government at the time ofthe transfer.

Another increaslngly important area of concern is environmental corn-pliance. Just as the proJect agreement will normally have required theproject company to comply with local environmental laws and regula-tlons, it should be clear, elther contractually or as a matter of law, that "the project compan)t is obligated to transfer the project free from knownand undue environmental hazards.

r Gosts of tlansferThe costs of transferring the project to the host government at the

end o{the concesston period should be explicifly dealt with in the proJectagreement. The main costs are the direct and indirect costs associatedwith the transfer itself, such as the followlng:

Transfer or stamp taxes, recording costs and notarlal fees.' l

r Fees for new permits and approvals.

. Employee termination costs.


Costs of training the government employees who will take over re-sponsibility for operatlon and maintenance.ra

Fees to third party experts for any required inspections or certi-fications.

Internal costs and expenses of each party (management time' costsof surveys, inventories, inspections etc.).

Legal fees that either party may incur in documenting the transfer'

There is no hard and fast rule for the allocation of these costs, Onepossible solutlon would be to have the host government' as trpay for the dtrect additlonal costs caused by the transfer, such as trans-fer taxes, notarlal fees and new permlts; to have the proJect comPanypay for employee termlnatlon costs, addlttonal trainlng, and requtredinspections and certlficattons; and to have each party bear its own inter-nal costs as well as the costs of lts legal counsel.

r Watlanties upon translet

A fundamental issue to be resolved in connection with the transfer ofownership is whether the project company will provide any warrantiesto the host government with respect to the project assets to be trans-ferred. At the very least, the host government should insist that anyunexpired warranties that are avallable to the project company, eitherby contract or by law, such as the warranties of maintenance contrac-tors or equipment suppliers, be assigned to the host $overnment at thetime of transfer. If necessary, the project company's contractors andsuppliers should be required to consent to such assignment as part ofthe orl$inal contractual documentatlon.

Beyond the asslgnment of third parly warranties, the proJect com-pany may be required to provide a general warranty at the time of trans-fer that the proJect assets are in good working condition, have beenproperly mai:rtained and meet the minimum construction and perform'ance standards required by the proJect agreement. There are valid

'{ Some governments will require training throughout the implementation of the project.

EI4


reasons for the govemment to require such a warr4nty at the expiry ofthe concession period. A one-year warranty to repair or replace defects,for example, might discourage the project compb.ny from a policy of be-nign neglect as the transfer date approaches. Another approach is torequire a one-year prolongation of the maintenance bond.


SOME GRITERIA FOR A SUGGESSFUTAPPLICATIOI{ OF THE BOT GOI{CEPT

Chapter 15 summarizes the factors that are important to the success ofBOT projects in developing countries. The decision whether or not to

utilize the BOT concept will depend, of course, on the particular project

and the circumstances prevailing in the host country at the time, buthost governments, sponsors and lenders will look at the factors that areparticularly important for success. r5

The proiect must be linancially sound, feasible and affordable

First and foremost, the proJect must be financially and economically sound.secondly, it must be feasible from a practical standpoint. Thirdly, thecosts of the seMce or the fees charged must be affordable for the'users'Sponsors and host govemmgnts must be convinced at the outset that theproject will be successful throughout lts lifetime. A feasibility study musttheiefore conclusively demonstrate the financial and economic viability of

the project under different scenzrrios. It must show a stable source ofrevenue over the proJected operating period. The revenue must be suffi-cient to cover the debt and operating expenses and to provide a fair rateof return for equity investors, as well as to provide a cushion againstcontingencies and changes. Assumptions used in tfre feasibility study,including demand estimates, inflation rates and interest rate projectioris,must be realistic and, where possible, supported by fletailed historical orcomparative data.

fhe country lisks must be manageable

A BOT project, like arty foreign investment, requires a stable politicaland economic environment. Even the most practical and flnancially vi-able BOT proJect may not be attractive to sponsors and lenders if thecountry risks are perceived to be too great. Finance on reasonable termsmay be unavatlable in countrles with a very weak credit standing' The

rs Since discussions of lhe B0T concepl tend to tocus on large, complex inlrastructule projects, it might be concludedthat the B0T concept and the success factors discussed in this chapter have little relevance for srnall, ordinaryinfrastructure projects. This is not the case: the B0T concept can be used.for a simple road project as wdll as a lormajor inlernalional transportation network. Indeed, a government should be cauli0us aboul selecting a very large


scheme as its tirst B0T proiect

281

legal and economic framework in some countries may not be sufficientlydeveloped to support a Bor construction programme. political instabil-ity, including the risk of expropriation and changes of laws, may frightenoff potential private investors. Insurance against political risks and gov-ernmental guarantees is not an adequate substitute for a stable andsupportive political enrironment.

Thele must be strong gouernment suppolt

Flost govemment support is essential to any Bor project. The privateseetsFrsinterestin$+anei -ened if the host government has announced that it wishes to promotepublic-private partnerships and that it will allow certain infrastructure .sectors to be privately implemented under Bor schemes. Since movingpublic functions into public-private ventures can be difficult politically,the host govemment's commitment to a BOT policy is critical.

The proiect must rank high on the host governmont'slist of infrastructule proiects

sponsors and lenders must be assured that the Bor proJect under con-stderation has a.high priority tn the host government's infrastructureproJect planning. some govemmerits may not have enough resources topursue more than a short list of projects, and sponsors and lenders arenot likely to seriously pursue proJects that are not on that list. A hostgovernment should therefore seleet a number of Bor proJects for activesupport and announce its commitment to them.

The legalfiamework must be stable

fur appropriate ancl stable legal framework that clearly sets forth whichgovernment agencies are authorized to develop Bor projects and thelaws and regulations that will apply to sponsors and lenders in suchareas as foreign investment, corporate law. security legislation, taxa-tion, intellecttral property rights etc. is widely recognized;s essential fora successful Bor policy. That some developing countries have enactedspecial legislation to address Bor matters reflects the importance andurgency of this requirement. In effect, the foundation of a Bor proJect isa web of interrelated contractual arrangements among the host country,sponsors, lenders and suppliers. The enforceability of these contracts isa sine qua non for a successful BOT programme


-

The administratiue framework must be efficient

Complicated bureaucratic procedures are often cited as a serious obsta-

cle to BOT projects. Seeking approvals from many different ministries and

local authorities is yery time-consuming and creates uncertainties for for-

eign sponsors. The host govemment should therefore tlffer an efficient

administrative process or entity for dealing with the varjous authorities

who grant approvals, permits and licences throughout the construction

and -perating period. Such approvals, permits and licences must begranted in a fair and obJective manner, based on laws and regulationsascertainable at the outset of the proJect development.

The blddlng procodulo must be fait and tlanspalent

The biddlng procedure is avery important part of a country's BOT policy.

Private sponsors cannot be expected to invest time and resources in the

developing of bids if the process for awarding a BOT project is not rea-

sonably oiderty, fair and transparent so that the chances for success

are predictable. The bid evaluation criteria must be clearly defined and

the bids must be evaluated in a public and objectivb manner.

Although some early BoT projects were awarded after direct negotia-

tions with a chosen sponsor, experience with comiletitive bidding sys-

tems shows that the latter usUally lead to terms and conditions more

favourable to the national interest. An orderly and transparent biddingprocedure should also win public support for private sector participa-

tion in infrastructure Projects'

B0T transactions slrould be structured so as to be Goncludablewithin a reasonabls time and at a reasonable cost

The private sector will be more interested in BOT tnfrastructure prr{ectsif the host government is able to conclude BOT transactions within areasonable time and at reasonable cost. Sponsors are reluctant to pro-pose BOT proJects tf the host government has a history of carrying onlong and expensive negotiations that never reach:a conclusion. In thepast, the long time and high cost of moving from th'e announcement of aBOT proJect to its conclusion has been a major drawbaek and has kepta number of BoT projects from going forward. It is therefore essentialthat host governments have a consistent and clear procedure to be fol-lowecl, tl-rat. thc.y estaltlish standarcl conl.rit<:ts and rtthr:r documenlalion1 r r < l t l u r l l i r r . y s c t - i r r r r l i r l r l r l r : l r . y , i r s l i r r i r s p o s s i l r k : I . i r t t t : l ; r l r l r : s i t t t < l

nt i l t :stortcs lklr the procurctncrrt ol ' IJO'I ' proJc<:ls.

.,t


The sponsors must be expedenced and reliable

The technical ability, experience and financial strength of the privatesponsors is of paramount importance and must be clearly established.lenders to a Bor project place great $'eight on the ehoice of sponsorsand their abtlity to manage and support a BOT project. A BOT proJectshould therefore not be awarded to the lowest bidder unless that btdderalso satlsfies the other essenttal crtterla.

The sponsols must have sufliclent llnanclal strength

Attractlng sufflcient equity is one of the key challengeS for all Borpro.lects. Governments and lenders will require the private sponsors tolrave:l lnrge r:nough financial interesl in the llof pro.lrxrt lo nrerke ildill lcult lor them to abandon or neglect the project. BoT proJects mustbe structured so that the sponsors have the capicity to absorb financialrisks and the incentives to do everything reasonably possible to makethe project a success.

.

The Gonsttuction contractor must haue sufficientsxpolionce and rosources

The lenders will insist that the prime contractor, preferably selected ona eompetttlve basls, has the techntcal and managerlal competence, staff-tng and financlal strength to fuull lts contractual responslbtlifies. Al-though ultimate responslbillty for the performance of the contractor restswith the sponsor group, the failure of a prime contractor can be a seri-ous setback for any BOT proJect.

For Bor projects, the lenders will also usually require a fixed-priceturnkey construction contract or a simllar scheme provldtng for liqui-dated damages, a performance bond and construction and equrpmentwarranties.

The project dsks must be ailocated fationally among the parties

The rational allocatlon and management of proJect risks is another factorcritical to a sugcessful Bor project. simply stated, this means that (a) allmajor risks are identlJled, {b) the identffid risks are allocated to the par-ties most able to bear them in terms of cost and control and (c) the allo-cated risks €ue managed in a rational way, usually by a combination ofcontractual arrangements and financial commitments.


It is advisable to address the risk problem at an early stage of BOT

development. All too often the private sector is so concerned about re-

ducing its exposure and the host government so concerned about trying

to transfer all risks to the private sector that the parties lose sight of

how much the project is actually paylng for a particular risk allocation.

Every transfer of risk has a price associated with it and is only as mean-

ingful as the assets that underwrite it.

The financial sttucture must ployide the lenders adequate security

sponsors' ability to arrange financing. Lenders require that the project

will pay off the loans as they become due and that adequate security isprovided in case of default.

vartous techniques to protect th6 lenders against non-payment ofthelr loans must therefore be built tnto a BOT arTangement. Such tech-niques wlll normally inctude safeguards such as a real estate mortgage,completlon and equipment guarantees, take-or-pay contracts, stand-bycredit arTangements, reserye accounts to cover future debt service, as-signments of tn" benefits6fdili6-t contracts, insurance, and a power

of attorney or trust arTangements that allow lenders to take over and

exeycise the rights of the sponsors well in advance of a default under theloan agreements.

The currency, fof{gn gclange and inflation issues must be solved

Currency convertibility, forelgn exchange ancl inllation risks can tle largestumbling blocks to the success of BOT projects. When investments in a

BOT project are in foreign currencies and the income from the project is

in local curTency;'the sponsors and the lenders will have to be satr'sfiedin three areas:

That foreign culTency to cover repayment of the principal and inter-est on any foreign exchange financing will be available in the hostcountry.

That the host government will allow project revenues to be con-verted to the currency ofthe loans and transferred offshore.

That the project is protected against losses. from exchange rate i

fluctuation and in{lation. I


Inllation in the host country will also affect the financial success of aBOT project and the ability of theisponsors to repay the lenders. Thisrisk, too, will have to be managed in the structuring of a BOT project, byindexing or other well-recognized financial techniques.

The B0T contractual framework must be coordinated and mustleflect the basic economics of the ptoiect

The contractual framework governing a BOT proJect ls complex. Thedevelopment and integration of the legal documents and their terms and

for success. The drafting of a contract package for a BOT project is achallenge with many pitfalls along the way. That the host governmentmust use qualified legal counsel goes without saying. Normally, thebasic terms and conditions of the project agreement should be outllnedas early as possible in the BOT process, preferably in the tender docu-ments from the host government.

In all stages and at all contractual levels it is essential to avoid sur-prise terms in the contracts. If a party feels that the contract terms areunfair there is a danger that it will walk away from the project or at leastbe uncooperative.

rn9Jy.!!!.r_g$t!!-e_ptru.q!9see!er$"[ped-!a-c"g-.enQte!eon a win-win basis

One element runs through successfirl BOT projects: in large part, theywere successful as a result of efficient cooperation between the publicand private entities. Bor proJects that are beneficial to both pirties,known as win-win proJects, have a much greater likelihood of success.Fair rewards for both parties encourage cooperation and efficiency.


GLOSSARY1

ADB: Asian DeveloPment Bank.

AilORTllATl0ll: Reduction of loan outstandl!9s'trsyqg,g-9g9rye"I'lh 9ligpj!.ryp3-vCI-enlsiii6i[il*

(AillluAtl RATE 0F RETURil: An undiscounted method of investment appraisal that compulesihe prolit or return on an investment, expressed as an average annual percentage ol its cost,

averaged over the life of the investment.

AppRAISAL: Analysis of a proposed investment to determine its merit and acceptability in

accordance with established decision criteria, The process of examining the attractiveness of aprl4t, from economlc, technical, social, commercial, environmentaland otherviewpotnts, before

the investment is made.

BlDiB0il0: A bond given on behalf of a party bidding for a contract to ensure that il will enterinto and perform the c0ntract if its bid is accepted.

BollDS: Financial securities, usually issued by larger firms with a public listing, to borrow long'term finance. Bonds are purchased by lqng{erm institutional investors, such as pension lunds.They are risk-averse and will generally only provide funds to blue chip companies, pre{erring

those with a credit rating.

' The terms in the glossary have becn compiled lrom dillerent sources. World tsank, "World Developmellt Reporl

1 9g4-lntrastructure for Development'' (New York, 0xlord universlly Press' 1 994); Gary Bond and Laurence carter'"Financing private infrastructure projects": emergin0 trends and experiences"i Discussion paper 23, International

Financecoiooration,1994:cl i f lordchance,ProjectFinance(London'IFRBooks'1994);JL Hansoa'/Dict ionary

ol Economics and Frnance (London, MacDonald &Evans, 1 969); Graham Bannock and William Manser ' lnternational

DictionaryolFinance(London,EconomislBooks/HamishHamilton,1995);NormanD Moore'DictionaryolBusiness'

finance and lnvestmerl (New York, prake fublishers, 1 976); UN|D0, "Glossary ol selected terms used in investmentproject preparation", 1 995.


BUllD, OPERATE AllD REltEtyAt 0F c0ltcEsstOlt {BOnl:.A contractuat arrangementwhereby the private sector entity undertakes the construction, inlluding financing, of i giveninfraslructure facility and the operation and maintenance thereof. The private sector entity operatesthe facility over a fixed term during which it is allowed to charge users appropriate fees and othercnarges not exceeding those proposed in its bid and incorporated in the project agreement loenable the private sector entity to recover its investment and operating and maintenance expensesin the proiect, plus a reasonable relurn thereon. In the process the private sector entity maytransfer technology and provide training to local companies and personnel. At the end of thefixed term, the private sector entity will have the right to request negotiations for renewal of thec0ncesst0n.

rrrrrrEn [DU I ,. A uur trraurual arrangemenl wngreoy a pnvate sect0rentity undertakes the construction, including design and tinancing, ol a given infristructure facilityand the operation and maintenance thereof. The private sector entity operates the facilily over ilixed term during which it is allowed to charge {acility users appropriate fees and other ihargesnot exceeding those proposed in its bid and incorporated in the project agreement to enable theprivate sector entity to recover its investment and operating and mainteiance expenses in fheproject, plus a reasonable return thereon. At the end of the fixed term the private sector entitytranslers the facility to the government agency or to a new private entity selected through publitbidding.

BUIID' 0Wtl'Al{D 0PERATE {800f : A contractual anangement whereby a private sectorentity undertakes the construction, including financing, of a given inhastructure facility and the0perati0n and maintenance thereof. The'private sector entity is allowed to recover its totalinvestment, operating and maintenance costs, plus a reasonable return by collecting fees andother charges from facility users. Under this arrangement the private sector entity-owns thefacility and its assets in perpetuity.

BUI[D, TRAI{SFER AtlD TEASE (BTt}: A contractual arrangement whereby a private sectorentity finances and builds an infraslructure facility assuming cost overruns, delays and specifiedperformance risks. 0nce the facility is tested and commissioned satisfactorily, tiile is lransferredto the implemenling governmentagency, The private sector enlity, however, operates the facilityon behalf of the agency for a fixed period under a lease arrangement.

cAPAcITY FEES: The capitat iecovery fees, fixed operating fees and service fees.

GASH FL0W: As used in benefit-cosl studies, the net benefit stream anticipated for a project.Net benefits are available lor lhe service of borrowed funds (amortizalion, interest and othercharges), payments of dlvidends ts shareholders and the paymentof profitlaxes. Care should betaken l0 avoid confusing this concept with that traditionalty employed .in financial projectionanalysis, which defines cash flow (or cash generation) as afteriu-income plus depreiiationcnarges.

:

theo f a


COMPtETl0ll GUARAIITEE: A guarantee, usually given by a parent company or sponsor, ofperlormance of the project company's obligations to bring the project to the point of completion.

C0MPtETlOll: Salisfaction of the agreed tests for practical complbtion of a project, usuallymarking the end of the construclion phase and the beginning of the operating phase.

:G0l{GESSl0tl: An arrangement whereby a private party leases assets lor service provision lroma public authority for an extended period and has responsibility for financing specilied new lixedinvestments during the period; the assets revert to the public sector at expiration of the contract.

COIIGE$StOll AGREEMEI|T 0R PRoJECT ACREEIIIEIlT: An agreement bstween a host

operation of a project and, usually, to have access to public utilities.

C0tlDlTlOllS PREGEDEIIT: Documentary and other conditions required to be satisfied beforethe borrower can requesl drawdown or other credit lacilities to be made available under the termsof a facility agreement.

C0IISTAI{T PRICES 0R REAI Pf,ICE: Prices that have been adiusted t0 remove general priceinl lat ion.

G0llSTRUGTlOll COIITRACT: The agreement or agreements between the project companyand the construction contractor for the design, engineering, procurement, construction, completionand testing of a faci l i ty.

COllSTRUGTl0l{ G0I|TRACT0R: The contractor 0r contractors hired by the project companylo perform the construction work in accordance with the'construction contract and the concessionagreement and their respeclive permitted successors and assigns.

C0llSTRUCTl0ll WOBI(: The design, engineering, procurement, conslruction, installation,completibn and testing of a facility and equipment

G0IISUMER: Purchaser of producfs for his or her own (or family's use) rather than for industrialor institutional use or for resale.

GOI{TRACTIIIG OUT (0R SERVIGE GOilfRAGT}: An arrangementwith the private sector toperform particular operating or maintenance functions for a fixed period and for specifiedcompensation.

C0IITRAGT0RS: Parties that construct or operate a project c0mpany's assets and sor,,relimesform part of the sponsor group.

.-*J


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{FltlAtlGlAt} BATE 0F RETUBII: A measuro of the financial profitability of a project from theviewpoint ot the enterprise undertaking it. lt is the discount rate atwhich the present value of thecosts would equal that of the benefits. Put differently, it is the maximum interest rate that theenterprise could pay on lhe capital invesled in the prolect and still break even.

FltlAllGlAt G[0SltlG: The execution and delivery of the financing documents as may be requiredto evidence the consummation of all transactions necessary for obtaining financing for construction

;work and commissioning of a lacility, together with the receipt of such equity commitments andcontributions as may be required by the financing documents.

rrilAilutilli uuuuMtilui: Loan arrangements, notes, indenlures, securtty agreements,guarantees and any other documentation relating to the financing for the project but does notinclude documents or agreements relating to the commitment or conlribution of equity by inveslors.

FIXEII C0STS: Costs that do notvary with changes in the volume of output.

FOfiCE MAJE/iIBE: Risks arising from circumstances, generally outside the control of the parties,which entitle one or other party t0 refrain hom performing its contractual obligations.

FOREIGIf EXGHAIIGE: Currencies of other countries. See also rgate ol exchanga.

FUtt RECOUf,SE: A (conventional) financing structure where lhe borrower-and possiblyguarantors-undertake t0 be responslble for repaylng the loan in full with.interest, regardless ofthe success or failure of the project.

GOUERT{II{G LAW: The system of law to which the terms and conditions of a contract aresubject, eilher expressly or by operation of the rples of conflict of laws.

GUARAIITEI: Formal pledge rhat the contracr conditions will be carried out; a manufacturer's orseller's undertaking to repair or replace defective producls under certain conditions.

IFG: International Finance corporation, the private lending agency of the world Bank.

lllCOME B0llD$: Bonds thathave a setintereslrate, but the paymentof the interest is dependentupon earnings of the corporation.

IIIFRASTRUCTURE (ECOtlOMlG 0R $OGlAtf: Economic infrastructure are the long-tivedengineered structures, equipment and facilities and the services they provide that are used in economicproduclion and by households. This infrastructure includes public utilities (power, piped gas, tele-communications, water supply, sanitation and sewerage, solid waste collection and disposal), publicworks (maior dam and canal works tor irrigation, and roads), and other kansport sectors (railways,urban transport, ports and waterways and airports). Ihe main items of social infrastructure are educationand health services, although housing, water and sewerage can also come into this category.


:F=

-,c&+e*-.

IIITEREST (COilP0UllDf : Interest calculated on the sum of an inltial principal or base andaccumulated interest. *

.

II|TEREST (DURltlG COllSTRUCTlOllf : Interest charges occurred during project executionand normally capitalized up to the point in time when the planl starts commercial operation.However, neither interest during construclion nor interest during operation is included in theinlernal rate of return calculations (return on investment).

IIITEREST ($lfilPlEl: Interest calculated on an inital principal and base.

f lfTERtfA[ RATE 0F RETUBII: See Economic rate ol return.

IPP: Independent power project. Private power project generating electricity for supply tothe grid.

lEASlllG: An arrangement wherbby a private party (lessee) contracts with a public authority forthe right to operate a facility (and the right to a flow of revenues from providing a specific service)for a specified period of time. The lacility continues to be owned by the public authority. Unlikein a concession, the lessee does not have responsibility for investments in lixed assets.

[E1{DEBS: The lending institutions thatare parties to the f inancing documents and their respectivesuccessors and assigns.

LlltlTED REG0UBSE: A financing structure in which the lender is relying to some degree onthe project assets and cash flows for repayment and debt service without full guaranlees lrom theproject company or its sponsors,

tlllKAGE (EFFEGTI: The effect ola proiect on investment, prices and output in relared industriesand trades. Backward linkages (sometimes known as upstream effects) occur in sectors thatsupply goods and services to the project, while forward linkages (downstream effects) arise inindustries that use the output of the project.

MAIIAGEMEIIT COIITRACI: An arrangernenl whereDy a privare contractor assumes respon-sibility for a full range ol operation and maintenance functions, with authority to make day-to-daymanagement decisions. Compensalion may be based partially on services rendered (as forservice contracts) and parlially on performance achieved (as in profit-sharing).

ltlEZZAtlllE FlllAllGlllG: A mix of financing inslrumenls, including equity, subordinated debt,complelion guarantees and bridge financing, the balance of which changes as the risk prcfile ofa project changes, i.e. as a project moves beyond construction into operation.

MIGA: Multilateral Investment Guarantee A0ency.


MUtTIPtIER EFFEGT: The elfect of a project 0n other parts of the economy produced whenincome generated by the project works its way through the economy, reactivating idle capacityand creating new income and employment to a multiple of the original stimulus.

I|ATUBAL MOI|0P0LY: An economic activity that is mosl efficiently carried out by a singleproducer.

l{CPl: National consumer price index,

llET PRESEI|T VALUE (l{PV): An ostimate of cash flows or the value of production to begenerated by a project, net of operating costs and expenses, discounted back to the time of

discounted difference between costs and benefits for each year of the project's life. NPV is anabsolute measure of oroiecl merit. '

ll0MltAt PRICES 0R GURREI|T PRIGE$: Prices thal have not been adjusted/deflated toeliminate general price inflation. A tradition in economics is to specify "constant" prices if thatis intended; othenc/ise, the inference is that current prices are intended. :

ll0ll-REC0URSE: Meaning the same as "limited recourse", sometimes used to indicate tfratthe lender is placing a particularly high degree of reliance on the project.

OFF-TA|(E AGREEMEHT: A long{erm agreementto purchase minimum amounts of the productof the project at an agreed price; often entered into by one of the project sponsors on a take-or-paybasis.

0PERATIOtI AllD MAlllTEtlA]lCE (0&Ml C0IITMGT; The agreementor agreemenls betweenthe proiecl company and the 0&M contractor lor the management, operation, mainlenance andrepair of a facility.

OPERATI0II AllD MAIHTEIIAI|GE (O&ftll C0I{TRACTOB: The independent contractor 0rcontractors hired by the projectcompanyJo manage, operate, maintain and repair a facility inaccordance with the 0&M contract and the concession agreement and its per"mitted successorsand assigns.

r 0PP0BTU[|lTY C0ST: Value lost hy using something in one application ralher lhan anolher.l l tc oppot l t t t t i ly r :u l l o l c t t t l t loyt t rg; t workct i t r ; t pro jc t ; l is l l rc lor ; : ; o l nc l orr lJr t r t l l ta l ; r workr : r

:would luve ptoduced elsewhere. The opportunity costof using good farmland lor suburbanhousing is the net value ol the crops foregone. The opportunity cost of investing in one projectis the return that could be obtained from another project. The concept of opportunity cost is thecornerstone of benelit-cost analysis. j

PATEIIT: The sole right to make ot sell a product or to use a process invented by the persongranted the patent, Patents are issued by governments.


r,l*:;..

PERFORilIAI|GE B0tll: A bond or guarantoe given by a bank in favour ol a proiect company 0nbehalf ol a contractor or supplier of a specified percentage of the value of the relevant contract,for example, conslruc.tion contract or supply agreement.

POWER PLAIIT: The specific power station, together with all equipment, fuel stciage and relatedfacilities; protective devices, transformers, switchgear, fixtures and the inlerconnection facilitiesand substation (but excluding the transmission line and other tacilities and equipment owned oroperated by the authority), all to be developed, designed, engineered, linanced, constructed,equipped, insured, completed, tested, commissioned, operated and maintained in accordancewith the concession agreemenl.

ractual a0reement to ourchase power froman IPP

PROJEGT:The development, design, engineering, f inancing, construction, equipping, insuring,completion, testing, commissioning and operation of a facility.

PRESEIIT VATUE (PRESEIIT W0f,TH): The value today ol a future payment, or stream o[luture payments, by discounting.at a speci{ied interest rate. A total present worth (or value)referstothesumofadiscountedstreamofcosts,benefi lsornefcashflows. Anetpresentvalue(NPV) most often refers to a discounted method of investment appraisal that calculates the netvalue or net benefit of a project when all costs and benefits have been discounted to the present.Expressed in absolufe terms, the NPV may be negative or positive, but for the project lo beacceptable, the NPV must be either zero or positive.

Pf,OFlT: Financial profit is the dillerence between tinancial revenues and costs. Economicproflt ls the surplus of benefits over costs when economic prices are used, after deducting theopportunity costs of capital..

PROJECT FlllAllGE: A financing modality where the lender looks to the project's cash llows torepay the debt and to the project's assels for security. lt is also known as structured financingbecausg it requires structuring the debt and equity such that the project's cash flows are adequatelo service the debt.

PUI|CH-L|ST: A comprehensive list of items to be completed or corrected by the contractorwhen the works have been substanlially completed; it is work outstanding when the takeovercertif icate is issued.

PURCHASIIIG POWER: The capacity lo purchase possessed by an'individual buyer, a group olbuyers or the aggregate of the buyers in an area or market.

UNIDO B0T Guidelines z9b

QUALITY A$$URAI{CE PB0GRAMiIE: The programme 0f quality assurance for the design,construction, testing, operation, maintenance and repafi of a facility.

RATE 0F EXGHAiIGE (EXCHAIIGE RATE): The price, or the indication sf the price, at which' one can sell or buy, with one's own domestic currency, a unit of foreign currency.

RAW tfIATERIALS: The basic materials used in the production of goods in a manufacturingpr0cess.

REAI VATUES: Normally, cosls and prices;thatare not adjusted for expected inllation (constantprices as compared to expected cash prices). Somelimes refers to economic values rallrer lhan

- tinaneialcoslsand4riees{+esoulee essts ralhe+than finaneial values)-

REAL PRICES: See Constanfprbes. :

REHABIIITATE, 0PERATE Atlll TRAI|SFER (ROT!: A contractual arrangement whereby anexisting inlrastructure facility is turned over to a private sector entity to refutbish, operate and

. maintain for a f ixed period, at the expiry of which the facility is lurned over to the governmentagency 0r to a new private entity selected through public bidding.

REHABILITATE, OWll AllD OPERATE (R001 : A contractual arrangemenl whereby an existinginfraslructure lacility is turned over to a private seclor entity to refurbish, operate and maintainwith no lime limitation imposed on ownership. As long as the private seclor entity is not inviolation of its project agreement, it can continue to operate the facility in perpetuity.

RlSl( MAIIAGEMEIIT: The identification and acceptance or olf-setting of the risks threateningthe profitability or existence of an organization.

$EGURITY: Protection; assurance, indemnif ication. The term is usually applied lo an obligation,pledge, mortgage, deposit, tien etc. given by a debtor in order to assure the payment or peformanceof its debl, by furnishing the creditor with a resource to be used in case of failure in the principalobligation. A pledge of financial or physical property to be surrendered in the event of failure torepay a loan.

SEllSlTlVlTY AI{AIYSIS: An integral parl of cost-benefit analysis that tests the effect on therate of return or nel present value of possible changes in outcomes, on both optimistic andpessimistic assumplions.

i

SPECIAL-PURP0SE C0MPAIIY: A company established for a particular purpose, for example,to achieve off-balance sheet or advantageous tax lreatment or to isolate the parent's other assetstrom the creditors of the company,


SERVIGE: In economic science, a useful function fulfilled by a person or organization, for thebenefits of which buyers are prepared to pay a price.

SHADOW PRIGE: The opportunity cost of a good or service, also accounting price'

$OUERElGll: A national governmenl in its role, for example, as a lender 0r borr6wer.

S0VEREIGI| [0A1]: A bank loan lo a government, usually of a developing country.

SpoilSoRS (0n oUrllERSl 0F THE PRoJECT GoMPAIIY: Providers of equity and the drivingforce behind a proiect.

suB0RDlllATED DEBT (AtS0 l$l0Wll AS QuAsl.EQulw 0R MEzzAlllllE FlllAllGllllll:Unsecured finance that is senior to equity capital but iunior to senior debt. Subordinated dObtconlains a schedule for the payment of interest and principal but may also allow participation inthe upside potential of an equity position.

ISUB0nDIilATED l0All: A loan made on terms whereby the lender agrees that some or all

lRaVmenl obligations will rank behind certain other unsecured indebtedness of the borrower.

SWAP: The exchanging of one debt, currency or interest rate for anothe r.

SWITCHIIIG VALUE: The value an element of a project would have to reach as a result of achange in an unfavourable direction before the proiect no longer meets the minimum level ofacceptability as indicated by one of the measures of proiect worth.

I SYIID|GAfED L0Afl: A loan made available by a group of banks in predefined proportions

I under the sarne credit facility.

TAKE-0R-PAY GOIITRACT: An agreement between a purchaser and a seller whereby thepurchaser agrees to pay specilied amounts periodically in return for producls or services even ifthere is no delivery of the products or performance of the services.

TEIIDER: 0flering of a service in response to advertisement (same as a bid).

TURIIKEY G0IITRAGT: A contract for the construction of a projectand installation of all lacilities,providing for the project to be handed over atthe point where it is ready for immediate operation.

USEFUI LlFE: ln accounting and taxation, lhe period of time for which an assel is capable ofbeing used for the production of income.


lndex

A

actadministrative- 224

agreement

concession- (same as proiect-)confidentiality- 24consortium- 24, 118, 120, 207, 211construction- 26, 207, 216, 245, 250consultant- 209fuel supply and transportation- 64fuel supply- 113implementation- 223inlercreditor- 219joint venture- 120loan-Z2,54, 188, 285licence- 266loan- 9, 26off-take- 15, 48, 64, 172,

173,207,214,294operation and maintenance (0&M)-

22,48, 164, 217power purchase- 62preliminary cooperation- 120pro ject - 9 ,10, 12, 22, 41,47, 50,

68, 76, 87, 89, 110, 112, 133, 145,160, 161, 167,169, 174,223,289

shareholders'- 160standardized project- 57, 97, 239syndicated facililies-'l 73technical assistance- 164vendormaintenance- 264

airporl 3, 32, 35, 161, 167

amortization 60, 287

appraisalcommercial- 130, 135economic- 38, 127, 129, 130, 131,

134, 135, 136, 142, 144, 148, 191technica l - 130, 131, 135. 138, 146

arbikation 55, 194, 237r-

arrangement ttake-or.pay- 48, 184..

authorityregulatory- 46, 148, 161

award process 95

Bbank

commorcial-14,17, 54, 55, 175, 186, 189, 190,192, 194, 195, 198, 199, 200, 218

national and regional development 191

bankable 214, 223,241

bidalternative- 108,document

99, 100, 116,evaluating-

114,121, 225

144, 156, ' t97

82, 97, 98, 123, 127, 144evalualion 22, 25,78, 90,

98, 105, 130, 144, 240,283opening 121

, package 22, 23,79pre- conferenc'e 1 1Bresponsive- 24, 225security 120selection orocess 1 1

UNID0 B0T Guidelinos 299

a

bidderinstructions to- 117, 1jg, 121, ZZs

biddingand procurement-related cost 196competitive-

23, 63, 100, 114, 126, 196,225,247, 283

procedure 78, Bg, gB, 225, 283p rocess 10 ,114 ,126regulation 98, 225rule 225

agencies 190, 193, 198lund 192loan 101

BLT 3

bondadvance payment- 2S4convertible- I 95income- 195,292maintenance. 48performance- 13, 110, 124,180,

218, 219, 231,249,254,269, 284

retention- 249, ZS4

bonusperforntance- 69, 261signature- 68

800 3, 94, 273,288

BOR 2BB

BOOT 3

BOTconcession 78, 89, 98, 144, 160,

167, 196, 228contract package 209financing 1 10, 180, 195law 55policy 50, 57, 93, ZBZ, ZBgstrategy 42, 45, 55, 56,

61, 240, 2s0

UNID0 80T Guidetines

bridges 5, 13, 14, 21, 35, 62,64, 67, 167

BRT 3

BTL 2BB

BT3

BTO 3

ccapabi l i ty bui lding

capacitycharge 63, 17A, fi4fee 13, 174, 214,288

capitalequity- 13, 166, 182, j84, 1BS,

192, 194, 196, 200,291international - market 13, 1BS, 192,

194, 196local - market 36, 219long{erm- 36, 190, 191, 192, 195market 4, 6, 7, 13, 36, 42,

102, 165, 185, 192, 194,196 , 210 , 218

mezzanine- 1Bi, jB4, 1BS, i86,195 , 199

change order 241, ZS3Channel Tunnel 14, 204, ZiS, 247cla im 63, 87, 1 i6 , iB2, 183,

231 ,237 ,249by the conkactor 252

clarification 22, gg, 117, 121, 156, ZZsco-financing 1g4commercial fieedom 65communication sector taw 226competing project 6b, 68, 213competitiveness 36, 27, B1

300

' - condilloiS

completionbonus 68, 69certificale of- 231test 26

concessionauthorization 224period 3,5, 26, 34, 61, 64, 75,

78, 80, 82, 85,8 i , 113, 117,121, 124, 142, 144, 145, 147,162, 183, 223,227,229,231,233, 274

contract package 21, 50, 207, 213,223, 286

contract-based revenue B, 213

contracting out 34, 291

contractor9, 24, 32, 41, 62,70, 81, 88, 94,101, 108, 115, 122,132, 155,159, 163, 168, 182, 199,202,211,230,245,284,289

construction- 11 , 1'17, 211, 216,

domestic- 81, 82, BB, 159

contractual asset i3

costoverrun 33, .70, 142, 146, 155,163, 168, 245

cost-benefit analysis 1 33, 1 37, 1 93, 290

creditlong-term - 186, 1Bgrating 6, 43, 192, 241

currencyforeign- 8,16, 49, 66, 172, 285local - funding 195

DDarttord River Crossing 247

DBFO 3 :DCMF 3

debtcapital 183financing 12, 168, 169, 186, 194,

198, 218, 274service coverage ratio 1 35, 1 64sbrvice ratio 148subordinated- 164, 184, 191,297

debt-equity ratio 183

Definition of Term 229

delay and penalty clauses 236

conllicts of interest 11, 37, 86, 248

constructioncost 7 , 67, 143, 163, 168, 197,

198, 204, 230, 247 :work 26, 83, 93, 98, 100, 113,

123, 132, 204,230, 247

constructor 55, 108, 145, 223,234

contingency fund 253

contraclbreach of- 194, 2?8, 235, 274construction- 9, 11, 22,48, 83, 95,

100, 117, 133, 161, 168, 202,203,211, 219, 230, ?41,284,289

equipmentsupply- 124, 161, 207,216, 248

joint venture- 172leasing- 34management- 34, 293off-take- 22, 161, 213operation and maintenance 9, 62, 1 1 7,

133, 218, 232, 259, 276,294standard- 240, 283take-or-pay- 63, 158, 289,297termination- 51, 236turnkey construction- 216, 219, 284turnkey- 164, 173, 248,297

contract financing 181


a-depreciation 60, 170,290 .

designchange 231, 238criteria 230, 238

cevelopment linance institution 191

discountrate 130, 134, 137, 148,290

dispute resolution 209, 228' 231

0oswell Independent Power Proiect 169

Eeconomic

appraisal38. 127, 129, 130, 131, 134,135, 136, 142, 144, 148 ' 191

cost 33, 37, 138costsand benefits 33, 37' 135, 138impact 32 :l i fe 145,274,291viability 6, 10, 44, 69, 125' 129,

141 , 143 , 163 , 187 , 191 ' 281

etfective date 1 24

electricity sector law 226

energy charge 63, 170' 171

enlorceability 53, 55- 181' 2BZ l

environmentallaw 54, 234, 276legislation 54, 133, '156

performancenorm 113, 132, 133performance rePorting system 238orotection 50, 5'1, 117, 226,

228, 234screening 21, 132, 133

equitycapitat

13, 166, 182, 184, 185, 192 '194, 196, 200,291

fund 183, 185, 1BB, 191, 198 ' 205inveslor 6 , 11, 13, 14, '15, 16,

24, ?5, |n,135, 166, 182, 183, 212, '

215, 219, 245, 250, 274, 281participation 1 1

' escrow account 117 ,219, 233, 252' 291

criteria 1095, 98, 99, 106, 111,122,123, 144, 283

evaluation process 225

exchangeloreign-16, 25, 36, 41, 45, 48,

49, 66, 70,113, 135, 145, 155,156, 159, 162, 172, 194,195,210, 213, 218, 226, 233, 241,285,292

rate .|6, 42, 49, 64, 66, 114, 13' l '137, 140, 146, 149, 154, 162,165, 166, 173,201, 213, 285,296

export credit12, 16, 17, 55, 1Bg, 192, 193,200,220,291

agencies 12,17, 55, 189, 192,200, 220

F

feasibility study 10, 1 1 , 13, 17 , 21 , 22,24 , 58 , 78 , 97 , 104 , 110 , 111 '112, 117, 124, 129,130,281,291

pre- 110, 111, 112, 287preliminary- 1Q, 21, 22


f inancialadv isers 11,181appra isa l 111,130, 134, 137, 140,

146, 148, 191closing 17, 22, 25, 26, 59, 123'

124,200, 219cost 37,139, 140, 147 ' 149flow 182law 54management 11, 111, 233package 64,100, 101, 1.79' 197' 200structuring 177, 179, 200

147 , 191 , 193

financier 163, 223, 227, 237, 239

f inancingcost 6, 37,196,232debt 12, 168, 169, 186, 194,

198, 218, 274document 232,292mezanine- 12,184,185, 186, 189,

190 , 196 , 198 ,293mult i lateral- 19300[.I0C0UIS0- 4' 199stand-by- 64strategy 1 10

force majeure16, 65, 66, 67, 70, 155, 158, 160,166, 209, 218, 220, 235, 236,241,249,274,292

frameworkadministrative- 39, 43, 283legal- 39, 42, 45, 50, 53, 55,

124, 156, 210,227, 239regulatory- 9,14, 43, 45, 56, 91,

98, 131, 147, 199, 201

lul l recourse 180,292

tundmutual- 185pension- 185,190, 218grant- 190

Ggeneralobllgalion 228, 233, 234, 252

governing law 55,292

governmentcounter-guarantee 166guarantee 3, 13, 16, 61, 64,

67 , 147 , 166incentive 59support B, 42, 43, 64,

66, 153, 187,220,282

bank- 166, 218compfetion- 164, 191 , 216,289corporate- 179, 193government- 3, 13, 16, 61, 64,

67, 147, 166interest rate- 66partial credit- 166partial risk- 166performance- 63, 64, 159,

162, 164, 173, 192,203,234,251,262,264

repayment- 164, 173, 195

Iincentive

6, 15, 36, 45, 49, 51, 56, 59,60, 62, 65, 67, 68, 69, 70, 78,94,126, 145, 147, 160; 192, 233,234, 241, 247, 248, 249, 250,260, 264,267,284

indemnif icationobligation 261provision 87

independenl power producer 1 92

inspection 22, 26,63, 112, 213, 231,265, 276,277

insiitutional investor13 , 186 , 190 , 192 , 194 , 198 , 218


,

Insurancecompanies 145,185, 190, 218, 260contract 22,124,217liabi l i ty- 164political risk- 194

intel lectualproperty 52, 94, 106,147 ,282

investmentforeign - code 49, 52, 60fund 137,185, 190, 200

jo intvenlure 11, 73, 75,77,88, 90,116, 118, 120, 172, 211, 212, 255

agreement 1 18, 21 1company 11

tLa Venta-Colegio Militar Highway 167

labourlaw 9, 54, 61right 234

landacquisition and use 230conveyance agreement 'l 1B

lawelectricity sector- 226environmental- 54, 234, 276financial- 54infraskuclure sector- 226

legal system 45, 47, 53, 154,159, 224,227

legislationbanking- 54business- 52concession- 50, 224environmental- 54, 133, 156

lendercommercial- 6, 7, 179, 191, 220

lendingcommercial- 11

letter of conveyance 1 1 B

liabilityclain 237insurance 237, 261provision 255

licenseauthorization- 224

liquidateddamage 70, 83, 164,

250, 267, 269, 284

t0ansovereign- 33, 67,299subordinated- 173, 184, 192, 297

211,218syndicated- 173, 194,297

Mmaintenance

standard 217,232, 26.4, 265bond 232, 254, 275,278

market research 135

measured unit price 246

mortgage anangement 230

MOT 3

multilateralagencies 193,210linancial institution 12, l7f inancing 193loans 179, 193

multiplier effect 32, 140,294

1{national

goods and services 80interest 4, 10, 42, 50, 56,

65, 79, 116, 191, 199, 273, 283personnel 76,83,234

304 UIllD0 B0T Guidelines

5 '

nationalization 49, 53, 70, 154

Navotas I Power Station 174', 1g7

negotiationdirect: 71, 96, 98, 99,196, 283,approach 226process 225

net economic value 137

netpresentva lue 113, 134, 141, 148,294

off-takeagreement 15, 48, 64, 172,173,214,294

one-window system 58

operatingcost 36, 131, 135, 140,157, 197, 199, 201, 204

operation and maintenance (0&M)agreement 22,48, 164, 217company 48, 223contract 9 ,62, 117, 133, 218,

232, 259, 276, 294contractor 62, 117,294operator 252,261

operation period 4, 69, 172, 174

operator 9 , 11, 12, 25,27,36, 145,147 , 161 , 163

0verruncost- 33, 70, 142, '146, 155,

163, 168, 245time- 204, 245

Ppenalt ies 68, 146, 164, 165, 192,

217,231, 236,249,250clauses 236,249

oerformancebased incentive 267bond 13, 110, 124, 180,

218, 219, 231, 249, 254,269, 284,295

criteria 100, 1 13, 213guarantee 63, 64, 159,

162, 164, 173, 192, 203,234,251,262,264

standard 111,223, 227, 232, 277

political acceptability 37, 144

powerpranr J, 3, b, u, lJ32 , 62 ,69 , 98 , 157,1 70,172, 174, 214, 216,265, 267,295

262, 263,

power purchaseagreement 5, 13, 62, 113, 170,

214,295price 170

prequalitication 10, 22,84, 96, 98,991 01 , 1 03, 1 06, 1 1 2, 1 1 5, 1 25, 1 29

criteria 115, 125

price escalation formula 165

pricing structure 233

privatization 7, 27, g4, 35

pr0curementmethod 58,93, 99, 100, 103,

104, 110, 225procedure 22,23, 43, 56, 93, 97;

100 , 103process 41,10,23,71, 93, 94,

114,225 .record 112regulat ion 58 ' 94,99, 116, 119, 125sole source- 23strategy 93, 249

procuring governmententity 71, 95, 99,100, 111, 113, 116, 120, 121, 123


--T\

profit sharing 1 17

projectcompany 3,10, 41, 62, 83, 87,

89, 1't0, 124, 134, 148, 154,155, 160, 163, 179, 2W,207,211,212, 213, 216, 217, 223, 224,225, 234, 245, 248, 259, 264,267, 268, 273, 274, 277

development 10,19, 25, 59, 71, 94,124, 163, 197, 283

development cost 163, 197 ;

f inance 3,4, 12,166, 189, 192,245,295

identi l ication 19, 21, 104, 130, 133implementation '17, 19, 25, 123, 130risk 15, 36, 70, 1A5, 144, 154,

156, 158, 160, 163, 179, 198,249. 284

sponsor 3,10, 41 , 54, 70, 71, 78,154, 156, 163, 167, 179, 180,183, 184, 185, 1S, 200, 201, 210,219, 247, 274

transfer 27

property rights 52, 87, 147, 282

proposalunsolicited- 124

orovisionassignment- 237buy-out- 67, 236 :categories ot- 228confidentiality- 87l iabi l i ty- 237

oublicprivate partnerships 282support 283

punch-list phase 263, 295

purchaser 181, 185, 223, 274,203, 215

aquality

assurance 85, 116, 231, 251,296standard 76, 90, 276system 231, 238

Rrail network 32

rateof return 3,4, 12, 15, 70,134, 139, 158, 162, 167, 201,

internal-1 3 4

rec0urselimited - basis 4, 5, 6, '189, 293non - basis 180, 193, 294non - financing 4, 1 99

repair work 264

research and development 36, 75, 77, 88

revenueflow 65, 148, 234market-based- B, 157, 215sharing arangement 113skeam 3, 4, 5, B, 13, 21, 47, 63,

1B t , 214 , 216

riskallocation

15, 70, 105, 121, 151, 153, 155,160, 216, 257, 26A, 261, 285

analysis 225associated-inkastruclure- 1 57completion- 155, 156, '160, 163, 216construction- 14, 163, 191, 198,

245, 247country commercial- 155, 160country legal- 155country- 154,220,281credit- 193demand- 155, 157, 160development- 155, 156, 160force majeure- 66, 70, 155, 158, 160genera l - 70,154, 156, 158


identif ication 15,42, 151, 153, 154,155 ,163

inflat ion- 15, 155, 285inkastructure- 157interestrate 155, 165management 70,53, 159, 160, 166,

251,261,296management- 155, 158,markel- 14, 158, 184operating- 155,157, 160, 164pol i t ical 102

155, 160, 162, '166, 194pro ject - 12,15, 36, 70, 105, 144,

1 54, 1 56, 1 58, 1 60, 1 63, 1 79, 1 98,249, 284

specific project- 154, 156, .158

supply- 155, 158, 164technical- 155, 157

risk-rewardbalance 1 47profi le 165, 166, 190provision 70

ssecurity

arrangement 47, 48, 219, 230exchange 195marketable- 192package 15, 47, 117, 180,

192, 200, 203, 207, 210, 219

seniordebt 65, 183, 184

sensit ivity analysis 131, 138, 296

shadowprice 135, 138, 140,297

Shajiao B Power Station 172

spare parls 86, 165, 252, 2i5

special-purpose companies 1 92, 296sponsorconsortium 11, 212

standardsa{ety- 141, 226,234, 287

subcontracling 81, 241, 252

subcontractor 76, 82, 164, 200,214, 230, 234, 252

subsidy support 65

suppl ier 9 , 11, 24, 25, 75, 77, 81,117, 158, .163, 1B5, 200, 203,212,216, 219, 223, 247, 277, 282

equipment- 11,62, 75, 1 17, 163,164, 184, 193, 200, 216,247,277

Sydney Harbour Tunnel 62, 64, 67 , 247

Ttariff adjustment 63

tarlft/tollcollection system 238revision lormula 238

tuconcession 60regimes 49, 60

technological innovation 77, BB

technologyforeign- 33, 75

technology transler (or transfer oftechnology)4, 6, 7, 12,22, 25, 26,27, 51,73, 7s, 76, 77 , 78,80, 81, 82,85 , BB , ' r 01 , 117 ,136 , 214 ,234, 275

tenderdocument 22, 23,78, 79, 90,

94 , 103 , 107 , 112 , 114 , 116 ,144, 146,230, 286

form 1 16invitation-to - document 23limiled - system 23


tenderingcompetitive- 93, 98limited - procedure 96proceeding 120, 225

terminationcost 197right 63

testing 22, 145, 174, 228, 231, 238,252, 263

tolladlustmentcollection 233, 238increases 169, 204road 3,5,8, 14, 15, 16, 32,

62 ,64 ,65 , 68 , 161 , 167 ,169, 215, 233, 259,262, 264, 265, 274

training programme 59, 77, 238

transferofownership 85, 87, 271, 277

transparency93, 94, 96, 99, 112, 118, 122,125, 199,225

tunnel 13, 14, 35, 167, 204, 205,215, 247

w

113, 219, 259, 269, 271, 275,277, 284


UNIDO GENERAL STUDIESThe following publications are available

SERIESin this series:

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Planning and Prograrnming the lntroduction ofCAD/CAM Systems

A reference guide for developing countriesValue Analysis in lhe Furniture IndustryProduction Mana :rnent for Small- and Medium-Scale

Furniture ManuiaclurersA manual for deveic:ping countries

Documentation and Information Systems for Furnitureand Joinery Plants

Low-cost Prefabrlcated Wooden HousesA manual lor developing countries

Timber Construction for Developing CountriesIntroduction to wood and timber engineering

Timber Construclion for Developing CountriesStructural timber and related products

Timber Construction for Developing CountriesDurability and lire resistance

Timber Construction for Developing CountriesStrdngth characteristics anil d6sign

Timber Construction for Developing CountriesApplications and examples

Technical Criteria for the Selection of WoodworkingMachines

lssues in the Commercialization of BiotechnologySoftware lndustry

Current trends and implications for developingcountries

Maintenance Management ManualWith special relerence to developing countries

Manual for Small Industrial BusinessesProject design and appraisal

Policies for Competition and CompetitivenessCase-study of industry in Turkey

Manual on Technology Transfer NegotiationsFrom Waste to Profits

Experiences, Guidelines, FilmAcceptable Quality Standards in the Leather

and Footwear IndustryInlormation Sources on the Leathor. Footwear

and Leather Products lndustryGuidelines for lnfrastructure Development through

Build-Operate-Transfer (BOT) Projects

Forthcoming titles include:Design and Manufacture of Bamboo and Rattan Furniture

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