"BOO/BOOT PROJECTS AND NEW

DmENSIONjPF
PROJECT AimfflSAL WITH
SPECIAL^pPliASIS ON
FEASfM@Fr STUDIES AND
CONTRACT DOCUMENTS"
Dr. S a r a t h Dasanayake
Senior Lecturer, University of Colombo

T
he main objective of this private investment to undertake the in­ Some believe that BOO/BOOT
paper is to show the latest frastructure development that has his­ concept has its historical roots in the
developments of project ap­ torically been preserved for the public concession systems of the nineteenth
praisal methodology with respect to sector. Under the BOO/BOOT and early twentieth centuries. But
the emergence of BOO/BOOT project, a private company is given con­ others believe that BOO/BOOT
projects in developing part of the cession to build and operate a facility projects differ so significandy from
world. The final outcome of this that would normally be built and op­ the old concession approach that
paper is to set an agenda to discuss erated by the government. This private their roots are much more recent. Un­
issues related to the preparation of company is responsible for financing der the old concession method, pri­
consistent feasibility studies and con­ and designing the project In most cases vate sector has more autonomy but
tract documents for the successful at the end of the concession period, host government does not have more
operation of BOO/BOOT projects. the private company returns ownership participation and more control on
First, this paper presents a brief defi­ of the project to the host government facility. But under the BOO/BOOT
nitional preamble to the B O O / However, this concession period is de­ projects, host government decides on
BOOT concept Second, it deals with termined primarily by the length of the needforthe project and its scope,
advantages and challenges of BOO/ time needed for the facility's revenue design, performance and mainte­
BOOT approach. Third, this paper stream to pay off the company's debt nance and select the private sponsors
explains the main characteristics of and provide a reasonable rate of return by means of an appropriate bidding
BOO/BOOT projects. Fourth, this for its effort and risk. Generally, BOT process.
paper presents the scope of works stands for build, operate and transfer
and terms of references for the feasi­ or build, own and transfer (the terms Advantages a n d Challenges o f
bility studies on BOO/BOOT mega are used interchangeably).The different the B O O / B O O T A p p r o a c h
projects. The fifth part of this paper forms of BOT variants include BOO
discusses issues related to the various (build, own and operate, ie without any The advantages and challenges of
contract documents and agrements obligation to transfer); BOR (build, o p BOO/BOOT approach can be
relevant to BOO/BOOT projects. erate and renewal of concession): summarised as follows:
Sixth, this paper illustrates important BOOT (build, own operate and trans­ 1 The use of private sector financ­
factors for the success of the BOO/ fer); BUT or BRT (build, rent or lease ing to provide new sources of
BOOT projects in develpoing parts and transfer); BT (build and transfer capital, which reduces public bor­
of the world. Finally, concluding immediately), BTO (build, transfer and rowing and direct spending and
observations will be fbllowed.In the operate); possibly subject to installment which may improve the host
annexure, the standard procedure payments of the purchase price); government's credit rating.
adopted by Sri Lankaforthe BOO/ OBFO (design, build, financeand op­
2 The ability to accelerate the de­
BOOT projects will be presented. erate); and DCMF (design, construct,
velopment of projects that would
manage and finance); MOT (modern­
otherwise have to wait for, and
ize, own/operate and transfer); ROO
T h e Definition of a B O O / B O O T compete for, scarce sovereign re­
(rehabilitate, own and operate) and
Project sources.
ROT (rehabilitate, own and transfer).
3 The use of private sector capital,
Disagreement can be found regarding
BOO/BOOT is the terminology initiative and know-how to reduce
for a model or structure that uses the origin of BOO/BOOT concept.
project construction costs,

Economic Review August/Octoberl999 25

 shorten schedules and improve op­ may spend considerable amounts for The Project Company is the autho­
erating efficiency. feasibility studies, professional fees to rized person to carryout the project
4 The allocation to the private sec­ advisors, consultants and cost of their Its rights and obligations are defined
tor of projectriskand burden that own management time. Therefore, the in the project agreement. Before the
would otherwise have to be borne host government should do everything establishment of project company, a
by the public sector, The private to ensure an orderly, fair and efficient consortium is formed to review the
sector is responsible for the op­ process, from bid solicitation, selection, request for proposals, prepare oppor­
eration, maintenance and output contracting and permitting, through to tunity, pre-feasibility and feasibility
of the project for an extended project implementation. The follow­ studies, and to submit a bid. The se­
period. ing diagram shows the structure of a lected sponsors will form a limited
5 The involvement of private spon­ BOO/BOOT project. liability or a joint venture company
sors and experienced commercial with equity contribution from each
lenders, which ensures an in-depth Structure of a BOO/BOOT sponsor. The project company is the
review and is an additional sign Project vehicle for borrowing the funds to
of project feasibility. finance the project. It is also an en­
6 Technology transfer, the training of The three major parties involved in tity that enters into necessary con­
BOO/BOOT project are the following:
local personnel and the development tractual arrangements with the host
of national capital market. (1) Host government government and other parties in­
7 In contrast to full privatization, (2) Project Company, and volved in the development of a
government retention of strategic (3) Sponsors- BOO/BOOT project. A project
control over the project, which is company may include other equity
transferred to the public at the end As shown in the diagram, the host gov­ investors such as investment or mer­
of the contract period. ernment and project company are chant banks, which act as financial
8 The opportunity to establish a linked through the project agreement advisors to the project Generally, the
private benchmark against which Project Company and sponsors are conflicts of interest of different par­
the efficiency of similar public sec­ linked through the shareholders' agree­
ties involved in BOO/BOOT project
tor projects can be measured and ment. Host government, Project Com­
can be solved through the board of
the associated opportunities to en­ pany and sponsors obtain advisory ser­
directors the Project Company.
hance public management of in­ vices from the outside technical, finan­
frastructure facilities. cial and legal advisors. On the one hand,
A sponsor consortium includes par­
Project Company directly deals with
ties that are interested in entering into
The main challenges of B O O / contractors, suppliers and operators
one or more of the contracts, such
BOOT approach are the following: through construction contract, supply
as a large international engineering
1 BOO/BOOT projects require contract and operation and mainte­
nance contract and on the other hand, and construction firms, one or more
time to develop
it direcdy deals with the government large equipment suppliers, and a firm
2 The degree of host government
agencies, lenders and insurers through with expertise in operating and main­
involvement and support
special agreements, loan agreements and taining the particular type of project.
3 Financial and legal complexity of
insurance policies. These parties are willing to contrib­
BOO/BOOT projects
ute equity to the project in the form
4 Requirement of suitable political,
economic and legal environment. The required government support for of cash, manpower, time and effort
The other challenges encountered by the BOO/BOOT projects depends on and or to give back of a portion of
B O O / B O O T approach are ex­ complexity, size and type of the project the fees they would normally earn on
plained in section six of this paper and the host country's economic and their contracts in order to have the
regulatory conditions. In most BOO/ opportunity to be the principal con­
under the heading of factors affect­
BOOT projects, income depends on tractor, supplier or operator of the
ing the success of BOO/BOOT
purchase agreements or market based project.
projects in developing countries.
revenues. In some cases, market based
revenue is very uncertain and therefore,
Main Characteristics of BOO/
government may help them by enter­
BOOT Projects
ing into purchase agreements. Gener­
The process of developing a BOO/ ally, the host government may provide
BOOT project is complicated, time- legislative, regulatory, administrative and
consuming, and very expensive for the financial support and relaxation of
sponsors. For mega projects, several labour laws, customs and currency con­
years can elapse before signature of vertibility, tax concessions, profit repa­
the project agreement or closing of triation facilities and foreign investment
the financing. In that time, sponsors protection.
26 Economic Review August/October 1999
 The phases of a B O O / B O O T and benefits should be in the for­ - Review of the overall develop
project can be traced as follows: mat of cash flow tables) of the fa­ ment plan of the project
1 Identification Stage (project iden­ cility development. - Review of the overall imple
tification, mode offinancing,pre­ 4 Engineering design/s and the techni­ mentation time schedule.
liminary feasibility study, assign­ cal aspects of the facility development - Review of appropriate sources
ing project manager and team, and 5 Manpower requirements of the of inputs to be used in the
host government decision). project implementation, operation project, procurement aspects
2 Government preparation for Ten­ and maintenance. and delivery systems.
dering (procurement procedure, 6 Practical aspects of implementation (c) Preliminary commercial justifica­
pre-qualification, project agree­ of the project (ex: phase-out devel­ tion of the project (possibility of
ment, tender documents and bid opment). off-take agreement or market
evaluation criteria). 7 Financial and commercial justification. based revenue).
3 Sponsor's preparation to Bid 8 Economic and social justification. (d) Establishment of conceptual site
(form Consortium/possibly 9 Environmental and ecological justi­ layout for the project
Project Company, feasibility study, fication (e) Preliminary site investigation and
identification of potential partner­ 10 Procedure for risk identification preparation of the tender speci­
ship and submit bid package). and management. fication for physical investigation
4 Selection Stage (evaluation of 11 Proposed new organizational setup at site and preliminary environ­
bids, clarifications/adjustments for project implementation and mental study (if any).
and awarding of the project). supervision. (f) Physical investigation of the site/
5 Development Stage (form project 12 Procedure for monitoring and s. This is necessary for feasibility
Company, equity contributions, evaluation. grade design and detailed cost es­
loan agreements, financial closing, 13 Tuning of the transfer (including the timates for the site specific civil
possible extension of the concession construction works such as me­
construction contract, supply
period) of project ownership to the teorological investigations on land
contract, off-take contract, insur­
host government or designee at the and sea, topographic investiga­
ance contract, operation and
end of the concession period. tions, hydrographic investigations,
maintenance agreement).
geo-technical investigations,
6 Project Implementation Stage (con­ Scope of the BOO/BOOT Project oceanographic investigations, de­
struction of facility and installationFeasibility Study livery system, water supply inves­
of equipment, testing, acceptance, tigations, products/raw materials
technology transfer and capability Feasibility study may be carried out in transport etc.
building and evaluation). the following four stages: (g) Investigations of other develop­
7 Operation Stage (operation and 1 Preliminary Study Stage ment activities taking place, exist­
maintenance during concession 2 Technical and Engineering Study ing infrastructure, and other con­
period, inspection, training, tech­ Stage ditions relevant to the develop­
nology transfer and capability 3 Commercial and Financial Study ment of the project comprising;
buildings). Stage - Socio-economic and environ­
8 Project Transfer Stage (transfer 4 Economic, Social and Environmen­ mental consequences of the
procedure). tal Study Stage project and recommendation
of protective measures to be
Preparation of Terms of References The studies to be performed will include taken, if necessary.
and Scope of Works for the BOO/ the following items at each stage with the - Construction cost of site ac­
BOOT Investors scope of their services. The details of their cess by land and sea, and land/
The Main Contents of BOO/ stages are given below. building acquisition etc.
BOOT Projects Feasibility Study - Land and marine transporta­
Preliminary Study Stage tion for delivery/distribution
The respective Authority/ies of the of main products and by prod­
This study stage mainly includes:
host government/country should re­ ucts, equipment and construc­
(a) Data collection and confirmation
quest from the project or facility de­ of Line Ministry (Ministry to which tion materials.
velopment Consortium/s or Com­ project belongs) requirements. Col­ - Availability and quality of con­
pany to incorporate the following lection of existing data, reports and struction materials and other
main aspects in their feasibility study: other relevant information on the inputs including sources of
1 Main objectives and the final out­ project in the host country. This in­ energy and their procurement.
come of the project or facility de­ cludes collection of data and in­
velopment, formation on aspects such as topo­ Technical and Engineering
2 Clear justification/contribution graphic, geological, hydrological, Study Stage
of the proposed project develop­ meteorological, oceanographic, The objective of this study stage is
ment on national and regional marketing, socio-economic. to ensure that BOO/BOOT
economy of the host country. (b) Review and analysis of the existing project is soundly designed, uses the
3 Clear and more precise estimation data and reports on the selected appropriate technology and meets in-
of costs and benefits (direct costs project.
Economic Review August/October 1999 27
ternational design and engineering should concentrate on the following as­ technical know how effects, for­
standards. This study stage mainly pects: ward and backward effects and
concentrates on the following as­ (a) Identification and location of po­ so on (provisional).
pects: tential customers for the main out­
(a)Technical design and engineering put and for the by products. Environmental and Ecological
for all components of the project (b) Demand analysis of different Study Stage
through developing optimized de­ project output/products in the
signs on systems and equipment/ host country and the region. The objective of this study is to as­
facilities layouts, etc., and provi­ Correlation analysis of different certain and to report the impact of
sions of key drawings and bill of projects products with socio-eco­ project design/s, construction, and
materials, those with each justifi­ nomic indicators operation on natural and man-made
cation of the technical option se­ Time series forecasting for differ­ environment to get environmental
lected as being necessary for fea­ ent project outputs clearance from the respective Envi­
sibility study including realiza­ - Econometric modeling (This ap­ ronmental Authority/ties of the host
tion of; proach should concern the main country. This study stage mainly con­
plant type and size includ­ variables such as anticipated trend cerns:
ing unit sizes in regional and world market). (a) Investigation of human settle­
inputs type, procurement (c) Possibility of introducing new ments, roads, forests, animal life,
aspects and delivery system products into the market and off­ land and sea utilization, air, wa­
cooling water and feed wa­ take agreement ter and soil pollution and vari­
ter systems (if any) (d) The actual and expected regulatory ous rights to be compensated in
yard arrangements framework for the operation of the the study areas.
storage facilities (crude/ project (b) Existing environment-physical
products) (e) Investment profitability analysis and biological systems.
fire brigades and other pre (SRR, PBP, NPV, IRR, C/O and (c) Existing environment-human,
cautionary aspects C/B ratios). economic, social and cultural as­
security of plant and assets (f) Liquidity and capital structure pects.
analysis (This should include the (d) Project design, construction and
(b) Detailed project cost estimates methods of financing, types of operational impacts and mitiga­
comprising construction, opera­ capital, debt/equity situation, fi­ tion measures.
tion and maintenance. These es­ nancial structuring techniques and
timates should be in cash flow so on) General Agreements and Con­
tables in foreign and local cur­ tracts relevant to BOO/BOOT
rencies. Economic and Social Study Stage Projects
(c) Construction planning and time
schedule for implementation. The main purpose of this study stage The respective Authorities in the
(d) Manpower requirements is to assess and to report BOO/BOOT host country should cooperatively
(skilled/semi-skilled and un­ projects potential contribution to the work with the different parties in­
skilled) in phases of project host governments development objec­ volved in the development of BOO/
implementation, operation and tives for the regional and national BOOT project in preparation of the
maintenance. economy and, accordingly, the project's following contract documents and
(e) Reliability of the construction priority in the regions infrastructure de­
agreements to provide an appropri­
schedule (phase-out develop­ velopment program. Economic and so­
ate and stable legal framework. These
ment). cial study stage should include:
agreements and contract documents
(f) Project capacity analysis (a) Adjustments for the monetary costs
may be improved transparency and
(Planned and operating capacity and revenues of project to reflect
accountability in the project imple­
output in major products areas), economic and social costs and ben­
efits (shadow price analysis). For mentation, operation, maintenance
storage facilities and distribution
this part, UNIDO, "COMFAR HI and transfer activities. Furthermore,
analysis (if any)
Expert" package will be recom­ they give certainity about the comple­
Commercial and Financial Study mended. tion of the project.
Stage (b) Distribution of costs and benefits 1 Preliminary consortium or joint
of project between different sectors venture agreement (sharing of cost
The main objective of this study and income groups. of feasibility study, outside advi­
stage is to ensure that BOO/BOOT (c) Sensitivity analysis on key project sors and other preliminary devel­
project is commercially and finan­ variables (prices, interest rates, in­ opments of the respective project).
cially sound uses the appropriate puts, construction period, market
2 Project company agreement (This
commercial and financial techniques forecast and so on).
and meets international financial mainly associates with the host
(d) Additional economic consider­
standards to "bankable" the project country's company laws, tax laws
ations such as employment ef­
(if necessary). This study stage fects, net foreign exchange effects, and foreign investment laws).

28 Economic Review August/October 1999

 3 Consultant agreement (This may 12 Transfer contract (conditions for 15 The BOO/BOOT contractual
be applicable to external techni­ and timing of the transfer or, possi­ framework must be coordinated
cal expertise, financial/economic bly, the renewal of the concession, and must reflect basic econom­
expertise and business legal exper­ scope of the transfer, maintenance ics of the project.
tise activities. It mainly includes and monitoring schedule prior to the 16 The public and private sectors
scope of work, qualifications/ex- transfer date, supply of inputs/spare need to cooperate on a win-win
perience, type of consultancy, parts after the transfer, marketing/ basis.
pricing/payment and professional sale procedure for the project out­
liability). puts after the transfer, technology Concluding Remarks
4 Concession agreement (This docu­ transfer, training of local personnel
needed for the further operation of The above discussion has shown that
ment mainly includes the rights and
the project, environmental compli­ under the BOO/BOOT project
obligations of the host government
ance, definition and allocation of structure, project appraisal has wid­
and the project company).
transfer cost, warranties, passing the ened its frontiers from traditional
5 Off-take agreement (Terms under boundary to a new dimension. Es­
which the BOO/BOOT project risks, cancellation of contracts and
assignments, removal of objects pecially, BOO/BOOT projects in­
company is expected to earn its rev­ volve more detailed feasibility study
enues to operate at minimum capac­ owned by the project company, re­
lease of maintenance bonds and and furthermore, they require many
ity. This is very important to lend­ contracts and agreements with the
ers, equity investors, host government transfer procedure).
major parties involved in the project
and Project Company). development. After restructuring of
6 Construction agreement (This Facts Affecting the Successful Op­ economic activities and rationaliza­
should include contracting op­ eration of BOO/BOOT Projects in tion of public expenditure under the
tions, lender and host government Developing Countries IMF/IBRD structural adjustment
requirements, timing, quality, per­
The factors that are important for the policies in many developing coun­
formance, pricing and payments, tries, the private sector has been given
success of BOO/BOOT projects in the
subcontracting and so on). a leading place in the economy.
developing part of the world, can be
7 Equipment supply agreement (For Therefore, most of the governments
summarized as follows:
heavy equipment required seaport, have begun to promote infrastruc­
1 The project must be financially
airport and power generation ture projects with the private sector
sound, feasible and affordable.
projects should prepare these con­ participation that would normally be
2 The country risk must be man­
tracts). built and operated by the govern­
ageable.
8 Operation and maintenance con­ ment. For the successful operation
3 There must be strong government
tract (scope of the operator's ser­ of the BOO/BOOT projects and to
support.
vices, project company's respon­ obtain more benefits to the host
4 The project must rank high on the
sibilities, warranties and guaran­ country, the policy makers of the de­
host government's list of infra­
tees, compensation, access to veloping part of the world should
structure projects
books and records, insurance, li­ understand each and every aspect of
5 The legal frame must be stable in
ability and indemnification, de­ BOO/BOOT project development
the host country.
faults and remedies, term and ter­ explained above.
6 The administrative framework
mination, dispute resolution and
must be efficient
choice of the law).
7 The bidding procedure must be
Standard Procedure for the
9 Insurance contract (This contract fair and transparent
BOO/BOOT Projects in Sri
mainly deals with general or coun­ Lanka
8 BOO/BOOT transactions
try risks and more specific project should be structured so as to be Apart from projects financed under
risks. Insurance professionals must concludable within a reasonable the Consolidated Fund, infrastruc­
be consulted to find-out the best time and at a reasonable cost.
option from the recently devel­ ture projects will be identified to at­
9 The sponsors must be experienced tract private investment. The Bureau
oped international BOO/BOOT and reliable.
insurance schemes). of Infrastructure Investment (BIT)
10 The sponsors must have sufficient of the Board of Investment (BOI)
IOFinancing contract (procedure for financial strength.
fund mobilization, types and of Sri Lanka will function as the pro-
11 The construction contractor must
sources of capital and financial moting, facilitating and co­
have sufficient experience and re­
risk bearing arrangement). ordinating agency for servicing the
sources.
II Security contract (matters related Ministries in this regard under the
12 The project risks must be allo­
to esctow agents/accounts, ap­ overall supervision of the Minis­
cated rationally among the parties.
pointment of trustee, inter-credi­ 13 Thefinancialstructure must pro­ try of Finance and Planning. How­
tor agreement, rights of take over vide the lenders adequate security ever, thefinalresponsibility and au­
in failures, force majeure and so 14 The currency, foreign exchange thority will lie with the relevant
on). and inflation issues must be solved. contd on page 32
Economic Review August/Octoberl999 29
 contd. from page 29
Line Ministry and the Cabinet of
Ministers. The standard procedure
specified in Sri Lanka for the BOO/
BOOT projects can be summarised
as follows:
1 Project Identification (by Ministry of Fi­
nance and Planning/Line Ministry).
2 Appointment of Project Committee (by
Secretary to the Treasury).
3 Feasibility Amiability Study Report (Line
Ministry/Project (Committee).
4 Approval of Priority Project (by Ministry
or Finance and Planning/Cabinet).
5 Appointment of Cabinet Appointed Ne­
gotiating Committee (by Cabinet),
6 Preparation of Bid/Tender Documents
(by Project Committee and Line Minis­
try).
7 Preparation of Documents laying down
criteria of assessment of the technical/fi­
nancial capability of the proponents,
Terms/conditions and eligibilities (by
Project Committee and Line Ministry)
8 Examination and Recommendation to
Cabinet Appointed Negotiating Commit­
tee on assessment criteria prepared by
Project Committee (Project Committee).
9 Approval of assessment criteria terms/
conditions and eligibilities (Cabinet Ap­
pointed Negotiating Committee).
10 Request for Proposal to be issued to all
those interested (by Line Ministry)
11 Examination and Recommendation to
Cabinet Appointed Negotiating Commit­
tee the acceptability of the proponents se­
lected (by Line Ministry)
12 Approval of Sponsors whose bids are sub­
stantially responsive (Cabinet Appointed
Negotiating Committee/Cabinet).
13 Examination/recommendation on docu­
ments including methods of transfer, rev­
enue sharing adjustment of stalls, fees,
rates, rent, charges and etc., (by Project
Committee).
14 Final Project Committee Report (by
Project Committee)
15 Negotiation with the responsive bidders
(by Cabinet Appointed Negotiating Com­
mittee).
16 Recommendation to Cabinet Appointed
Negotiating Committee recommendation
on sponsor (by Cabinet).
17 Approval of Cabinet Appointed Negoti­
ating Committee recommendation of
sponsor (by Cabinet).
18 Issue of Letter of Intents (LOl) to spon­
sor (by Line Ministry).
19 Final Price Negotiation (by Cabinet Ap­
pointed Negotiating Committee)
20 Final Proposals to be submitted to the
Cabinet (by Cabinet Appointed Negoti­
ating Committee and Line Ministry).
21 Signing of Agreement after Cabinet ap­
proval of final proposal (Line Ministry).
22 Notice to proceed (by Line Ministry)
23 Evaluation of progress of project (by
Project Committee and Line Ministry).
24 Termination and release of performance
bonds (by Line Ministry and Project Com­
mittee).