B.O.T

PPP Vs BOT

PPP Models

P3 Players & Risk

To Look For

Case Study

Build Operate Transfer (BOT) when applied to Infrastructure development facilitates,Public Private Partnership (PPP) as a means for financing wherein, a Private Entity receivesa Concession from the Private or Public Sector, to Finance, Design, Construct, and Operatea facility stated in the Concession Contract. This enables the project proponent to recoverits investment , operating and maintenance expenses in the project.

Due to the long-term nature of the arrangement, the fees are usually raised during theconcession period. The rate of increase is often tied to a combination of internal andexternal variables, allowing the proponent to reach a satisfactory Internal Rate of Return(IRR) for its investment.

• Legal Authority• Protection of Procurement Policies • Broad prospective/balance the competing goals to meet public needs • Personnel – dedicated but constrained • Capital resources

Public Sector Strengths

Private Public Partnership (PPP) is a contractual agreement formed between publicand Private Sector partners, which allows more private sector participation than istraditional.

Private Sector Strengths •Management Efficiency •Newer Technologies • Workplace Efficiencies • Cash Flow Management • Personnel Development • Shared Resources (Money)

• Growth of Public Debt • Accounting fallacies to distinguish between recurrent and capital expenditure. • Traditional funding sources keep pace with growing Infrastructure needs. • Increase in demand for public services.

Need For Public Private Partnership

Want OF PPP• Access to private sector finance • Transferring risk to the private sector • Potentially increased transparency • To reduce the full life-cycle costs

Successful Partnerships• The Secret is to Balance the Strengths of Both Sectors • The experience of One Sector helps another new technologies, and tools • New research expertise and infrastructure • Private equity markets; donor funding • New product markets and new customers • New marketing and distribution networks Opportunities for partnership exist `

Variants of

P.P.P

Build Transfer (BT)

Govt. contracts with a private partner to designand build a facility in accordance with therequirements set by. After completing the facility,it assumes responsibility for operating andmaintaining the facility.

Build Own Operate( BOO)

Govt. grants the right to Finance, Design, Build,Operate and Maintain a project to a privateentity, which retains ownership of the project.The private entity is not required to transfer thefacility back to the government.

Build Own Operate Transfer (BOOT)

Govt. grants a franchise to a private partner tofinance, design, build and operate a facility for aspecific period of time. Ownership of the facilityis transferred back to the public sector at theend of that period.

Build Operate Transfer (BOT)

This model combines the responsibilities of design-buildprocurements with the operations and maintenance of afacility for a specified period by a private sector partner.At the end of that period, the operation of the facility istransferred back to the public sector.

Concession:Govt. Grants pvt. entity exclusive right to provideoperate and maintain an asset over a long period oftime in accordance with performance requirementsset forth. Govt. retains ownership of the originalasset, while the Pvt. operator retains ownershipover any improvements made during the concessionperiod

PPP Models

Shareholders’Agreement

LendingAgreement

O&MAgreement

ConstructionContract

ProjectCompany

ConcessionAgreement

Offtake PurchaseAgreement

Input SupplyAgreement

•The chart shows the contractual structure of a typical BOT Project or Concession, including the lendingagreements, the shareholder's agreement between the Project company shareholders and the subcontracts of theoperating contract and the construction contract, which will typically be between the Project company and amember of the project company consortium.

•Each project will involve some variation of this contractual structure depending on its particular requirements: notall BOT projects will require a guaranteed supply of input, therefore a fuel/ input supply agreement may not benecessary. The payment stream may be in part or completely through tariffs from the general public, rather thanfrom an offtake purchaser.

Sponsors

Power Off taker

EPC and O&M Bank SyndicateProjectSPV

Product Payments

Fees

Services Debt

Repayment

Equity Dividend

Project Contractual Relationship

Financing Contractual Relationship

Types of ContractsAsset

OwnershipO&M

Capital Investment

Commercial Risk

Duration (Yrs)

Service Contract PublicPrivate &

PublicPublic Public 1-2

Management ContractPublic

Private Public Public 3-5

LeasePublic

Private Public Private 8-15

ConcessionPublic

Private Private Private 25-30

BOT / BOOTPrivate &

Public Private Private Private 25-30

Build Own Operate

Privatisation

Buy Build Operate

Build Own Operate Transfer

Build Lease Operate Transfer

Lease Develop Operate

Government

Degree of Private Sector Involvement

Deg

ree

of P

rivat

e Se

ctor

Ris

k

Risk Type Mitigation

* Pre-Completion * Cost Over-runs * Delays

* Fixed Price Trunkey Contracts * Warranties / Penalties / Incentives * Fixed project specification * Strong contractors

* Post-Completion

* Revenue forecasts * Revenue build-up * Operating costs * Management failure

* Committed supply contracts * Committed off-take contracts * Strong operators * Performance guarantees

*Technical* Performance * Environmental * Safety

* Warranties * Proven technologies * Public consultation and approval

* Financial

* Structure: Debt / Equity Ratio Ex: 75:25 * Structure : Return on Capital * Structure : Risk / Reward ratio * Foreign exchange * Interest rates * Debt Service Coverage * Taxation

* Equitable ROE, eg (15-20%) * Acceptable Cover ratios e.g (1.5 - 2.0) * Escrow and reserve accounts * Dividend constraints * Loan syndication * Insurance / Financial derivatives * Standby funding arrangements

*Legal * Regulatory framework? * Concession law?

* Experienced lawyers * Clear, simple documents

* Political* Regime stability * Political Intervention * Force Agreements

* Clear regulatory regime * Investment Insurance

Risk Matrix = PPP Contract

Delays

Construction Risk

Overrun

GeologicalRisk

Contractors

Lenders

Fixed Rate

Commercial Risk

Environment Risk Construction

Risk

Termination & Force Majeure Risk

Non Recourse Long term debt

All risk Construction

Liability, Casualty, Fidelity

Force Majeure

Business Interruption

Insurance Companies

Granting Authority

Expropriations

Toll Revisions

Preliminary Design

Environment Licenses

Force Majeure

Operator

O & M Risk Penalties

ConcessionCompany

Sponsors

Fig. P3 Players & Risks

Contract

Scope of Work What is the job to be complete - tenure,geography, amount, stages etc. ReferConcessionaire agreement, consultant report and other supporting documents.

Transaction Who will Build (B) ? ,who will Operate (O) ? and who will get the ultimateownership by way of Transfer (T) ? What is the revenue stream ?

Entities Involved

Host / Principal

Who has awarded the contract ? Host should be reputed principal with sufficientauthority and financial back-up to undertake the projects like NHAI. Stateauthorities may also award BOT projects but one should check the paymentshistory apart from financial agreements.

Sponsors

Parties to whom contract is awarded. Sponsors should have necessaryexperience and capacity to complete the project. Check for works done in thepast. (Project may have been awarded on satisfaction of criteria other thanexperience.)

Lenders Bankers, entities providing / arranging debt.

Project CompanySponsors may create an SPV to undertake the contract. Project companyformed may have some entities that are lending only their name and may not beactually involved. Such arrangements need be to understood.

Operational Maintenance (Operator) Who will run the operations post construction ?

Consultants Technical experts to the project

Construction consortium / Equipment suppliers

Who will execute the construction part in the 1st phase of the project ? (Or EPCContractor ?) Its expertise and experience is of prime importance to mitigate theproject execution risk

Local PartnersOne or more entities might be involved for name lending, due to local clout orother vested interests. Profit sharing arrangement between them to beascertained

Authorizations / Approvals

Legislation, Approvals etc.any special legislation enacted for the project ? What rationale is given for theneed of the project? Was contract awarded by way of a transparent biddingprocess or some other manner ? Has there been any opposition to the award ?

Revenue

Stream of revenue

Toll collection ( Road Projects ), Sale of Services (Rail projects), Sale of Output( Power), Equity payment in the project by host on transfer, etc.to the govt., govt.agency, public at large, selective industry, public & privateenterprise etc.

Technology InvolvedTypes of Technology It should be proven one and not experimental.

Financing Arrangements

Means and source of finance Equity, Debt, Subordinated debt, other types of Equity, etc. Who are theinvestors and lenders ?

Stages of project

Investors and lenders may be interested in funding different stages of projectseeking different mix of risk and return. Ingeneral High Rish pahse ofconstruction is more risk than 2nd phase of project i.e Operations seems to besafer since project completion risk will be eliminated.

Security Lenders

since the lenders will have no recourse to the principal or sponsors and onlyassets of the project company would be available, securities offered in differentforms would be required.

* Escrow arrangements to trap the cashflows from the operations* Benefits of various contracts like those of Insurance, etc. assigned to thetrustees for benefit of lenders* Equity of the company pledged with lender (To enable the latter to take overthe project on its own incase of an incomplete project )* Govt. support in the form of guarantee, subordinated debt to cover shortfall inrevenue, etc.

Relations with External Parties

Agreements ( look for )* Assurance of supplies of inputs ( raw materails, land, equipment etc.* Assurance of revenues (binding agreement to sell the output, minimum level of revenue assured by way of guarantees by host etc.)

BOT elements and what to look for in them ?

Risk Involved (Various risks such as )

* project not completing in stated time and price* Performance and operations are not as per agreed terms* Cash flows not occuring as per the plans / projections, disrupting flow of works.* political intervention* Insurable events* Non insurable event (Force Majeure)* Inflation eroding value of cashflows

Costs

* Cost of Project and its validation* Cost of Debt* Cost of EquityLower cost of capital will allow the Concessionaire to achieve a break-even poiny in a shorter period of time.

Incorporated in 1986, Sushee undertakes mining, irrigation, railways, infrastructure and road projects. Its clientsinclude the Irrigation Department of Andhra Pradesh, Singareni Collieries Company Ltd, Coal India Ltd, IndianRailways and MORTH.

Sushee IVRCL Arunachal Highways Limited (SIAL) is a special purpose vehicle (SPV) floated by Sushee InfraPrivate Limited (Sushee) – 74% and IVRCL Limited (IVRCL) –26% to undertake execution of project awarded byMoRTH. The project involves widening of the existing road to 2-lane NH standards along with improvement andre-alignment from Nechipu to Hoj via Seppa, Khodaso, Saggalee (part of Trans Arunachal Highway) in ArunachalPradesh under Arunachal Pradesh package of roads and highways of SARDP-NE on NH 229 on Design, Build,Finance, Operate and Transfer (DBFOT) Annuity basis.

The concession period for the project is 17 years from the appointed date, ie, July 18, 2013, including a 4 and ahalf years of construction period. As per the L.I.E. Report for June 2014, SIAL has achieved cumulative physicalprogress of 18.50% by June 30, 2014,marking completion of Milestone II as against planned progress of 15%.Furthermore, recently, the company has achieved Milestone III upon completion of physical progress of 23% onDecember 02, 2014, vis-à-vis target date of January 17, 2015.

SIAL has received second and third tranche of cash support of Rs.49.03 crore (net) and Rs.61.61 crore (net) inthe months of February and March 2014, respectively, upon successful completion of Milestone I and II apart fromMobilisation Advance (Tranche I). Furthermore, recently, upon achievement of Milestone III, MoRTH has approvedthe release of next tranche of cash support amounting to Rs.60.77 crore (net).

Positive: The successful execution of the order book leading to a substantial increase in the revenue and profits,while maintaining the credit metrics.

Negative: Delays in order execution or deterioration in the working capital cycle leading to a significant increasein the leverage could lead to stress scenario.

Case Study

Prashanth Ravada