Risks In Build Operate Transfer (Bot) Infrastructure Project: Fill & Download for Free

WHAT IS PPP [ PUBLIC PRIVATE PARTNERSHIP]An arrangement between the public and private sectors with clear agreement for delivery of public infrastructure and/or public services.The private sector contractors are long term providers of services combining Design, Build, Finance, Operation & Maintenance and To deliver services needed by public sectorFORMS OF PPPBuild Operate & Transfer (BOT):Build-Operate-Transfer (Annuity)Build-Operate-Transfer (Toll)Design, Build, Finance, Operate & Transfer (DBFOT)BENEFITS OF PPP APPROACHSpeedy, Efficient and Cost-effective delivery of ProjectsHigher Performance IncentivesBetter Value of MoneyCompetition and Greater Construction CapacityHigher AccountabilityBetter Risk AllocationGovernment SupportWHAT IS EPC MODEThe EPC contractor (EPCC) agrees to deliver EPC, which is an acronym that stands for engineering, procurement and construction. It is a common form of contracting arrangement within the construction industryUnder an EPC contract, the contractor designs the installation, procures the necessary materials and builds the project, either directly or by subcontracting part of the work. In some cases, the contractor carries the project risk for schedule as well as budget in return for a fixed price, called lump sum or LSTK depending on the agreed scope of work.NEED FOR EPCGuaranteed PriceGuaranteed Timeline for CompletionSpecified Level of PerformanceSingle Point of ResponsibilityPost-Commissioning ServicesFlexibility and CertaintyHigher Supervision and ControlPRINCIPAL ELEMENTS OF EPC STRUCTURECost, Time & QualitySingle Point of ResponsibilityFixed Completion DatePerformance SpecificationsMonetary Liabilities for Delay/DefaultsCap on LiabilityPerformance GuaranteeDefect LiabilityWHY GOVERNMENT ADOPTED EPC MODEL INSTEAD OF PPP MODEL FOR NATIONAL HIGHWAYSCurrent growth scenario cannot support big highway projects typically developed in the PPP mode.There are no private equity funds which are willing to come in at this moment to take up these projectsThirdly, there are no developments regarding many provisions which NHAI has proposed to improve financing conditions. Hence, NHAI now believes that projects can only be developed through the engineering, procurement and construction (EPC) mode.ADVANTAGES OF EPC MODE OVER PPP MODE IN CONSTRUCTING BIG HIGHWAY PROJECTSTogether with the Schedules, the proposed framework of the Model EPC Agreement incorporates international best practices and embodies an enabling contractual framework for construction of highways in an efficient, economical and competitive environment. It will minimise, if not eliminate, the time and cost over-runs characteristic of the extant item rate contracts. Further, this will enable a faster roll-out of projects with least costs and greater efficiency while minimizing the potential for excessive discretion12TH FIVE YEAR PLANThe Twelfth Plan envisages investment of USD 1 trillion in infrastructure for a sustained and inclusive growth of the economy. To meet these expanding demands, large investments will be needed in roads, railways, ports and civil aviation sectors for augmentation of capacities and modernization. The public sector is expected to continue to play an important role in building transport infrastructureWHY RECENTLY IN NEWSThe Ministry of Road Transport and Highways has decided to adopt the Engineering Procurement and Construction (EPC) mode for National Highways which are not viable on PPP basis. The 12th Five Year Plan envisages construction of 20,000 km of 2-lane National Highways projects through EPC mode.The Government has adopted the EPC mode of construction to ensure implementation of projects to specified Standards with a fair degree of certainty relating to cost and time and with a view to enabling a transparent, fair and competitive roll out of National Highway projects.The EPC mode is different from the conventional Item Rate Contracts. Experience has shown that such contracts are prone to excessive time and cost over runs.The EPC mode assigns the responsibility for investigation, design and construction to Contractors for a lump sum price awarded through competitive bidding, wherein provision for index based price variation is made.The new initiative has been adopted to resolve the hindrances in the construction of National Highways on a fast track and to ensure seamless construction of National Highways in the country.The Ministry of Road Transport and Highways is entrusted with the responsibility for construction and maintenance of National Highways (NHs) in the country. All roads other than the National Highways in the States fall within the jurisdiction of respective State Governments. In order to assist the State Governments in the development of State roads, the Ministry also provides financial assistance out of the Central Road Fund (CRF) and Inter-State Connectivity and Economic Importance (ISC & EI) schemes.

A2A Thank YouNegative perceptions are always welcome in Quora, in particular when these are addressed to hurt the friendship and patriotism of the people. China and Pakistan have friendly relationship and CPEC consists of many projects mutually beneficial to both countries and their people.Some raised about the cost of finance for the CPEC projects and concluded that Pakistan will be in trouble. Some even consider that the Chinese SOEs participating in the projects are similar to the East India Company. I have no intention to be offensive but such views and comments shown very inadequate knowledge about modern project finance.Let’s take an imaginary highway project as an example to explain what a BOT model is in details. In general, this can apply to any infrastructure project under CPEC. (All figures are for illustration purposes only for the concepts)Project Details:Project : A highway in Pakistan (the Asset)Project model : Build-Operate-Transfer (BOT)Operating Period : 20 years (say)Construtor : China SOEsOperator : Project Co. (i.e. China SOEs)Asset Legal title : PakistanOperating Rights : China SOEsFinance : Bank syndicate (China, Pakistan, approved foreign banks)Finance Details:Finance Amount : say, RMB 200 millions (construction costs + others)Borrower : Project Co. (i.e. China SOEs subsidiaries)Finance Period : say, 20 years (i.e. operating period)Interest : say, 30% (high enough to scare you ??? )Repayment : Future revenues of Project co.Collateral : Future net cash flowsProject Budget:Revenue : say, RMB 1000 million (Vehicle toll fees + Others, 20 years)NPV of Revenue : RMB 350 million (20 years, after interest of 30% ???)PV Construction Cost : RMB 200 million (i.e. finance amount)NPV Estimated Profit : RMB 150 million.So you see how BOT works now?It is like you (Pakistan) who is the landlord, lease me (China) a piece of land where I will build a shop (called CPEC) selling lemonade (Toll fees) to people in the street. I lease the land for 5 years (operating period ) and can profit from selling lemonade and the profit is large enough to pay for the shop building cost (Construction cost). The bank lend me the money to build the shop and I have to repay the bank with interest by making profits from my lemonade business.Who takes the risk ? Me (China, Operator), not you (Pakistan, Landlord).Who takes the profit ? Me, perhaps I can share with you some profits too.Who owns the land ? You. I cannot take it home.Who owns the shop ? Me, for 5 years, then yours forever.Who pays the bank ? Me, from my lemonade proceeds.Who builds the shop ? Me, of course.Who runs the shop ? Me, for 5 years then you forever.Why do I do it ? I have friends who love lemonade. (Clear business objectives)Now, let’s address you original question with the above background information.Why are there Chinese working on the infrastructure projects ?They are the experts who know how to build such projects. They have their teams working together for 30 years and the team can ensure everything goes right. It is not Pakistan to take the risk of failure. They have better CVs, in short.Why the SOEs do not employ Pakistani and experts from other countries?You do not have the expertise and experience. Is there any German engineer who have built the highway networks in China ? Can the highway networks in Germany compare to the scale of the networks in China? The cost of Chinese labour is much higher than the local Pakistani. Why build in such higher costs ? Quality control is the answer. They had experienced with low quality workers in China who had turned the infrastructures into bean curbs. They cannot afford to risk with local workers without experience.Can Pakistani participate in CPEC ?Once the key fundamentals are completed. Of course, the local Pakistani can participate. The CPEC is anticipated by the Pakistan government to create 2.3 million jobs during 2015 to 2030.All kinds of secondary and tertiary industries or businesses will be established in Pakistan in relation to the infrastructure projects. The local Pakistani do not have to participate directly in the building. Why don’t you sell lemonade to the Chinese expats there, for example?Many of the jobs will be taken up by Pakistani, of course. Do not expect me really selling lemonades to the population there. That will be your job and unless you let the Indian selling BBQ there, the BBQ business will also be your business.Are the SOEs similar to East India Company of the British in India ?The SOEs are basically infrastructure companies, not trading companies and they do not employ or deploy any military personnel. The laws and orders are enforced by the Pakistan government, not by the SOEs.Once the CPEC is completed.Many countries will utilise the facilities for international trades. More foreign investments from any country are envisaged and Pakistan will have more responsibilities to safeguard their interests. Join the police, if you are looking for a CPEC related job.Many still have the visions of a zero-sum world and cannot see synergies. They still consider the prosperity of China and Pakistan will deteriorate the economies of the US and India and many other countries. They still consider keeping others low is the only way for advancement. That is not patriotism. That is just ignorance.

Projects along the CPEC are neither equity nor loan financing. They are not free gifts either. They are BOTs.Like many of the very successful infrastructures developed inside China (highways, ports, airports etc), many infrastructure projects along the CPEC are operated under BOT financing models. Under the BOT models, China (the government or state-owned enterprises) will build the infrastructure projects (B) , operate the projects for certain years and recover the investments with toll fees and other revenues (O) and finally, transfer the projects back to the Pakistan government(T).Build–operate–transfer - WikipediaThe CPEC projects are physically located in Pakistan. China and any country including Pakistan cannot physically relocate the infrastructures to anywhere on earth or any planet in the universe. These are fixed asset investments by China in Pakistan territories. The projects are financed by China. In return, China has the rights to operate the projects and generate revenues from the projects. Pakistan is the owner and has titles to these projects and China must transfer the projects back to Pakistan for free in the future.The projects are on Pakistan territory. They are owned by Pakistan. The projects are built by China and Pakistan lease them to China with the building costs as the rent consideration. China only has the rights to use and generate revenues from the fixed assets so invested for certain years.The CPEC projects benefit both China and Pakistan. China has more than 80% of her energy imports from the Middle East and Africa through the Malacca Strait and the South China Seas. The CPEC projects ensure China to have another alternative logistic route for her energy imports in addition to the Sino-Miyamar pipeline. Even if Pakistan contribute nothing to the future project revenues, China herself could generate enough revenues from her energy imports to recover the building costs.Although the China energy logistic route is an important economic and political factor, CPEC can benefit both Pakistan and China by creating many jobs, trades and all kind of industries in Pakistan. Pakistan is located in the heart of the OBOR and CPEC can be considered as a OBOR extension. Pakistan will continue to benefit economically from CPEC for years. CPEC will fundamentally change the economy of Pakistan and ensure continuous GDP growths in Pakistan for years to come.There are suspicious views from the West on CPEC and speculate the political motives of both China and Pakistan. They consider China moves to marginalised US influences in Pakistan.More than USD 7.5 billion investments made by US in Pakistan were complete failures. The US investments were mainly for anti-terrorism. US made Pakistan at risk on anti-terrorism while nothing brought benefits to Pakistan economically. Whenever there were adjustments on US diplomatic policies, Pakistan was always the victims. In contrast, both Pakistan and China have never changed their policies on each other no matter what adjustments were made on their diplomatic policies.The US-Pakistan and Sino-Pakistan relationships are fundamentally different and are not comparable.