SR NO TITLE PAGE NO

1 CHAPTER 1
1.1 Introduction 1
1.2 Management Of Construction Projects 5
1.3 Bot Projects 6
1.4 Risks In Bot Projects 7
1.5 Need Of Present Research 9
1.6 Objectives Of The Present investigation 12
1.7 Methodology 12
1.8 Scope Of Present Research 13
1.9 Organisation Of The Thesis 13

2 CHAPTER 2

3 CHAPTER 3

4 CHAPTER 4

5 CHAPTER 5

6 CHAPTER 6
 CHAPTER – 1
INTRODUCTION
1.1. INTRODUCTION
Civil infrastructure is vital to the nation’s economic growth. Infrastructure may be
considered to be the skeleton on which the society is built. It includes highways,
railways, ports, bridges, hydraulic structures, power plants, tunnels, municipal facilities
like sanitation and water supply, and other facilities serving public needs. Adequate
funding is required to construct and maintain the requisite infrastructure. The immediate
need for such projects coupled with chronic budget shortages experienced by public
agencies has encouraged the use of innovative financing [1][2].
Traditionally public infrastructure has been delivered by the public sector using the
design-bid-build procurement system. With the increased demand for new developments
and for maintaining existing infrastructure, public funding resources were unable to keep
pace with the demand [3]. Public-private partnerships (PPPs) were sought as alternative
delivery systems to address some of the funding problems. PPP arrangements are utilized
extensively and have found considerable acceptance in several parts of the world.
India has seen a rapid increase in private investment in infrastructure since 2003. Its PPP
program has grown rapidly in the past five to six years; in 2002–06 more than 150 PPP
deals closed, compared with 66 in the previous seven years as shown in Figure 1.1. This
growth was mainly in the transport and urban infrastructure sectors, with road projects
accounting for a large share of the increase, particularly in the number of projects [4].
2
Figure 1.1: PPP Projects 1995-2006
It is well recognized that, with its present state of physical infrastructure, India will be
hard pressed to sustain 7 percent plus annual GDP growth over the medium term. In
recent years, efforts have been made by the Government of India (GoI) to step-up
investment in infrastructure. However the investment needed can be met only by
increased private participation. The overall financing gaps up to 2010 – 2011 is shown in
table 1.1 [5].
Table 1.1: Overall Financing Gap in Infrastructure up to 2010-11 (Rs. Billion)
Sectors Investment needed Financing Gap
Roads 4670 1106
Power 10591 3500
Telecommunications 2143 478
Railways 1242 151
Airports 191 72
Ports 306 236
Total 19143 5542
3
In many countries, particularly, developing countries shortage of public funds have led
Governments to invite private sector entities to enter into long term contractual
agreements for financing, construction and operation of capital intensive infrastructure
projects. A Public Works Financing database of worldwide projects between 1985 and
2004 shows that 1,121 PPP infrastructure projects (road, rail, airport, seaport, water, and
building), representing $450.9 billion worth of investment, were funded and completed
with the majority of the projects being in Europe, Asia, and the Far East as shown in
Table 1.2 [3].
Table 1.2. Regional Share of PPP Projects funded and completed
between 1985 and 2004 [3]
Several arrangements of PPPs have been utilized including the common build-operatetransfer
(BOT), and its variants such as build-transfer-operate (BTO), design-buildfinance-
operate (DBFO), build-own-operate (BOO), design-build-operate maintain
(DBOM), and several others [6][1]. These arrangements were used in varying degrees
among countries worldwide. Table 1.3 shows the distribution of the PPP arrangements
for $322.4 billion worth of road projects planned since 1985, with the
BOT/BTO/concession projects being the most widely used. Table 1.4 shows the regional
distribution of the different PPP arrangements used in road projects. [3]
Table 1.3. Contractual Arrangements in planned PPP Road
4
Projects between 1985 and 2004 [3]
Table 1.4. Regional Distribution of PPP arrangements for Road
Projects between 1985 and 2004 [3]
The increases in investment called for by the 11th Plan Approach Paper foresee a major
role for the private sector. If investment is to increase to 7-8% of GDP, the amount
contributed from the private sector has to rise from the average of 1% of GDP to the
range of 2% of GDP or more.
The experience of other countries shows that much higher private investment levels — as
a percentage of GDP — can be achieved with the right policies and institutions in place.
Table 1.5 shows that several countries have sustained private investment at or above 2%
of GDP since 1990. In contrast, India is well behind the leaders, though since 2001 it has
seen private investment levels on average at 1% of GDP.
5
Table 1.5 India’s Performance vis a vis that of other countries in attracting Private Investment
Private investment in infrastructure as a percentage of GDP, averaged over period
1.2. MANAGEMENT OF CONSTRUCTION PROJECTS
Construction Project Management is a complex, challenging and often a hazardous
profession with high risk due to uncertainties in the business environment. The
preparation, design, construction and operation of a modern small or large construction
facility is a complex project. Many specialists have to be coordinated. The interaction
with the environment, particularly ecological system is a must, as infrastructure facilities
are usually large objects, and have a relatively long life. They are very visible and
interrelated to their specific local environment. Thus each project has its own
peculiarities and it needs capable management and engineering. For successful project
completion and smooth operation, risks should be properly addressed and allocated. One
of the major risks encountered by the owner is the cost and time overruns.
Country Since 1990 Since 2001
Malaysia 3.5% 2.9%
Nigeria 1.2% 2.5%
Czech Republic 2.1% 2.4%
Hungary 2.5% 1.9%
Brazil 1.9% 1.9%
Chile 2.3% 1.8%
Colombia 1.5% 1.4%
Thailand 1.4% 1.4%
Turkey 1.0% 1.1%
India 0.7% 1.0%
Argentina 2.0% 0.7%
Mexico 0.9% 0.7%
Indonesia 1.1% 0.7%
China 0.4% 0.2%
6
A number of reports indicate that most construction projects are delayed [7]. To a project
owner who counted on revenue from the project commencing from a specific date in
order to comply with the schedule for repayment of the project finance, delay is not only
an embarrassment, but a serious risk of financial failure of the whole enterprise. On the
contractor’s side, delay in completion entails increased overheads over those budgeted.
1.3. BOT PROJECTS
A BOT-type infrastructure project can be described as a project based on a concession
granted to a consortium (the concessionaire) that is usually from the private sector by a
client that is usually a public organization, where the concessionaire makes financial
arrangements to “build” the facilities of the project, “operate” the project during the
concession period to generate revenues for debt repayment and investments recovery
with a certain level of profit, and “transfer” the facilities of the project in operational
condition and usually at no cost to the client at the end of the concession period. In a
BOT-type project, the concessionaire is responsible for financing, building, and operating
the project. Even if the client is also the service user, it usually pays for the service
instead of financing the infrastructure [8].
In today’s construction climate, public sector owners are finding themselves under
increasing pressure to improve project performance, complete projects faster, and
reduced the cost of administering their construction programs. The success of a
construction project is attributed to a number of factors which are large in numbers and
project participant can focus only on a few most important ones. Identification of critical
success factors (CSFs) allows one to reduce the vast number of factors to some
manageable few but vital ones. Based on the CSFs, contractors’ limited resources such as
money and manpower can be allocated and aligned appropriately for yielding a maximum
outcome of overall competitiveness.
7
1.4. RISKS IN BOT PROJECTS
The whole process of project development under Build-Operate-Transfer (BOT) contract
is a complex, expensive and time consuming business. In BOT type arrangements, a
private sector consortium finances, designs, construct and operates an asset for an agreed
franchise period. It may look an extension of design and build mode by enhancing two
more functions of finance and operation, but in reality spells out a significant paradigm
shift in the procurement of the infrastructure projects. Although governments have been
motivated into entering public private partnership (PPP) arrangements to reduce the debt
and contain taxation, it had other benefits of sharing financial risks and rewards between
public and private sector. The governments have shifted many project risks to the
franchisees which were previously borne by them and as such it has to accommodate
enhanced rewards or incorporate some minimal safeguards/guarantees of satisfactory
returns.
From the viewpoint of the public procurer, there is an obvious need to ensure that money
has been spent economically, efficiently and effectively. The Government seeks to utilize
private sector finance in the provision of public sector infrastructure and services and
thereby achieve value for money. Value for money, defined as the effective use of public
funds on capital project, can come from private sector innovation and skills in asset
design, construction techniques and operational practices. It may also come from
transferring key risks in design, construction delays, cost overruns and finance to private
sector entities. However, in some cases the emphasis on risk transfer can be misleading as
value for money requires equitable allocation of risk between the public and private
sector. From the perspective of the project sponsors, PPP is essentially project financing,
characterized by the formation of a highly-geared special purpose company for the
project vehicle and consequently a reliance on direct revenues to pay for operating costs
and cover debt financing while giving the desired return to risk capital.
8
Project financing involves the raising of funds to finance an economically feasible capital
investment project by issuing securities that are designed to be serviced and redeemed
exclusively out of project cash flow. BOT is fashionable worldwide, especially in
developing countries to attract private capital to assist in developing public infrastructure
[9]. The first BOT project officially implemented in modern times was in the mid 1980s
as part of a move to privatize infrastructure projects and large power plants in Turkey.
The BOT method was used as early as 1834 when the Egyptian government was
financially supported by European capital to build the Suez Canal [10].
Financing has replaced the availability of technology and expertise as the main problem
in infrastructure development around the world. After years of large cost overruns and
numerous change orders on 100% publicly funded projects, many governments started
seeking greater efficiency by centralizing the management and control of complex
projects in the hands of private experts. Public deficits, resistance to taxes and a shift
among development strategists toward private investment incentives have created
opportunities for private companies and public agencies to cooperate in the form of BOT
projects. Ideally, BOT projects put large, well-capitalized private firms at the services of
governments with strong commitment to economic development, in the process of
finding design and construction efficiencies, reducing the drain on the public purse, and
distributing risks and rewards fairly. The success of BOT projects depends on the
motivations of a market economy that benefit all parties i.e. government, end user, and
sponsor [11].
1.5. NEED OF PRESENT RESEARCH
It is generally accepted that the major goals in a construction project are budget, schedule
and quality, although there are other more specific objectives, such as safety
consideration and market entry, depending on the nature of the project and company.
9
For the infrastructure development in developed as well as developing countries different
types of public private partnerships (PPPs) have been used. On one side, the projects have
been successfully developed through this approach whereas on the other side various
problems have been encountered in PPPs throughout the world. One problem is the slow
progress of the implementation of PPPs resulting in a very small portion of the
infrastructure being built by this approach. Many PPP projects have failed and even
abandoned causing distress not only to the promoter but also to the lending financing
institutions. Many projects have been abandoned in India. Table 1.6 gives the list of some
of the abandoned projects in India.
Table 1.6 List of abandoned projects in India
10
The majority of public sector has a long tradition of using the lowest bid to award the
contract. However a low bid system encourages contractors to implement cost cutting
measures instead of quality enhancing measures which makes it less likely that the
contract will be awarded to the best performing contractors who will deliver the highest
quality products. As such the public owners are increasingly exploring ways to include
non price factors, both qualitative and quantitative, in procurement process to motivate
contractors not only to improve their performance during construction but also to build
value into the end products of the construction.
From the literature survey made of the different existing methods and models used during
the project planning & execution , it becomes quite clear that these existing methods
attempts to capture only a partial view and are therefore unable to provide satisfactory
solutions. In summary, the following are the major observations:
11
• BOT projects are plagued by risks and uncertainty resulting in poor performance
with increased cost and time delay. Many countries are still at the lower ends of
their learning curves on BOT arrangements. Various BOT-type procurement
protocols are not yet proven and are still being tried and tested. Therefore, there is
a need to benchmark the best practices.
• Concerted efforts from, both government and private sectors as well as
appropriate political environment and legal framework are essential for the BOT
mechanism to work smoothly. There is also lack of capacity in public institutions
and officials to manage the PPP process. There is a need to identify and discuss
various issues that governments need to deal with to endeavor a win-win strategy.
• Critical success factors of BOT projects need to be identified for Indian
conditions
• Probability theory cannot deal with important aspects of project uncertainty and
cannot be used for identification of critical success factors for BOT projects.
• A Transparent and Competitive selection process and multi-criteria tender
evaluation is needed for identifying the contractor.
As such there is an urgent need for an efficient procurement protocol for improved
practices in future PPP projects. A number of factors determine the success or failure of
an infrastructure project in terms of meeting its objectives of cost, time and quality. The
identification of the CSF for these objectives will enable efficient use of available limited
resources. There is also an urgent need to develop a mathematical model for the
construction projects especially to identify CSF with reference to Indian construction to
assist the owners and/or contractors for implementing construction projects and to
implement the best value contracting strategy considering the unique characteristics of
each project.
12
1.6. OBJECTIVES OF THE PRESENT INVESTIGATION
In view of the above, the research work is proposed with the following specific purposes:
1. To conduct field survey by postal questionnaire and personal interviews of the experts to
identify principal causes of delay for both traditional and BOT projects, and to obtain the
perceptions of three main participants: owner, consultant and contractor to the factors
causing project delays.
2. To identify and rank critical success factor for BOT projects based on accumulative
knowledge and judgment of experts in the industry using the Analytical Hierarchy
Process (AHP).
3. To identify and discuss various issues that governments should deal with for BOT
mechanism to work smoothly.
4. To develop a “decision support system” using Multi attribute decision theory for
prequalification of BOT promoters so as to provide best value to the public procurer and
5. To carry out sensitivity analysis by altering the weights of the attributes on ranking of
alternatives.
1.7. METHODOLOGY
Research processes included a wide range of survey of published literature in diverse
areas of construction management- risk associated with major infrastructure projects,
causes of delay, critical success factors, lessons from worldwide BOT practices, selection
of a suitable contractor and best value selection models. Research also includes the
analysis of postal surveys conducted to find the extent and factors causing time overrun
in construction projects. The survey was followed by intensive interviews with the
various stakeholders of the construction project to get a deeper insight into the factors and
reasons for the delay. Postal survey was also made to identify the critical success factors
for the BOT projects. The research also included the identification of issues that the
government should deal with for BOT mechanism to work smoothly. Finally a procedure
13
was developed for selecting and ranking BOT promoters during prequalification using
AHP. The study developed a decision support system to provide best value to the public
procurer based on a multi objective decision making methodology.
1.8. SCOPE OF THE PRESENT INVESTIGATION
Identification of critical success factors for construction projects and development of a
model for selecting a concessionaire depending on project specific characteristics is the
main focus of the present investigation. The model development process will have input
from a variety of sources, but emphasis is given to the views of experts involved in
construction projects. Specific models have been developed which is useful to the owners
and contractors for management of projects.
1.9. ORGANIZATION OF THE THESIS
It is proposed to present the study in eight chapters. A brief outline of the various
chapters is as follows:
In Chapter 1, the objectives and scope of the research work has been defined. A brief
outline of various chapters has also been presented in this chapter.
In Chapter 2, a critical survey of work happening globally as existing in the literature for
the success of construction projects is presented.
In Chapter 3 overall methodology of the research work has been presented.
In Chapter 4, background of BOT projects and its variations has been presented. The
current status of PPPs in India is described and the comparison is made with other
14
countries. PPP projects are targeting towards financing, designing, implementing and
operating infrastructure facilities and services that were traditionally provided by the
public sector. The role and relationships between various participants and stake holders in
a BOT project are enumerated. The financing needs for the required infrastructure in
various sectors have been shown.
In Chapter 5, the results of field surveys for time delays in traditional and BOT projects
are presented. The postal survey was conducted to determine the causes of delay and their
importance according to each category of project participant. In this Chapter, the factors
causing time overruns in construction for both traditional and BOT projects in India are
identified and their relative importance and significance is established. The results
obtained are then compared with other researchers’ results.
In Chapter 6, systematic approach has been taken to identify and analyze CSFs for BOT
projects. Through literature survey and initiatives of experts and practitioners in India
certain factors were initially identified which were considered to be the critical for the
success of BOT projects. In the first step, a questionnaire based on the success factors of
BOT projects was developed in which the respondents were asked to give the importance
of the factors on a scale of 1 to 5. The analysis of data obtained was made by Relative
Importance Index method and the important CSFs as identified were further sent to the
experts for a second survey. The Analytical Hierarchy Process (AHP) method has been
adopted in the second survey to solicit consistent subjective expert judgment.
The analysis and results of the survey made to identify CSFs are presented in this chapter.
Top CSFs identified are compared with previous study. The results of the survey are
validated through Agreement analysis. The main CSFs identified in the study are
discussed in detail and next chapter.
15
In chapter 7, a transparent, multi-attribute decision support system has been developed
for addressing the pre-qualification issues such as the decision criteria analysis, weights
assessment and decision model development. A best value procurement model is
developed to select the private sector partner which provides a balance between the
consideration of price and qualifications so as to provide the best value to public
procurer. A procedure for sensitivity analysis has also been developed on MS Excel
which will help the owners/governments to ensure that the results would be sufficiently
robust.
The final chapter, chapter 8, is devoted to results and conclusions. The recommendation
to practitioners is made. This chapter also discusses scope for further research.
 CHAPTER – 2
LITERATURE SURVEY
2.1 INTRODUCTION
Public–Private Partnership (PPP) in construction is gaining in popularity [12]. Project
delivery method of Build-Operate-Transfer (BOT) increases the commencement
probability of public construction works through private investments. Public construction
works worldwide that adopt the BOT model as their project delivery method are
increasing gradually. Although many BOT projects have been implemented at various
stages, some projects encounter major obstacles for advancement. The importance of
Infrastructure has been summarized as under :
1. Infrastructure increase economic output directly by making private capital more
productive, by increasing the attractiveness of a region, and by the stimulation of the
construction market.
2. As the infrastructure network expands, national economic and financial efficiencies
grow.
3. Infrastructure has long term effects on the type of social structure which will be
developed – in particular the growth of urban centers and their linkages.
4. Inadequate infrastructure maintenance can cause an increase in costs to producers
and, in extreme cases, a breakdown in economic activities.
5. Badly planned sequencing of infrastructure provision can tie up capital unnecessarily.
In the vast majority of cases the infrastructure is delivered or, at least, facilitated by
governments. Infrastructure is too central to the health and wealth of the nation.
17
Government agencies will often rank potential projects in accordance with their benefitcost
ratio and build facilities as money becomes available. Contracts with private
companies for the design and construction are common, sometimes with some degree of
contractor cash flow financing. The facility will then be handed over to the government
agency responsible for operation and maintenance. This will continue to be the most
common means of delivery for infrastructure that fulfils a social need but is not capable
of generating a profit to a private investor.
For increasing private participation by providing them incentives, in recent years,
governments have been increasingly adopting Build–Operate–Transfer (BOT) contracts
for large infrastructure projects. [13]
Many fundamental issues significantly distinguish PPPs from traditional design-bid-build
contracts. These include: (1) a broad range of uncertainties and risks associated with the
long-term PPP contract; (2) radical realignment of risks, responsibilities, and rewards
among multiple project participants; (3) the private-sector partner undertakes far more
responsibilities and assumes much more and deeper risks than a mere contractor; (4)
nonrecourse or limited recourse and off-balance transactions; and (5) Complicated
contractual arrangements between project participants [14][8][15][16].
Studies in this chapter have been focused in addressing the following issues.
• Risks and uncertainty associated with large infrastructure projects.
• Delays in completion of construction projects.
• Critical success factors for traditional construction projects.
• Critical success factors for BOT construction projects.
• Prequalification and selection of contractor/promoters/concessionaire.
• Financing BOT projects.
18
2.2 RISK AND UNCERTAINTY
2.2.1 General
A review of the literature reveals that the concepts of uncertainty and risk are often used
interchangeably. However, risk is said to exist in situations where each outcome has a
known probability of occurrence, whereas uncertainty arises where the probability of the
outcome of events is unknown.
According to Oxford Dictionary of English the term “risk” means: “hazard, chance of a
bad consequence, loss, exposure to chance of injury or loss.” Accordingly this definition
illustrates one problem with the term risk – its ambiguous use as a synonym of
probability or chance in relation to an event or outcome. Further, Hillson argues that the
common usage of the word “risk” only centers on the downside negative outcomes. Risk
is often related with adversity, things that may go wrong and threats to the project . With
such a conception, project risk management tends to focus on processes and methods that
reduce the effect of threats. More lately, however, it has become more common to
conceive risk as encompassing both upside and downside effects.
For example: in the guide to the Project Management Body of Knowledge (PMBoK)
published by PMI [17] risk is defined as “an uncertain event or condition that, if it
occurs, has a positive or negative effect on a project objective”.
2.2.2 Risk Associated With Major Infrastructure Projects
Merna and Smith [18] classified risks first into two broad categories of global and
elemental—the first being those deemed to be generally outside the control of the project
parties (including political, legal, commercial, and environmental factors), and the second
including project risks (such as construction, design, technology, operation, finance, and
revenue risks).
19
Songer et al [19] demonstrated a Monte Carlo risk assessment methodology for revenue
dependent (privatized) infrastructure projects.
Akintoye et al. [20] noted the conscious transfer of risk to the private sector in the U.K.’s
PFI (Private Finance Initiative) and conducted a survey on perceptions of the relative
importance of 26 postulated risk factors, such as design risk, construction cost risk,
environmental risk, and legal risk. They presented rankings of the importance of such
risks by the different groups surveyed, i.e., contractors, clients, and lenders, as well as a
consolidated all respondents ranking.
Tam and Leung [21] found that political risks were the most difficult to handle in
comparison with financial risks, while technical risks were the easiest to handle, even on
projects incorporating innovative technologies.
Lam [22] made a sectoral review of risks associated with major infrastructure projects as
number of these projects had run into daunting risks resulting in their cancellation,
serious delay and cost overruns.
Charoenpornpattana and Minato [23] presented a detailed identification of privatizationinduced
risks in transportation projects in Thailand. Their risk classification itself
grouped risks under five broad headings of political, economic, legal, transaction, and
operation.
Salzmann and Mohamed [24] identified families of risks (containing factors and subfactors)
found to need addressing in Build-Own-Operate-Transfer (BOOT) projects.
Their identification of 12 risk factors (such as project characteristics) together with 58
risk sub-factors in the development phase and 11 risk factors with 39 risk sub-factors in
the operations phase was based on a detailed survey of available literature.
20
Shen et al. [25] studied the construction industry in China which is developing fast
towards the international procurement practice, and such development has attracted many
foreign firms into the Chinese construction market through the formation of Sino-foreign
joint ventures. Joint ventures have become an important sector in the Chinese
construction industry. A significant degree of risk is involved in joint venture
investments. Thus, foreign firms increasingly intend to spend more effort in studying
proper strategies of managing risks in their joint venture businesses.
A process to cope with these varied risks was proposed by Miller and Lessard [26]. They
pointed out that risks first need to be dissected into categories such as (1) market-related:
demand, financial and supply; (2) completion: technical, construction and operational and
(3) institutional: regulatory, social acceptability and sovereign.
Cano and Cruz [27] developed a generic project risk management process that had been
particularized for construction projects from the point of view of the owner and the
consultant who assists the owner.
An appropriate combination of tariff structure and adjustment mechanism can be
effective to manage key risks of BOT projects. Ye and Tiong [28] had done simulation
that shows that a well-designed tariff can create a ‘‘win-win’’ solution for both project
promoter and the host government.
Ghosh and Jintanapakanont [29] reviewed the literature to identify essential risk variables
associated with infrastructure projects. Based on these risk variables, conducted a survey
to isolate and assess the critical risk factors for a mass rapid-transit underground rail
project (Chaloem Ratchamongkhon Line) in Thailand. Nine critical factors with 35 items
were extracted. Critical risk factors obtained through the factor analysis were assessed to
gain better understanding of their importance and impact on project management.
Gupta [30] demonstrated the effects of major risks by way of some case studies (Table
2.1 and Table 2.2)
21
Table 2.1: Risk Aspects of Power Projects
Project
name/
location
Risk mitigation
measures
Residual risks Risk consequences
Akkuyu
Power plant,
Turkey
• Electricity authority
undertook to
purchase power
from the
concessionaire at
fixed price
Absence of sovereign
guarantee on:
• Repayment of external
debt
• Purchase of minimum
amount of electricity
• Exchange rate
• Convertibility of
revenues into hard
currencies
• Export credit
agencies
unwilling to
provide export
credits
• Sponsors and
lenders unwilling
to proceed
Dabhol
Power Plant,
India
• Central-government
counter-guarantees
that State Electricity
Board pays for
electricity supplied.
• State Electricity
Board commits to
take 90% of power
even in non-peak
hours.
• Free repatriation of
dividends and
interest on foreign
equity and loans.
• Fuel has to be imported
with bureaucratic
procedures for
clearances and
approvals.
• Many locals are not
used to paying for
power supply, making it
politically awkward to
enforce collection.
• Lack of competitive
tendering aroused
skepticism of
accountability.
• 1st phase changed
to use local
naphtha as fuel
• Legal challenge
by trade union
body (cleared).
• Successive State
governments
reviewed contract,
nearly scrapping
it.
• Work interrupted
for over 1 year
before being
22
• Protection from
forex fluctuations
• Guaranteed return
on equity for a
specified minimum
availability
• Tax holidays
• Environmentalist’s
objection
• Allegedly high capital
costs and tariffs
revived in Dec 96
after a
compromised
reduction of
capital cost and
tariffs
• State government
obtained right to
take a 30% stake
in the project
Pagbilao
Power plant,
Phillippines
• Multilateral
agencies (IFC,
CDC, and ADB)
invested equities
and provided loans
• Electricity authority
undertook to
construct
transmission
facilities
• Bonus for early
completion
• Capacity and
energy fees payable
in US$ and pesos
• Environmentalist’s
objection
• Land acquisition and
compensation problem
• Delay in construction of
transmission system
• Differences in the
interpretation of
concession contract
• Legal battle
challenging the
proper issuance of
the environmental
compliance
certificate
• Injunction sought
by local groups
against the project
agreement on
ground of pubic
interest, public
safety and health.
• 16% of cost spent
on pollution
control
• delay start-up
• expansion plan at
odds for fear of
rekindling
23
opposition from
local residents
Karachi
Power Plant,
Pakistan
The government had
issued guidelines for 3
other projects as
follows:
Guaranteed return
on equity
Guarantee against
currency depreciation
Guarantee payment
by power purchasers
Government insisted on
the use of local coal, which
investors feel uncertain as
to quality and quantity
Slow progress of
geological survey offered
little help to verify local
coal reserve.
Promoter chose site
near coast for import of
coal, but government
objected
Alternative inland
site locations offered
by government, but
these require
substantial
investment in
building connecting
roads.
Impasse affected
progress of
negotiation.
Table 2.2: Risk Aspects of Expressway Projects
Project
name/location
Risk mitigation
measures
Residual risks Risk consequences
North-South
Highway,
Malaysia
• Government
guarantees to
reimburse
concessionaire for
traffic volume
shortfall, foreign
exchange and
interest rate losses
• Obligatory
contribution to
• Difficult terrains:
the highway
construction ran
through abandoned
tin mines with
unknown condition,
jungles, mountains
and swamps.
• Design changes to
overcome
• Cost overruns
entailed
additional loan
and equity
financing
• Completion 15
months ahead
of schedule
brings
additional toll
24
equity by the 48
participating subcontractors,
effectively
providing
completion
incentives
unexpected
technical
difficulties
• Inflation on cost
due to construction
boom in Malaysia
• Allegation of
political patronage
revenue (upside
result)
Second Stage
Expressway,
Thailand
• Government
willing to share
revenue from
existing toll road
system
• A decree was
issued to facilitate
acquisition of
land
• Corporate income
tax relief
• Tax exemptions
on dividends
• Upon adversities
in interest rates,
economic
conditions,
relocation of
utilities,
government
interference,
unanticipated
Disputed broke out on
the following issues:
• Revenue sharing
scheme
• Whether
concessionaire
could collect tolls
and manage tariff
• Which party was to
pay VAT
• Which party had
right to develop
land under elevated
sections of the
expressway.
• Reduction of
contracted toll by
one-third.
• Banks
suspended loan
in 1993 halting
project
• Completed
stretch of 20 km
closed for 5
months due to
row.
• Government
obtained court
order to force
open completed
stretch.
• Concessionaire
claimed that
US$80 million
was owed from
the defunct
revenue sharing
agreement
• Major share25
ground
conditions, force
majeure etc.,
concessionaire
would be entitled
to adjust revenue
sharing
proportions, toll
levels, and
extension of
concession
period.
holder
Kumagaigumi,
pulled out by
selling its 65%
share to Thai
contractor and
bankers in 1994
• Shock-wave
sent across the
international
financing
community,
posing
questions of
financiability of
subsequent
projects
Gtrangzhou-
Shenzen-Zhuhai
Highway, China
• Project
guaranteed by
GITIC, the
investment arm of
the Provincial
government
• Peoples’
Insurance Co. of
China covers
political risk of
policy change and
nationalization
• No dividend or
• Financial close
delayed for 2 years
due to Tiananmen
event in 1989
• The land
acquisition process
(8000 acres) took 6
years and US$132
million to complete.
• The 16 km Boca
Figris Bridge,
which forms an
essential link of the
• Delayed
commencement
but Phase I was
opened to
traffic earlier
than agreed
with financiers.
• Developer
applied for
doubling of toll
due to
depreciation of
local currency.
26
repayment of subordinated
loans to
be made until
Performance Test
criteria are met.
• Bonus clause for
early completion
entire route, was
under threat of
take-over by
competitor
• Design changes and
abortive work (e.g.,
widening span of
bridge already
constructed).
• Depreciation of
local currency
• Post-completion
traffic management
not fully in
concessionaire’s
control.
• Frequent
accidents within
the first 2
months of
operation
• Pilferage of
road signs and
trespassers
• Non-payment
by local
authorities and
vehicles,
leading to
accounting
problems and
revenue loss.
Han, Diekmann and Ock [31] described findings from experiments done to investigate the
risk attitude and bid decision behavior in the selection of international projects.
Bing et al. [32] conducted a questionnaire survey to explore preferences in risk
allocation. They concluded that some risks should be retained within the public sector or
shared with the private sector. As per World Bank(2006) table 1.6 shows some of the
abandoned projects in India.
Ng and Loosemore [33] analysed the rationale behind decisions about risk distributions
between public and private sectors and their consequences. They also demonstrated the
complexity and obscurity of risks faced by infrastructure projects and the difficulties in
distributing them appropriately, and gave recommendations to better manage risks in
such projects.
27
Zeng and Smith [34] presented a risk assessment methodology to cope with risks in
complicated construction situations and applied fuzzy reasoning techniques to handle
the uncertainties and subjectivities that arises in the construction process. They also
modified analytical hierarchy process to structure and prioritize diverse risk factors.
Zou, Zhang and Wang [35] prioritized risks according to their significance of influences
on typical project objectives in terms of cost, time, quality, safety and environmental
sustainability, and scrutinized them from a joint perspective of project stakeholders and
life cycle. The study was conducted for construction projects in China
Ebrahmnejad et al [36] in their paper, made an attempt in identifying common risks in
BOT projects. A novel hierarchical structure of risks is presented on the basis of the
project-oriented point of view; next, some effective criteria for risk ranking in BOT
projects are introduced. The proposed model is used for identifying and assessing risks in
Iran BOT power plant project. Finally, the rankings of high risks are determined.
2.3 CAUSES OF DELAY (TIME OVERRUN) IN CONSTRUCTION
PROJECTS
Delay in construction projects is considered one of the most common problems causing a
multitude of negative effects on the project and its participating parties. Construction
delays are for the most part costly, and completing projects on time is beneficial to all
project parties. Therefore, it is essential to identify the actual causes of delay in order to
minimize and avoid the delays and their corresponding expenses.
Assaf & Al Hejji [7] defined construction delay as “the time overrun either beyond
completion date specified in a contract, or beyond the date that the parties agreed upon
for delivery of a project.” Delay is also defined as an “act or event which extends
28
required time to perform or complete work of the contract manifests itself as additional
days of work”.
Many researchers have worked to find the causes of delay in construction projects. The
major causes of delay identified are summarized in Table 2.3.
Table 2.3: Causes of Delay in Construction Projects
Researcher Country Major causes of delay
Baldwin & Manthei
[37]
U.S. • Weather conditions
• Shortages of labour
Okpala and Aniekwu
[38]
Nigeria • Shortages of materials
• Payment problems
Al-Barak [39] Saudi
Arabia
• Lack of experience
• Bad decisions in regulating company’s policy
Mansfield
et al. [40]
Nigeria • Improper financial & payment arrangements
• Poor contract management
• Shortages of materials
• Poor estimates
• Increase in cost
Semple et al. [41] Canada • Increase in scope of work
• Inclement weather
• Restricted access
Assaf et al. [42] Saudi
Arabia
• Slow preparation and approval of shop
drawing
• Delays in payments to contractors
• Changes of design/design error
• Shortages of labour supply
Al-Ghafly MA [43] Saudi
Arabia
• Cash flow problems / financial difficulties
• Difficulties in obtaining permits
29
• Changes in design & scope and variations
• Delay in making decisions by owner
• Coordination & communication problems
Ogulana S.O. [44] Thailand • Shortage of material
• Changes of design
• Coordination & communication problems
Chan and
Kumaraswamy [45]
Hong Kong • Poor risk management & supervision
• Unforeseen ground conditions
• Poor decision making involving all project
teams
• Variations in scope of work
Kaming et al. [46] Indonesia • Design changes
• Poor labour productivity
• Inadequate planning and resources shortages
Al-Momani [47] Jordon • Poor design
• Change orders / design and variation
• Inclement weather
• Unforeseen site conditions
• Variation in scope of work
Augustine and
Mangvwat [48]
Nigeria • Financing &late payment for completed
works
• Improper planning
• Under-estimation of time for projects
• Frequent changes in design & materials
• Poor site management
Rehman et al. [49] Malaysia • Financial problem
• Clients influence
• Manpower problem
• Poor site management
30
• Approvals by authorities
• Sub-contractors
• Design Problem
• Construction method
• Additional work and variation in scope of
work
Tommy Y. Lo et al.
[50]
Hong Kong • Unrealistic contract duration
• Poor site management & supervision
• Shortage of working capital
• Exceptionally low bid
• Unforeseen ground conditions
• Inexperienced contractor
• Works in conflict with existing utilities
Ajibade A. A. &
Henry A. O. [51]
Nigeria • Contractors financial difficulties along with
clients Cash flow problems
• Incomplete drawing
• Slow mobilization of resources
Assaf S.A. & Al –
Hejji S. [7]
Saudi
Arabia
• Change orders by owner
• Delay in progress payments by owner
• Ineffective planning & scheduling by
contractor
• Poor site management
• Shortage of labour
• Difficulties in financing
Iyer K.C. & Jha
K.N. [52]
India • Conflict among project participants
• Hostile socioeconomic environment
• Owner incompetence
• Indecisiveness of project participants
• Harsh climatic condition at site
31
Murali S. & Y.W.
Soon [53]
Malaysia • Contractors improper planning
• Contractors poor site management
• Inadequate client finance and payments for
completed work
• Problems with sub-contractors
• Lack of communication between parties
• Poor quality of work requiring reworking
Yang, Cheng & Kao
[54]
Worldwide • Improper contract planning
• Debt problem
• Uncertainty on political issues
• Government-finished items
2.4 CRITICAL SUCCESS FACTORS FOR CONSTRUCTION
PROJECTS IN GENERAL
Success or failure of any project is greatly influenced by the performance of cost, time,
and quality aspects of a project.
The identification of the critical success factors (CSFs) will enable the limited resources
of time, manpower and money to be allocated appropriately [55].
Ashley et al. [56] identified 46 factors contributing to project success and grouped them
into five areas including (1) management, organization and communication: (2) scope
and planning: (3) controls: (4) environmental, economic, political, and social: and (5)
technical, Based on the study of eight projects with average performance and eight
outstanding projects, they found significant differences between the average and the
outstanding projects in six factors including planning effort in construction and design,
32
project manager goal commitment, technical capabilities, scope and work definition, and
control systems.
Schultz et al. [57] classified critical success factors in two groups and concluded that
these groups affect project performances at different phases of implementation. The first
group is referred to as the strategic group that consists of factors like project mission, top
management support, and project scheduling. The other group is the tactical group, which
consists of factors like client consultation and personnel selection and training.
Pinto and Slevin [58] identified ten critical factors including project mission, top
management support, project schedule/plans, client consultation, personnel, technical
tasks, client acceptance, monitoring and feedback, communication and trouble-shooting.
All of them were considered as critical for success at various stages (conceptual,
planning, execution and termination) of project life cycle.
Mohsini and Davidson [59] examined the effect of six variables of inter-organizational
conflict on project performance in the traditional building process
Larson [60] stated that project success can be better assured if participants work together
as a team with established common objectives and defined procedures for collaborative
problem solving.
Songer and Molenaar [61] identified 15 characteristics of successful projects through
literature review and unstructured interviews of academia and public sector agency
representatives. Eighty-eight public-sector representatives were asked to rate the
importance of these characteristics through a questionnaire survey. They found that the
top five important project characteristics were well-defined scope, shared understanding
of scope, owner construction sophistication, adequate owner staffing, and established
budget.
Mo and Ng [62] conducted a survey on architects and builders views on the D&B
procurement method in Hong Kong. Their results showed that the quality of the client’s
33
brief was rated as the most important project success factor, while the client’s and the
contractor’s experience in D&B, good working relationship, and proper channel of
communication were also critical.
Chitkara [63] pointed out inadequate project formulation and the improper management
of the projects as the primary reasons for project failures.
Rowlinson [64] stated that critical success factors are those fundamental issues inherent
in the project, which must be maintained in order for team working to take place in an
efficient and effective manner. They require day-to-day attention and operate throughout
the life of the project.
Chua et al. [55] maintained that success of a construction project was determined by four
aspects, namely: project characteristics, contractual arrangements, project participants,
and interactive processes. Project characteristics include external (e.g., political and
economical risks, impact on public efficiency of technical approval authorities, adequacy
of funding, and site limitation and location) and internal characteristics (e.g.,
constructability, pioneering status, and project size).
Abdul Aziz [65] studied Malaysia’s privatized national sewerage project and expressed
some of the major concerns of the public towards infrastructure privatization.
Zhang and Kumaraswamy [1] identified and discussed various issues that governments
need to deal with, for the BOT mechanism to work smoothly. Those issues were further
illustrated by relevant examples from Hong Kong experience in evolving an effective
BOT project management framework for transportation/tunnel projects.
Chan et al. [67] asserted inter-organizational teamwork as a major factor in ensuring
project success.
Lim and Ling [68] found that the client’s role is an important ingredient in achieving the
project success.
34
Abraham [69] also studied critical success factors for the construction industry.
Gupta [30] considered external and internal project characteristic aspects independently,
and also made emphasis on elements of monitoring and control aspect for the success of a
project.
2.5 CRITICAL SUCCESS FACTORS FOR BOT PROJECTS
Research and discussions about CSFs for BOT projects have been previously conducted
by Berry [70], Tiong et al. [71], and Morledge and Owen [72].
Tiong [71] had identified six CSFs in winning BOT contracts: (1) entrepreneurship and
leadership; (2) right project identification; (3) strength of the consortium; (4) technical
solution advantage; (5) financial package differentiation; and (6) differentiation in
guarantees.
It has also been shown that there is a positive agreement between promoters and
governments on the importance of these six CSF’s even though the order of ranking on
importance of the CSF’s may be different.
Tiong and Alum [73] had further identified distinctive elements of winning proposals in
competitive BOT tendering from the subfactors of the CSFs of technical solution
advantage, financial package differentiation, and differentiation in guarantees.
Gupta and Narasimham [74] identified additional CSFs for promoters to win BOT
contracts: ability to provide a suitable transfer package, built-in flexibility for future
growth and changes, supportive and understanding community, and short construction
period.
35
Tam [75] had analyzed the successful and failing examples of BOT projects in Hong
Kong and Bangkok and concluded the ingredients of a successful BOT project.
Zhang [76] studied critical success factors for public-private partnerships in infrastructure
development. Various success factors have been identified through case studies, literature
review, and interviews/correspondence with worldwide PPP experts and practitioners.
These success factors are further analyzed, distilled, coded, and finally classed into five
main CSF aspects: (1) economic viability, (2) appropriate risk allocation via reliable
contractual arrangements, (3) sound financial package, (4) reliable concessionaire
consortium with strong technical strength, and (5) favorable investment environment.
Iyer and Jha [52] identified 55 attributes responsible for impacting performance of the
projects. These attributes were then presented to Indian construction professionals in the
form of a questionnaire. Statistical analysis of responses on the attributes segregated them
into distinct sets of success attributes and failure attributes. Factor analysis of sets of
success attributes and failure attributes separately grouped them into six critical success
factors and seven critical failure factors. To understand the extent of contribution these
factors have on the outcome of a construction project, a second stage questionnaire
survey was also undertaken. The analyses of responses of the second stage questionnaire
concluded that two success factors and one failure factor: commitment of project
participants; owner’s competence; and conflict among project participants contribute
significantly in enhancement of current performance level of the project. The extent of
their contribution was, however, been observed to vary for a given level of project
performance.
Ahmed Aziz [77] studied two common approaches that have been used by governments
for the implementation of public-private partnerships (PPPs): a finance-based approach
that aims to use private financing to satisfy infrastructure needs, and a service-based
approach that aims to optimize the time and cost efficiencies in service delivery. The
implementation of PPPs, however, may suffer from legal, political, and cultural
36
impediments. In the United States, the federal government enabled a number of acts to
ease the impediments and promote PPPs for infrastructure development. Based on a
detailed analysis of PPPs in the United Kingdom and British Columbia, Canada, this
paper describes principles that would characterize the implementation of PPPs at the
program level (e.g., whether the implementation is successful). The principles pertain to
the: availability of a PPP legal framework and implementation units; perception of the
private finance objectives, risk allocation consequences, and value-for-money objectives;
maintenance of PPPs process transparency; standardization of procedures; and use of
performance specifications. Guidelines for successful implementation are explained and
discussed in the context of the United States PPPs experience and impediments.
According to Weisheng [78] gaining or maintaining a “contractor’s” competitive
advantage is not easy as it is determined by a large number of factors. Identification of
critical success factors (CSFs) allows one to reduce the vast number of factors to some
manageable few but vital ones. Based on the CSFs, contractors’ limited resources such as
money and manpower can be allocated and aligned appropriately for yielding a maximum
outcome of overall competitiveness. This paper describes the CSFs identified from a
survey study carried out in Mainland China. The ranking analysis of the survey results
shows that 35 factors are rated as critical for determining the competitiveness of a
contractor. Factor analysis reveals that the 35 CSFs identified can be grouped into eight
clusters, namely, project management skills, organization structure, resources,
competitive strategy, relationships, bidding, marketing, and technology. The CSFs in this
study provide a vehicle for guiding a contractor in managing its resources in order to
improve competitive advantage. The study also provides insights into the management of
competitiveness for contractors that are operating in the particular context of the Chinese
construction industry.
Kumaraswamy and Morris [79] reviewed recent BOT projects and developments in Hong
Kong, China (mainland), Laos, Malaysia, India, Sri Lanka, the Phillippines, Thailand
and concluded that :
37
• Careful evaluation of the suitability of a project for BOT type procurement is
critical at the outset, for example, with stable political and legal regimes and
suitable socioeconomic conditions with the project being clearly in the public
interest, capable of sustaining steady cash flows, and being provided with
adequate safeguards against the various risk factors;
• A reasonable but not excessive rate of return is needed, with any useful
safeguards such as sensible toll adjustment mechanisms to achieve the desired
balance;
• A proactive, stable, and reasonable (including non-corrupt) sponsor (e.g.,
government/public sector body) is needed; and
• A financially strong, technically competent, and managerially outstanding
consortium is required as a franchisee, who should hopefully be attracted by the
foregoing conditions.
Bakatjan et al. [80] presented a simplified model to determine the optimum equity level
for decision makers at the evaluation stage of a BOT hydroelectric power plant (HEPP)
project in Turkey, which takes place immediately after the completion of the feasibility
study. The model is the combination of a financial model and a linear programming
model that incorporates an objective of maximizing the return of the project from the
equity holder’s point of view.
Senturk et al. [81] studied the problems that arose during the implementation of the Izmit
Domestic and Industrial Water Supply Project, the biggest privately financed water
supply project procured under the BOT model in the world at the time and the first in
Turkey. The problems identified were- the scope of the project, equity debt ratio, return
on equity, principles of accounting, coordination of State departments, land access,
determination of the optimum operation period, & the sale price of the water. To over
come those problems, they suggested that :
38
• Scope of water production and distribution projects have to include the delivery of
the product to the end user.
• Equity debt ratio, must not be enforced to get an optimum total investment cost.
• Return on equity should be based on certain criteria rather than negotiations.
• Conditions dictated by the financers have to be more tolerant in order to achieve
an optimum investment cost.
• Principles of accounting have to be declared in advance.
• Coordination of State departments must be achieved.
• Money must be allocated within the finance structure for expropriation.
• Sale price of water must be fixed or ascending with time with the use of
refinancing opportunities negotiated at the beginning of the project.
Ayed and David [82] studied that infrastructure in the United States is in need of a large
and immediate investment. The funds provided by public agencies are not nearly
sufficient to face such a challenge. Build-operate-transfer (BOT) is a delivery/financing
system that can be a solution to this problem. A questionnaire survey of large
municipalities and state departments of transportation was conducted to determine the
extent to which they are using BOT in their large projects, to investigate the
implementation of BOT, and the reasons why some government agencies avoid using
BOT. The findings indicate that very few agencies use BOT. The reasons why most do
not use BOT were reported by the respondents to be the availability of proven
alternatives and enough funds, the existence of political barriers, and resistance to change
both on the part of government agencies and private sponsors.
Zhen Yu Zhao et al [83] studied Chinese electric power industry which has adopted
Build–Operate–Transfer (BOT) approach in a number of projects to alleviate the pressure
of sole state-owned investment. Using an extensive literature survey, this paper identifies
31 success factors under 5 categories for Chinese BOT electric power projects. This is
followed by a questionnaire survey to exam relative significance of these factors. The
39
results reveal the different levels of significance of success factors for BOT thermal
power projects versus wind power projects.
2.6 PREQUALIFICATION AND SELECTION PROCEDURE
In project management, the problem of choosing the best alternative (or best course of
action) or making a complete ranking of a finite set of alternatives is usually encountered.
It involves decision making under conditions of risk and uncertainty. In most cases, the
problem is focused on the estimate of benefits and costs. It also includes environmental,
social and regional objectives as well. The decision has to be taken during the conceptual
and the early design phase when the information available is not complete and the
decision making environment is governed by uncertainties. Two major problems
encountered are:
1. Selecting a suitable project during project appraisal.
2. Selection of a concessionaire/ promoter.
2.6.1 Project Appraisal
According to several surveys [84][85], project appraisal in the private sector has
systematically concentrated on establishing the financial and technical feasibility of a
project.
The emphasis on the financial and technical aspects of projects is understandable from
two points of view. First, for private sector companies, the requirement for ensuring
financial viability is ultimately related to the survival of the organization; an objective
which can never be subjugated. In association, a project that is not technically viable is
effectively unfeasible, and in turn would lead to financial problems. Second, and more
40
pragmatically, both aspects can, to a large extent, be quantified and manipulated. This in
turn, leads to an over-confidence in the ‘numbers’.
Lopes and Flavell [86] have criticized the emphasis placed on the financial and
quantitative side of projects, defining it as myopic and misplaced. According to them, the
methodology of project appraisal should assess the overall viability of a project.
As per Mohamed and McCowan [87] the analysis of a project should be broadened to
include other dimensions, such as the organizational and managerial aspects, political
aspects, social acceptability, environmental problem etc., depending on the precise nature
of the project. These are all risk dimensions which can cause the failure of a project. The
view is supported by the result of an large number of audits, conducted by both
practitioners and academicians, examining the reasons for success and failure of projects.
These studies have suggested that many non-financial factors such as organizational and
managerial, political, social and environmental issues can cause the failure of a project
despite favorable financial or technical components. Therefore they should be assessed
along with the financial aspects when appraising projects. They showed that the three
techniques: the net present value, internal rate of return and pay back period investment
appraisal techniques have formed the major component of feasibility studies. These
techniques are based upon the time-cost-of-money principle and use slightly varied
procedures to forecast the expected monetary returns on an investment. The reliability of
their output depends upon the accuracy of the deterministic cash flow values and their
timings as estimated by the organization. In addition to the crucial uncertainty factor, the
above techniques do not allow for the non-monetary (qualitative) factors to be considered
in assessing the investment option. These uncertainties are not just prevalent in
international projects but also involve the complex risks that are particular to
international transactions. A number of authors have described the risks specific to
international construction projects [88][89][90][91][92][93].
41
Messner[91] developed the information framework analysis process model which
focused on qualitative tools and does not provide a computational methodology to
evaluate the project conditions.
Han and Diekmann [94] developed a comprehensive approach for making stable and
systematic go/no-go decisions for international projects. The model developed by them
does not concentrated on expert knowledge elicitation and model validation through fullscale
experimental case studies by industry participants. Moreover, the model developed
caters only to the traditional competitive public sector projects, which are either financed
by governments or funded by international agencies. It is not suitable for international
design/build projects, international BOT projects, and international private sectors.
The techniques used for evaluation of BOT proposals by government are the NPV
method, the score system and the Kepnoe-Tregoe method [95]. Some governments
evaluate the commercial and financial package by performing an NPV calculation to
discount the project cash flows due to the promoters. The lower is the NPV, the cheaper
the offer. The advantage of using the NPV method is that the proposals could be
compared based on calculated numbers. The method, however, ignores the relative
advantages and disadvantages of the technical solution in different proposals.
In score system, points are given to the selection criteria and the proposals containing the
financial package, technical designs and others are evaluated based on the scores
obtained. The proposal with the highest score is considered to be the best overall
proposal. The advantage of this method is that several criteria are used in comparing the
proposals. The disadvantage of the score system is that it assumes that all the criteria are
of equal importance.
42
The Kepnoe-Tregoe decision-making technique has been used in projects to evaluate the
BOT proposals. In this technique, the major elements consist of the evaluation statement,
the MUST criteria, the WANT criteria and the evaluation matrix. The MUST criteria are
mandatory and they must be achieved to guarantee a successful decision and any
proposal that cannot fulfill a MUST criterion would be discarded. The WANT criteria are
not mandatory. The proposals would be judged on their relative performance against a set
of WANT criteria, not on whether or not they fulfill them. The function of these criteria
is to give the assessors a comparative picture of proposals. Each MUST and WANT
criterion could also be sub-divided into its own set of sub-criteria. Each WANT criteria is
weighted by the Selection Committee. The most important criterion would be identified
and given a weight of 10. All other criteria would then be weighted in comparison with
the first, from 10 (equally important) down to a possible 1 (not important). Evaluations
are done on the basis of the MUST and WANT criteria. The total weighted score would
give the government a tool for selecting a tentative choice.
Many countries are still at the lower ends of their learning curves on BOT arrangements.
Various BOT-type procurement protocols are not yet proven and are still being tried and
tested. Therefore, there is a need to benchmark the best practices. There are three key
problems associated with BOT projects [96]: (1) availability of experienced developers
and equity investors; (2) the ability of governments to provide the necessary support; and
(3) the viability of corporate and financial structures. Problems 1 and 3 indicate that the
selection of an appropriate concessionaire is critical to the success of a BOT project.
Therefore, it is necessary to formulate a workable and efficient selection framework.
Negotiated tendering, invited tendering, and open competitive tendering have been used
in the international concessionaire selection practices, among which the open competitive
tendering is a trend. The NPV method, simple scoring system, multi-attribute analysis,
and Kepner-Tregoe decision-making analysis technique have been used in open
competitive BOT tender evaluation. In prequalification and tender evaluation, the
43
potential concessionaires should be assessed against package criteria that include
financial, technical, managerial, safety/health, and environmental aspects.
Tiong and Alum [95] identified that the selection of a suitable concessionaire depends on
three elements : (1) the quality of the definition of project-specific criteria; (2) the quality
of evaluation of the available tenders; and (3) the quality of the understanding of what
these tenders can achieve.The use of a suitable tender evaluation method and the
derivation of project-specific tender evaluation criteria are two important issues in the
concessionaire selection process.
Zhang et al [97] analyzed the concessionaire selection process for BOT tunnel projects in
Hong Kong and observed that the Hong Kong government had formulated a wellstructured
concessionaire selection framework, supported by the Kepner-Tregoe
technique. BOT characteristics, client objectives, and project attributes were taken into
consideration in this framework.
For the better use of the Kepner-Tregoe technique, other supplemental decision-making
tools (e.g., brainstorming, group decision methods, and Moody’s precedence charts) can
be incorporated to facilitate the generation of a realistic decision statement, the
identification of appropriate MUST/WANT criteria, the derivation of their corresponding
weights and maximum achievable score points, and the judgment of alternative tender
proposals against the MUST and WANT criteria.
The Kepner-Tregoe technique is much more complicated than the simple scoring method,
NPV method, or even the multi-attribute analysis. It takes time and effort to determine
appropriate decision statement, MUST/WANT criteria, and the relative importance of the
WANT criteria. Furthermore, it was recognized that it was forever impossible to
determine empirically whether the selection made was better than the one not made,
because the project can only be done once.
44
Zhang [2] had discussed a number of tender evaluation methods and their applications in
some countries. These include the simple scoring method, NPV method, two-envelope
method, multi-attribute analysis, and Kepner–Tregoe decision analysis technique. These
methods can be modified and combined to suit a particular project.
Multiple tender evaluation criteria used in different types of PPP projects worldwide had
been explored and generated four evaluation criteria packages for PPP projects in
general. They are (1) financial, (2) technical, (3) managerial, and (4) safety, health and
environmental.
During tailoring these criteria packages for a specific PPP project, adjustments should be
made to reflect the revised risk allocations in that particular PPP project, the uniqueness
of the specific concession and the composition of the concessionaire, the resources and
capabilities of, and the role played by, each constituent company.
The Chinese construction practice has its own characteristics, such as governmental
regulations, professional qualification systems, and procurement systems. These
characteristics present a different practice in awarding construction contract from that in
the West. Shen [98] investigated the characteristics of construction business environment
in China and identified the key parameters used in assessing contractor’s competitiveness
for awarding construction contracts in the market. The parameters are useful tools for
assisting contractors in identifying their strength and weakness, thus reengineering
actions can be adopted for improving competitiveness.
Zhang [99] proposed a core concessionaire selection protocol that incorporates public
procurement principles, best-value selection approach, competitive selection process, and
multi-criteria tender evaluation. He concluded that the successful selection of the most
suitable concessionaire depends on a number of issues, which include the quality of (1)
the general arrangement of the selection process, (2) the definition of project objectives
45
and core requirements, (3) identifying and defining project-specific criteria, (4) the
prequalification and tender evaluation methodology, (5) the understanding of what these
tenders can achieve, and (6) the negotiation skills.
Wibowo [100] in his discussion on Zhang [2] submitted additional methods viz. least
present value of revenue, lowest tariff/tolls, the shortest concession duration, highest fee
paid to the government, least cost to the government, the minimum required amount of
government supports in investment and present value method for evaluation of proposals
submitted by the concessionaires.
Tiong the proposed contractor selection method employs the fuzzy set theory to deal with
the uncertainty and vagueness surrounding the subjective nature of the decision making
and multiple attributes decision method to cater to the simultaneous consideration of the
multiple decision criteria and multiple decision makers. The expected marginal
contribution of each of the decision criteria to the overall goal of decision making, that is,
to select a contractor who is technically and financially sound enough to deliver the
project as specified, is obtained by using the Shapley value formula. A hypothetical
problem is analyzed to illustrate the data requirements , mechanics, and solution nature of
the proposed method. It is to develop a valid theoretical frame work for the future
development of a computer based fuzzy decision model for contractor selection.
The public sector has a long tradition of using the lowest bid as the award criterion for
contracts, reliance on non price criteria is increasing. The purpose of this paper is to
describe and explain how public owners use multiple criteria for the award of
construction contracts. It is likely that non price criteria support the alignment of owner
and contractor interests, and that bidder behavior should be affected by the likelihood of
repeated contracts, and by the transparency of owners’ evaluation procedures. Data from
386 bidding documents reflecting practice in Swedish municipalities in 2003 are
analyzed. A typical pattern is a 70% price weight combined with three non-price criteria.
Price formulas, translating bid prices into scale values, were found to be based on the
46
lowest bid, bid spread, or average bid. Non price criteria were evaluated on either relative
or absolute merits. Owners should be aware of the incentives that their selection practices
create and view this in a policy perspective, whereas contractors should be ready to
assess the short and long term values of non price features.
Li [11] proposed a fuzzy framework-based fuzzy number theory to solve construction
contractor prequalification issues, which include decision criteria analysis, weights
assessment, and decision model development.
Magdy [101] presented a method to assist government agencies in selecting the best
contractor(s), the research results shared in this paper are relevant to both academics and
practitioners. The paper provides practitioners with a tool for ranking contractors based
on best-value and provides academics with selection parameters, a model to evaluate this
best-value, and a methodology of quantifying the qualitative effect of subjective factors.
2.7 FINANCING BOT PROJECTS
Zhang [16] suggested that project finance refers to the development of a stand-alone
project on a nonrecourse or limited recourse financing structure, where debt and equity
used to finance the project are paid back from the cash-flows generated by the project.
Unlike corporate finance where lenders examine a company’s general credit and use the
cash-flows generated by its entire asset portfolio for debt service, in project finance,
lenders look primarily to the revenue stream generated by the project for repayment and
to the assets of the project as collateral for their loans. Lenders have no recourse or only
limited recourse to the general funds or assets of the project sponsors. The project
company is a distinct legal entity; project assets, project-related contracts, and project
cash-flows are segregated to a substantial degree from the sponsoring entities [14].
47
Also develops a methodology for capital structure optimization and financial viability
analysis that reflects the characteristics of project financing, incorporates simulation and
financial engineering techniques, and aims for win–win results for both public and
private sectors. This quantitative methodology defines the capital structure of a privatized
project in four dimensions, examines different project participants’ perspectives of the
capital structure, optimizes the capital structure, and evaluates the project’s financial
viability when it is under construction risk, bankruptcy risk and various economic risks
~that are dealt with as stochastic variables!, and is subject to other constraints imposed by
different project participants. This methodology also evaluates the impact of
governmental guarantees and supports, and addresses the issue of the equity holders’
commitment to project success by initiating the concepts of equity at project risks, value
of governmental loan guarantee, and project bankrupt probability during construction. A
framework and a solution algorithm are provided for this proposed methodology.
Grimsey and Lewis [102] presented a framework for evaluating the risks of public
private partnerships for infrastructure projects and used as illustration a case study of a
waste water treatment facility in Scotland which is typical of most PPP projects.
Schaufelberger and Wipadpisut [103] suggested that project risk, project conditions and
availability of financing are the major considerations in selecting a financing strategy.
The project risks that were determined to be most significant in financing strategy
selection were political, financial, and market risks. Based on the study findings, a
decision model was developed that can be used by BOT project sponsors in selecting
appropriate financing strategies.
Wibowo [100] presented a stochastic approach in infrastructure investment evaluation in
his studies. Table 2.4 shows the summary of previous works on stochastic approach in
infrastructure investment evaluation. He suggested that If a project is implemented using
48
a project-finance approach, the debt service payment relies solely on the project cash
flows and its assets. His paper identifies, quantifies, and evaluates major financial risks
associated with project-financed toll road projects in Indonesia. Ordering payments by
priority level, subject to cash availability, enables risk to be evaluated from the different
perspectives of multiple parties involved. The paper makes use of Latin Hypercube
simulations for risk analysis because they deal with problems involving large and
complex systems. To better illustrate the concept, a case study is presented. A sensitivity
analysis of the impact of delay-in-adjustment risk and of the adoption of a new regulation
related to the toll adjustment is performed and discussed. Simulation results show that the
project sponsor fares worse as delay-in-adjustment risk increases but that the creditor can
fare better, given that the risk level is low or moderate. Output statistics also reveal that
the adoption of the new regulation has negative impact on the project cash flows from
both the project sponsor’s and the creditor’s perspectives under different scenarios
associated with delay-in-adjustment risk.
49
Table 2.4 : Summary on previous works on stochastic approach in infrastructure
investment evaluation
58
CHAPTER 4
PUBLIC PRIVATE PARTNERSHIP FOR INFRASTRUCTURE
PROJECTS
4.1 GENERAL
Civil infrastructure is vital to the nation’s economic growth. Infrastructure may be
considered to be the skeleton on which the society is built. It includes highways,
railways, ports, bridges, hydraulic structures, power plants, tunnels, municipal facilities
like sanitation and water supply, and other facilities serving public needs. Adequate
funding is required to construct and maintain the requisite infrastructure. The immediate
need for such projects coupled with chronic budget shortages experienced by public
agencies encouraged the use of innovative financing [1][2]. In many countries,
particularly, developing countries shortage of public funds have led governments to invite
private sector entities to enter into long term contractual agreements for financing,
construction and operation of capital intensive infrastructure projects.
To achieve meaningful growth, developing countries have to promote infrastructure
development, which has a positive ‘knock on’ effect in catalyzing continuous economic
development, apart from meeting basic needs. However, in proceeding towards this goal,
developing countries face various constraints, among which, lack of advanced technology
and inadequate public financial resources are two major drawbacks. To overcome or
alleviate these constraints, developing countries are encouraging local and foreign private
sector involvement in the provision of infrastructure projects or services. Global trends of
privatization and reduced governmental roles extend to developed countries as well.
Build-operate-transfer (BOT) type schemes have therefore provided an increasingly
popular vehicle to move towards infrastructure development.
59
Infrastructure projects are complex, capital intensive, having long gestation period and
involves multiple risk to the project participants. In many countries shortage of public
funds have forced the govt to enter into long term contractual agreement for financing
construction and operation of infrastructure projects. A PPP can be defined to be the
private sector construction and operation of infrastructure which would otherwise have
been provided by the public sector. PPP structures are typically more complex than
traditional public procurement projects. PPPs complexity is due to number of parties
involved and the mechanism use to share the risk.
PPP projects are characterized by non-recourse or limited-recourse financing where
lenders are repaid from only the revenues generated by projects. The concessionaire is a
special purpose vehicle in which the sponsoring entities are not responsible for the
repayments of the loans. These projects have a capital cost during construction and a low
operating cost afterwards which implies that the initial financing cost are very large
compared to the total cost. Further, a mix of financial and contractual arrangements
amongst the multiple parties including the commercial banks, project sponsorers,
domestic and international financial institutions and government agencies makes it
further complex.
From the viewpoint of the public procurer, there is an obvious need to ensure that money
has been spent economically, efficiently and effectively. The Government seeks to utilize
private sector finance in the provision of public sector infrastructure and services and
thereby achieve value for money. Value for money, defined as the effective use of public
funds on capital project, can come from private sector innovation and skills in asset
design, construction techniques and operational practices. It may also come from
transferring key risks in design, construction delays, cost overruns and finance to private
sector entities. However, in some cases the emphasis on risk transfer can be misleading as
value for money requires equitable allocation of risk between the public and private
sector. From the perspective of the project sponsors, PPP is essentially project financing,
characterized by the formation of a highly-geared special purpose company for the
60
project vehicle and consequently a reliance on direct revenues to pay for operating costs
and cover debt financing while giving the desired return to risk capital.
This chapter presents the background of BOT projects and its variations. The current
status of PPPs in India is described and the comparison is made with other countries.
4.2 BOT PROJECTS
The term “BOT” is used mainly in the area of infrastructure projects financed by the
private sector. The economic environment today is suitable enough for the private sector
to invest in infrastructure projects for the following reasons :
• Government policy aiming to increase the private sector participation.
• Modification in legislation and laws that encourage investments.
• Decrease in inflation rates.
• Availability of cheap and experienced work force.
4.2.1 Background of BOT
It was reported that Turgut Ozal, a former Prime Minister of Turkey, first coined the term
BOT and used the BOT approach in Turkey in 1984 as a part of the Turkish Privatization
Program. However, the philosophy and origins of BOT and BOO (Build Own Operate)
schemes can be traced back to the privately financed French canals and bridges in the 17th
Century : the privately funded and operated trade related infrastructure for the
transportation of people and raw materials following the industrial revolution; and the
French concession contracts, for example to supply drinking water to Paris in the 18th
century; the Suez Canal; the Trans-Siberian railway; and the railways and power
companies in the USA (which were mostly on a BOO basis, i.e. without the need to
‘Transfer’ back the facility)[105].
61
Despite such wide-ranging precedents, the perceived need for central planning and
control of critical public infrastructure precluded private sector participation in most of
such developments until the 1980s. The paradigm shift that mobilized the private sector
more recently resulted from a combination of forces, such as the gross inadequacies of
public funding capacities, particularly in comparison with the growing aspirations of
burgeoning populations; the inefficiencies of government monopolies; the conspicuous
availability of surplus private resources (financial, technical and managerial) ; and the
formulation of creative non-recourse financing mechanisms whereby projects could be
self-funding (i.e. not have recourse to other assets of the stake-holders). However,
experiences indicate that although the idea of complete non-recourse is central to the
BOT concept, some level of guarantee/support or a comfort letter is invariably sought in
practice.
4.2.2 Definition of BOT
“BOT” has more than one definition. Here are a few :
• A model that entails a concession company providing the finance, design
construction, operation, and maintenance of a privatized infrastructure project for
a fixed period, at the end of which the project is transferred free to the host
government [106].
• The granting of a concession by the government to a private promoter, known as
the concessionaire, who is responsible for the financing, construction, operation,
and maintenance of a facility over the concession period before finally
transferring the fully operational facility to the government at no cost [107].
• A model or structure that uses private investment to undertake the infrastructure
development that has historically been the preserve of the public sector [108].
62
• A type of project financing whereby the government grants a concession to a
private entity (project company) to build and operate a project, such as
infrastructure of resource extraction, that would be operate by the government
[109].
• Essentially a form of project financing whereby a government awards a group of
investors (hereafter referred to as “ Project Consortium”) a concession for the
development, operation, management, and commercial exploitation of a particular
project [110].
• A contractual arrangement and a new legal concept to encourage private
enterprises and entrepreneurs to help the government in its development effort
[111].
4.2.3 BOT Variations
The emerging trend is to build infrastructure by privatizing them, at no cost to the state,
using the procurement called Build-Operate-Transfer (BOT). A BOT project can be
described as a project based on the granting of a concession by a client (usually a public
or governmental agency) to a consortium or concessionaire (usually in the private sector)
who is required to ‘Build’ (including financing, design, managing project
implementation, carrying out project procurement, as well as construction), ‘Operate’
(including managing and operating the facility or plant, carrying out maintenance etc.,
delivering product/service, and receiving payments to repay the financing and investment
costs and to make a margin of profit), and to ‘Transfer’ the facility or plant in operational
condition and at no cost to the client at the end of the concession period.
While BOT in Turkey has been legitimized by a specific law based on the original BOT
concept, diverse variations have evolved in many countries. These mainly differ in the
63
precise mechanisms of ownership, usage rights, and obligations . These variations include
the following, with the terms indicating basic arrangements and/or essential emphasis:
• BOO = build-own-operate,
• BLT = build-lease-transfer,
• BOOM= build-own-operate-maintain,
• BOOT = build-own-operate-transfer,
• BOOTT = build-own-operate-train-transfer,
• BTO = build-transfer-operate,
• DBFO = design-build-finance-operate,
• DBO = design-build-operate,
• DBOM = design-build-operate-maintain,
• DOB = design-operate-transfer,
• ROO = rehabilitate-own-operate, and
• ROT = rehabilitate-operate-transfer.
In the Philippines, the ‘‘BOT law’’ embodied in Republic Act 7718 of 1993 recognizes a
range of procurement protocols from BLT, BOO, BOT, BT, and BTO to DOT, along
with any other approved variants. BTO was preferred in the Caltrans project in California
[10] primarily to reduce tort liabilities that may have overburdened private entities.
Meanwhile, it has been observed that maintenance and life cycle costs may be optimized
through DBO. This mechanism has therefore also been used in procuring utilities, for
example, in the 120 mgd Tolt water treatment facility in Seattle. This also enables
continued public ownership of the facility. DBOM has been used in North American
transportation projects, whereas BOO has been employed for power production under the
Public Utility Regulatory Policies Act in the U.S. and also for power projects in India and
Sri Lanka and buildings such as prisons in Australia.
64
4.2.4 Participants in BOT Projects
The implementation process of a BOT project involves many parties, including the
government, promoter, construction contractor, operating firms, financiers and other
parties. The main stakeholders in BOT projects are – Government;
promoter/concessionaire; lenders/financiers and the public. All of them have particular
reasons to be involved in the project.
I. Public Procurer/Government
From his point of view, there is an obvious need to ensure that money has been
spent economically, efficiently, and effectively. At its simplest, the Government
seeks to utilize private sector finance in the provision of public sector
infrastructure and services and thereby achieve value for money. Value for
money, defined as the effective use of public funds on a capital project, can come
from private sector innovation and skills in asset design, construction techniques
and operational practices and also from transferring key risks in design,
construction delays, cost overruns and finance and insurance to private sector
entities for them to manage.
II. Project sponsors/promoters
From the perspective of the project sponsors, PPP (and PFI) is essentially project
financing, characterized by the formation of a highly- geared special purpose
company for the project vehicle and consequently a reliance on direct revenues to
pay for operating costs and cover debt financing while giving the desired return
on risk capital.
III. Lenders / financial Institutions
BOT-type projects usually use a nonrecourse or limited-recourse financing
structure, where lenders look primarily to the revenue stream generated by the
project for repayment and to the assets of the project as collateral for the loan. The
65
lenders have no recourse or only limited recourse to the general funds or assets of
the project sponsors because the concessionaire is a special-purpose vehicle, in
which project assets, project-related contracts, and project cash flows are
segregated to a substantial degree from the sponsoring entities. This special-
purpose vehicle allows the investors to reduce substantially both their financial
investments by using debts and, consequently, their exposure to project liability
[14]. Typically, the providers of finance look to the cash flow of the project as the
source of funds for repayments. Financial security against the project company
usually has minimal assets and because the financing is without recourse to the
sponsor companies. However, performance guarantees are often made available
by the sponsor companies in favour of the lenders. Thus the key principle for
large PPP projects is to achieve a financial structure with us little recourse as
possible to the sponsors whilst at the same time providing sufficient credit support
so that the lenders are satisfied with the credit risks.
Figure 4.1 indicates a typical relationship between principal participants in BOT type
procurement.
Figure 4.1: Typical Relationships between Project Participants In BOT Type
Procurement
66
4.2.5 BOT Project Financing
Project financing involves the raising of funds to finance an economically feasible capital
investment project by issuing securities that are designed to be serviced and redeemed
exclusively out of project cash flow. BOT is fashionable worldwide, especially in
developing countries to attract private capital to assist in developing public infrastructure
[9]. The first BOT project officially implemented in modern times was in the mid 1980s
as part of a move to privatize infrastructure projects and large power plants in Turkey.
The BOT method was used as early as 1834 when the Egyptian government was
financially supported by European capital to build the Suez Canal [10].
Financing has replaced the availability of technology and expertise as the main problem
in infrastructure development around the world. After years of large cost overruns and
numerous change orders on 100% publicly funded projects, many governments started
seeking greater efficiency by centralizing the management and control of complex
projects in the hands of private experts. Public deficits, resistance to taxes and a shift
among development strategist toward private investment incentives have created
opportunities for private companies and public agencies to cooperate in the form of BOT
projects. Ideally, BOT projects put large, well-capitalized private firms at the services of
governments with strong commitment to economic development, in the process of
finding design and construction efficiencies, reducing the drain on the public purse, and
distributing risks and rewards fairly. The success of BOT projects depends on the
motivations of a market economy that benefit all parties i.e. government, end user, and
sponsor [11].
A Public Works Financing database of worldwide projects between 1985 and 2004 shows
that 1,121 PPP infrastructure projects (road, rail, airport, seaport, water and building)
representing $450.9 billion worth of investment, were funded and completed with the
majority of the projects being in Europe, Asia and the Far East as shown in Table 4.1 [3].
Several arrangements of PPPs have been utilized including the common build-operate-
67
transfer (BOT), and its variants such as build-transfer-operate (BTO), design-build-
finance-operate (DBFO), build-own-operate (BOO), design-build-operate-maintain
(DBOM), and several others [6][1]. Also design-build (DB) is frequently considered a
form of PPPs. These arrangements were used in varying degrees among countries
worldwide. Table 4.2 shows the distribution of the PPP arrangements for $322.4 billion
worth of road projects planned since 1985, with the BOT/BTO/concession projects being
the most widely used. Table 4.3 shows the regional distribution of the different PPP
arrangements used in road projects.
Table 4.1. Regional Share of PPP Projects funded and completed
between 1985 and 2004 [3]
Table 4.2. Contractual Arrangements in planned PPP Road
Projects between 1985 and 2004 [3]
68
Table 4.3. Regional Distribution of PPP arrangements for Road
Projects between 1985 and 2004 [3]
Renowned for inadequate infrastructure, the Indian industry has been crying for
improvement. The government has committed $500 billion towards infrastructure
development to be spent over the next five years. The funding for the projects is expected
to come mostly from private partnerships. In cases, where there has been very little
interest from private participants and where the return on investment is believed to be
low, the government has provided for longer concession periods and the provision of
Viability Gap Funding (VGF) where the government foots a considerable proportion of
development cost. At the end of FY’08, 175 contracts covering a total length of 15,803
km have been awarded under the BOT programme with a total cost of over $17 billion.
[112].
In a PPP finance-based approach, tapping private finance is a major objective to get the
needed infrastructure built when insufficient government funds are available. For this
objective, having robust demand is an important financial factor for a project to be
successfully developed [113][71]. Projects are mainly funded through tolls in road
projects.
As shown in Fig. 4.2, the general financial structure of a project under such a scheme
could have the private consortium setting and collecting the user tolls. BOT/
BTO/concessions and franchises in India and worldwide are examples of this finance-
69
based approach. In the PPP service-based approach, the major emphasis is the
optimization of the time and cost efficiencies in “service” delivery through the utilization
of private sector skills, innovations, integration, and collaboration in project design,
construction, financing, operation, marketing, and management.
Figure.4.2. Financial structure with private financing as driver [77]
As shown in Fig. 4.3, the service-based scheme has the government compensating
contractors from government funds (with or without user fees) over the
contract/concession period where private finance is secured by these payments, not by the
robustness of the demand [114]. Further, at the extreme, government may participate in
lending to the private sector, as illustrated in Fig. 4.4. The United Kingdom was piloting
this lending mechanism, called Credit Guarantee Finance, in order to further reduce the
cost of finance; contractors were still required to provide necessary insurance guarantee
for repayments [115][114].
70
Figure 4.3 DBFO regular financial structure [114][77]
Figure 4.4. Credit guarantee finance facility proposed for United Kingdom’s PFI projects
[114][77]
71
4.3 RISKS & RISK MANAGEMENT
Much of the risk of a PPP project comes from the complexity of the arrangement itself in
terms of documentation, financing, taxation, technical details, sub agreements etc
involved in a major infrastructure venture, while the nature of the risk alters over the
duration of the project. For example, the construction phase of the project will give rise to
different risks from those during the operating phase.
At least nine risks face any infrastructure project :
1. Technical risk, due to engineering and design failures.
2. Construction risk, because of faulty construction techniques and cost escalation
and delays in construction.
3. Operating risk, due to higher operating cost and maintenance costs,
4. Revenue risk, e.g. due to traffic shortfall or failure to extract resources, the
volatility of prices and demand for products and services sold.
5. Financial risks arising from inadequate hedging of revenue streams and financing
costs.
6. Force majeure risk, involving war and other calamities and acts of God.
7. Regulatory/ Political risk, due to legal changes and unsupportive government
policies.
8. Environmental risk, because of adverse environmental impacts and hazards.
9. Project default, due to failure of the project from a combination of any of the
above.
Successful project design requires expert analysis of all of them and the design of
contractual arrangements prior to competitive tendering that allocate burdens
appropriately. For this purpose the risk can be broadly categorized as global or elemental.
Global risks are those risk that are normally allocated through the project agreement and
typically include political, legal, commercial, and environmental risks are considered as
72
those associated with the construction, operation, finance and revenue generation
components of the project.
The major risks a project sponsor faces are political, financial, construction, operational,
and market risks. Political risk comes from the potential occurrence of political events
such as war, revolution, expropriation of assets, tax code revisions, currency devaluation,
foreign exchange control problems (convertibility and availability), export restrictions,
and any other government action that could influence the profitability of a project [116].
Political risk may be significant when considering projects in developing countries with
unstable governments [99]. A change in government can affect government policy and
project sponsorship. Financial risk relates to fluctuations in currency exchange rates,
inflation, and cost of capital. Foreign exchange risk often is high in developing countries,
especially those experiencing rapid inflation. The cost of capital risk may not be related
to the country in which the project is to be constructed, but it will be a factor in the
countries where project financing is obtained. Construction risk primarily relates to
delays in completion and cost overruns. Construction delays may be caused by technical
difficulties, by poor management, or by a combination of both. Since BOT investors rely
on income from the completed project to recover their investment, any delay in
completion will delay the generation of revenue. Cost overruns will impact the
profitability of the project by increasing construction and financing costs. Operation risk
relates to the cost of operating the completed facility. Actual operation and maintenance
costs may exceed those anticipated during project planning. Unanticipated operation
costs also will adversely impact the profitability of the project.
4.4 PPP’S IN INDIA
There is now over 10 years experience in India in the development and use of PPPs for
delivering infrastructure services. Policies in favor of attracting private participation have
met with varying degrees of success, but real progress has been made in some sectors,
first in telecommunications, and now in ports and roads, and with individual projects in
73
other sectors. There has been considerable innovation with different structures now being
developed to attract private participation. But at the same time progress has been uneven:
there are islands of progress, with some states having undertaken far more PPPs than
others, and a much heavier use of PPPs in some sectors than others. And while there are a
number of successful projects to the present date, there have also been a number of
poorly conceptualized PPPs brought to the market that stood little chance of reaching
financial closure. In terms of frameworks for PPPs, some states have made more attempts
to develop this, including cross-cutting legislation and the development of cross-sectoral
units that play a role in the identification and preparation of PPPs. Others however have
worked within the bounds of their existing organizational structure.
In the surveyed states and central agencies, there have been at least 86 PPP projects in
our main sectors of focus where a contract has been awarded and projects are underway –
in the sense that they are either operational, have reached construction stage, or at least
construction/implementation is imminent. Over 70% of these are in the roads sector. The
other transport sectors have seen much fewer projects, with 8 ports (4 major and 4 minor
ports), 2 airport and 2 rail projects underway. In the urban infrastructure sector, 11 PPP
projects have been awarded, with 8 solid waste management, 2 water and sanitation and
one bus terminal projects. Outside of the sectors of immediate interest and hence not
included in the main text totals and charts, the survey found 6 PPP projects in e-
governance and 2 in education. Though the coverage may not have been exhaustive for
these last two sectors, it is clear that the potential use of PPPs in e-governance and health
and education sectors remains largely untapped across India as a whole.
74
Figure 4.5. Number of
awarded PPP’s by sector
(total = 86)
Figure 4.6. Project cost
of awarded PPPs by
sector (total =Rs billion)
There is now over 15years experience in India in the development and use of PPPs for
delivering infrastructure services. Table 4.4 gives the state wise figures for the total
number of project implemented. Figure 4.5 and 4.6 gives the sector wise value.
75
Table 4.4: Total number of projects state wise (‘PPP India Database 2008’)
State-Wise Figures
Total Number of Projects based on Value of Contracts
State
Total
Number of
Projects
Based on
100 crore
Between 100
to 250 crore
Between 251
to 500 crore
More than
500 crore
Value of
contacts
Andaman and Nicobar
Islands 1 1 - - - 85
Andhra Pradesh 36 17 5 8 6 10818
Bihar 2 1 - 1 - 422
Chhattisgarh 4 1 2 1 - 853
Delhi 8 5 - 1 2 9813
Gujarat 27 5 2 9 11 17700
Haryana 4 - - 3 1 658
Jharkhand 6 2 3 1 681
Karnataka 28 18 2 4 4 5252.7
Kerala 9 1 2 2 4 12463
Madhya Pradesh 25 14 2 8 1 4856
Maharashtra 25 2 5 3 15 31140.79
Orissa 4 1 - - 3 3730
Pudducherry 3 1 1 1 2346
Punjab 20 14 2 4 - 1339
Rajasthan 37 33 2 2 1 2538.68
Sikkim 24 6 4 7 7 17110.59
Tamil Nadu 26 5 5 14 5 9948
Uttar Pradesh 6 - 1 6 2 2108
West Bengal 5 - 1 3 1 2055.4
Total 300 127 38 78 64 135876
4.5 FINANCING GAPS
The planning commission of India has estimated the financing gaps in infrastructure up to
the year 2010 – 2011 and is given in table 4.5[6]
76
Table 4.5 overall financing gap in infrastructure up to 2010 – 11 (Rs billion)
The investment requirements are enormous and are not likely to be met from the public
sector alone. Attracting private capital in this critical sector is recognized as a key
strategy to meet the resource deficit. Consequently, Public Private Partnership (PPPs) is
being encouraged as the preferred mode for execution and operation of infrastructure
projects. PPPs offer a number of advantages in terms of enhancing the ability to take a
larger shelf of infrastructure investments, introducing specialized expertise and cost
reducing technology as well as bring in efficiencies in operation and maintenance.
The overall response to the call to promote PPP as the preferred mode for the
implementation of infrastructure is encouraging. The progress is, however, slow and has
been limited to a few sectors. Investment through the PPP mode needs to increase
substantially in the states and across sectors.
4.5.1 Experience of other countries.
India is far behind several other countries in private investment as a percentage of GDP.
Table 4.6 shows India’s performance vis a vis other countries in attracting private
investment.
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Table 4.6 India’s Performance vis a vis that of other countries in attracting Private
Investment
Private investment in infrastructure as a percentage of GDP, averaged over period
If investment in infrastructure is to increase to 7-8% of GDP, the amount contributed
from the private sector has to rise from the average of 1% to the range of 2% of GDP or
more. These investments have to rise outside the telecommunication sector which has
attracted most of the private sector investment in India.
The PPPs can help meet the infrastructure gap in India, but are not a panacea. They are
often complex transactions and the risk should be properly allocated to the public and
private sector. The key barriers and constraints that have contributed to project delays and
discouraged private investors are to be recognized and practical ways should be found out
Country Since 1990 Since 2001
Malaysia 3.5% 2.9%
Nigeria 1.2% 2.5%
Czech Republic 2.1% 2.4%
Hungary 2.5% 1.9%
Brazil 1.9% 1.9%
Chile 2.3% 1.8%
Colombia 1.5% 1.4%
Thailand 1.4% 1.4%
Turkey 1.0% 1.1%
India 0.7% 1.0%
Argentina 2.0% 0.7%
Mexico 0.9% 0.7%
Indonesia 1.1% 0.7%
China 0.4% 0.2%
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to mitigate these constraints and policy reforms to facilitate private investment in
infrastructure in India.
4.5.2 Foreign player vs domestic players
Private sector targeted towards financing, designing, implementing, and operating
infrastructure facilities and services that were traditionally provided by the public sector
have been a success story so far with the Government of India leading the process of
promoting Public–Private Partnerships (PPPs) in India.
Domestic players’ participation in PPP projects
Review of successful projects indicates that they have clear boundaries and measurable
performance for the private party, sufficiently large scale of operations, competitive
market for provisioning of the services, significant service delivery, and ability for the
private sector to control factors for which it is responsible.
On aggregate level the domestic players have dominated the PPP projects both in terms
of numbers and investment. Out of a sample of 300 projects 278 projects with investment
of Rs. 134145.57 crore, the road sector has dominated investment by domestic players
with aggregate investment of Rs. 51,398 crore.
The port sector with total domestic player investment of Rs. 23931 crore comes second
and airports at Rs. 19,111 crore. The energy space that includes hydro based power
plants is dominated by domestic private players Rs. 17,802 crore as shown in figure 4.7.
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Figure 4.7 Sector wise Domestic player investment in PPP projects
Leading among big domestic players is Larsen & Toubro with a total investment of, both
in existing and under construction projects, totaling Rs. 3498 crore mostly in road
projects. It is followed with GMR Infrastructure with a total investment of Rs. 1288
crore.
In case of small road projects on BOT basis Sadbhav Engineering Limited with
investment in 11 projects with total investment of 2085.68 crore leads the domestic
scene. The Delhi based DS Constructions Limited is second, with total investment of Rs.
320 crore. Mumbai based MSK Projects (India) Limited is third in terms of investment,
with 15 projects and total Investment of Rs. 238.84 crore. Among these three players
they shared 30 projects out of 300 sample projects as shown in table 4.7
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Table 4.7 Domestic Players in PPP projects
Foreign player Participation in PPP projects
As per available records, foreign multinationals have equity participation only in 22 PPP
projects in the sample of 300, where contracts have already been awarded and projects
are underway. Malaysian companies are leading investors in public private partnership
(PPP) projects in India, involving nearly six major infrastructure ventures. Followed by
the United Kingdom with four projects, Mauritius (three), two each for France, Germany,
United Arab Emirates and the Philippines, and one each for the United States and
Switzerland. Figure 4.8 shows the foreign versus domestic number of in PPP projects in
India.
Foreign equity participation of 27 foreign companies in PPP projects was only at Rs
1,725.85 crore which is meager 1 per cent of the total project investment. Prominent PPP
projects where foreign companies have an equity stake include modernisation of Mumbai
and Delhi international airports, Delhi-Noida toll bridge, Pipavav port, Bangalore
international airports and JNPT container terminal etc. Table 4.8 shows the foreign
versus domestic investment in PPP projects in India along with sector wise break up of
foreign investment in PPP projects.
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Mauritius-based ACSA Global (Airports Company South Africa), for example, has Rs
160 crore equity stake in modernization of Mumbai international airport project. Apollo
Enterprises from UK has equity stakes of Rs 48 crore and Rs 11 crore in Lucknow-
Sitapur road project and Raipur Durg expressway respectively.
Figure 4.8 Foreign versus domestic number of in PPP projects in India
Table 4.8 foreign versus domestic investment in PPP projects in India an sector wise breakup of
foreign investor participation in PPP projects
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4.6 CONCLUSIONS
PPP projects are targeting towards financing, designing, implementing and operating
infrastructure facilities and services that were traditionally provided by the public sector.
The government of India is leading the process of promoting PPP projects in India to
create a success story. However, the overall financing gaps in infrastructure are quite
high as per the estimates of planning commission of India. The investment needs for
infrastructure is enormous. India faces a very large financing gap which needs to be
bridged by domestic as well as foreign and private sector investment.