Infrastructure Development & Management (CEL 866)

Indian Institute of Technology, Delhi A PRESENTATION ON RISK ANALYSIS OF A HIGHWAY BOT PROJECT IN INDIA
Presented by : 1. Sandip Bhattacharjee 2. Rongali Uma Devi

Presentation Content
Introduction Literature Review Risk factors in Infrastructure Sector Risks in Indian BOT Context Models for Measurement of risk Some International Case Study Risk Analysis of an Indian BOT Project Possible Mitigation Measures Critical Success Factors in BOT Projects Conclusions References

Introduction
What is Public Private Partnership -Build-Operate-Transfer (BOT) ? Contractual arrangement between the Government and the Private Sector whereby the latter finances, constructs and in some cases operates and maintains a facility or Project. Private Sector is allowed to Charge User fees to Recover its investments. Both Government and Private Sector Share Project Risks. What makes BOT a Viable Alternative ? Able to Raise finance for the Project Attractive to Sponsors Each risk should be borne by the party who can cover it more efficiently.

Introduction
Role of BOT in Infrastructure Sector :
Reducing financial burden on the Government. Ensuring Project Completion to Time & Budget. Enhances Service Quality and Efficiency. Delivering better value of money proposition. Transparency and impartiality in the process of inviting Private Participation. Sharing the Risks between Government and Contractors.

Introduction
What is Risk ? Risk involve certain degree of uncertainties which may affect : Turn over Cash Flow Market Share What is Risk Analysis ? The Process which involve the following: Identifying the Risk Assessing the Risk Reducing Risks to an acceptable level Defines and controls threats and vulnerabilities Implements risk reduction measures Analysis in three Parts : Risk assessment: Determine what the risks are ? Risk management: Evaluating alternatives for mitigating the risk. Risk communication: Presenting this material in an understandable way to decision makers and/or the public

Literature Review
S.N Case Study Evaluation/Findings i) The Highway Agency paid more than the Construction Cost Financial Analysis of DBFO in 3 years in the form of Shadow Tolls since the Project was in UK roads. intended to be privately financed but publicly funded. ii) DFBO turned out to be pretty expensive. iii) Shift to Conventional Procurement with incentives for the Construction company to build on time & budget. Major Uncertainties in Toll Road Financial Risk Analysis of The Major uncertainties were the Construction Cost, Project Finance in Construction Schedule, Initial and future tolls, Traffic volume Indonesian Toll Roads. & Macro-economic conditions. i) Political Risks @termination of concession by government, Problems Facing Parties increase in taxes, changes in Law (specific) and changes in Involved in Build, Operate, law (general). and ii) Construction Risks Cost overrun, land expropriation, Transport Projects in increases in financing costs, variations, and time and quality Egypt. risks. iii) Operating Risks termination by project company, government department default, and project company default iv) Market and Revenue Risks ~monopoly, insufficient tariff, and insufficient income.

1.

2.

3.

Literature Review
S.N Case Study Evaluation/Findings

4.

5.

Hierarchical i) The paper has identified and prioritized 17 critical risks Structuring of PPP which occur during the development phase of highway Risks Using projects executed in India under PPP. Interpretative Structural Modeling i) The paper identifies the critical risks in order of Risk analysis of importance as delay in approval, change in law, cost Infrastructure overrun, dispatch constraint, land acquisition and Projects compensation, enforceability of contracts, construction schedule, financial closing, tariff adjustment, and environmental risk. ii) The Paper also indicates the risk management framework for BOT infrastructure project. Risk Assessment of i) The Study discusses a Case Study on a BOT road BOT Road Projects Project and indicates the various risks faced by the Contractor in the Project. ii) The Study also indicates the Possible Mitigation measures

6.

Literature Review
S.N Case Study Evaluation/Findings i) The paper presents the risk analysis of revenue and traffic forecast of a Build Operate Transfer (BOT) road Traffic and Revenue project using Forecast at Risk for Cumulative distribution method. a BOT Road ii) The paper also presents the risk analysis of the projected traffic and alternatively revenue with a real Project. case study and determine lower and upper limit of revenue and expected revenue has been determined using Monte Carlo Simulation Method.

7.

8.

The study try to create a risk management model and Risk Management use the model to identify the risks associated with a in BOT Project BOT Project and also indicate the methods to allocate & mitigate the risk from different parties perspectives.

Literature Review
Key Findings BOT scheme to financing infrastructure projects has many potential advantages A viable alternative to the traditional approach using sovereign borrowings or budgetary resources. BOT projects involve a number of elements (host government, the Project Company, lenders, contractors, suppliers The application of the BOT scheme in Indian infrastructure development is being carried out stage by stage. Broadly Risk for BOT projects: Country risks and Project Specific risks. The former associated with the political, economic and legal environment and over which the project sponsors have little or no control. The later to some extent could be controllable by the project sponsors. Different Researchers have different Perception on Risk Identifications. Risk Management is a critical success factor of BOT projects

Risks in Infrastructure Sector

Source: UNIDO[1996]

Risks in Indian BOT Contract

Risks in Indian BOT Contract

S.N. Type of Risk Basic Risk Attributes Risk associated prior to investment on the Project. Typically Concerns Project viability, Bid proposal, etc. The inability to arrange finance from equity & debt leading to delay in Financial Closure. May Lead to Termination of Contract.

1.

Pre-investment Risk

2.

Delay in Financial Closure

3.

Delay in acquisition of land and Land Acquisition including compensation to the affected people. May Rehabilitation & derail the Project in extreme Situation. Resettlement Permit/Approval Risk Relates to Delay in securing the Statutory Approval & Clearances . May lead to delay in Project implementation. & Inappropriate Specifications/Drawings Inability to Operate Consistently Outdated or inappropriate Technology

4.

5.

Design, Operational Technology

Risks in Indian BOT Contract

S.N. Type of Risk Basic Risk Attributes Insufficient Demand Changing Industry Structures Price volatility Inability to Complete within Budgeted Cost increase in general price level and other economic factors. Poor investigations & Schedule of Work. Financial issues like currency exchange rate, fluctuations in inflation rate Change in cost of indemnities and insurance frequent changes in taxes and import duties

6.

Demand/market risk

7.

Cost over-run

8.

Financial Risk

9.

Schedule/Completion risk

Inability of the project to commence operations on time and within the Stated Capital Cost.

Models for Measurement of Risks

Sensitivity analysis

Scenario analysis

Break-even point analysis including Cash Break Even analysis (to assess the

liquidity status)

Simulation analysis

Decision tree analysis

Managing risk

Models for Measurement of Risks

S.N

1.

Method Sensitivity Analysis

Description It indicates how robust or vulnerable a Project is to changes in value of the underlying variables.

Strength Weakness It helps to contain the The Sensitivity variability of the critical factor Analysis allows that is sensitive. one variable to change at a time. But in real world variables tend to move together.

2.

Scenario Analysis

It

allows

analysis

of

various The Scenario Analysis allows

scenarios when variables are inter- predicts the change under the related. most favorable or the adverse combination of key variables.

3.

Break Point Analysis

Even It indicates the Point of Zero Return It helps in formulating plans to (The NPV is Zero). contain depreciation of the accrued benefits on the cost incurred.

Models for Measurement of Risks

S.N. 4. Method Simulation Analysis Description In this analysis, the probability distribution of each risk is specified & the effects on the risks in combination are considered. The Probability Distribution is constructed using the Monto Carlo Simulation. Strength The limitation of Sensitivity Analysis to state the Probabilities of occurrence of each risk is removed in this method. Weakness It needs a large no of iterations to be made for building up the Frequency distribution for the whole Project.

5.

Decision analysis

tree The Decision tree creates a Are simple to model of decisions and their understand and possible consequences. interpret. People are able to understand decision tree models after a brief explanation. The inevitable risk associated with every project is at a level which is acceptable to the sponsoring organization, and is effectively managed

Calculations can get very complex particularly if many values are uncertain and/or if many outcomes are linked.

6.

Managing risk

The Risk associated It is not supported by any with the Project is mathematical modeling. inherently built in the Project and is effectively managed.

Some International Case Study

S.No Case Study Evaluation/Findings . 1. Hong Kong Cross harbor i)The Project involved a Tunnel Construction to Tunnel connect the City of Victoria in Hong Kong & Kowloon on the mainland. ii) The Project exceeded its capacity within four years of operation & all debt paid off. iii) Since as a result of the one possible damaging outcome, the project may land in Financial & Operational Crisis & hence host Govt has to share a part of the Risks instead of leaving the same on Sponsors & Lenders. Taiwan High Speed Rail The host Govt was not able to fianc the Project due Project. to pressure from other sector of the Economy and hence the Govt laid the development of the Project & maximum support from the Private Sector. The management of various risks (such as Land Acquisition, Credit, Completion, Interest rate, Reliability, Income & Political) by Private Investor delayed the Project. Hence Govt has to play an active role to ensure timely completion.

2.

Risk Analysis of an Indian BOT Project

There are several risks in a BOT Project. Major critical risks are Total Project Cost and Revenue/Tollable Traffic. Base Year Traffic (2012)

S.N Vehicle Types 1. 2. 3. 4. 5. 6. 7. Car (NT) Car (OT) Bus

Total No of Vehicles 291 291 437

Light Commercial Vehicles + MINI 1014 BUS 2-Axled Trucks 3-Axled+4 axle Trucks Multi-Axled Trucks 495 2110 365

Risk Analysis of an Indian BOT Project

Vehicle Type 2016-2020 Car (OT) Bus Light Commercial Vehicles 2-Axled Trucks 3-Axled Trucks Multi-Axled Trucks 8.00 7.00 8.00 Growth Rate Factor 2021-2025 6.00 6.00 7.00 2026-2030 6.00 5.00 6.00 2031 onwards 5.00 5.00 5.00

8.00 8.00 8.00

7.00 7.00 7.00

6.00 6.00 6.00

5.00 5.00 5.00

Risk Analysis of an Indian BOT Project

Risk Analysis The major risk has been observed with respect to variation in traffic/Revenue streams & also the cost overrun. And hence the Sensitivity Analysis method of measurement of Risk appears adequate for carrying out the Risk Analysis. Key Variables Base Cost (with a Variation of 15 %) Base Traffic (with a Variation of 15 %) Performance Indicators Total Project Cost (TPC) Equity Support of the Project Sponsor Financial Internal rate of Return (FIRR) Concession Period

Risk Analysis of an Indian BOT Project

Cost Variation of Some Project Executed in India
Total Project Cost Change of Scope Variation of Cost from (TPC) (In Crores) (Variation)(In Crores) Original Cost (%) 1175 425 1975 1250 2300 1400 550 675 1650 990 210 90 360 175 530 270 95 150 390 180 80 17.9 21.2 18.2 14.0 23.0 19.3 17.3 22.2 23.6 18.2 16.8 19.30 3.00 0.15

S.No. 1 2 3 4 5 6 7 8 9 10

Project A B C D E F G H I J

11 K 475 Average cost Variation (%) Standard Deviation of Cost Variation (%) Coefficient of Variation

Risk Analysis of an Indian BOT Project

Evaluation of Performance Indicators for 20% Increase in Cost

Equity (%) 10 20 30 40 50 60 70 80 90

FIRR(%) 15.87 14.09 12.84 11.86 11.08 10.45 9.91 9.46 9.07

NPV (Rs. Million) 1102.4 522.2 -28.84 -552.8 -1049.0 1519.0 -1962.2 -2380.0 -2772.0

TPC(Rs. Million) 6170.1 6052.4 5934.4 5817.0 5699.3 5581.7 6564.0 5346.3 5228.6

Risk Analysis of an Indian BOT Project

Project Cost TPC=Base Cost + Interest of Debt during Construction + Inflation during Construction Period

TPC

TPC

TPC

TPC increases with decreasing Percentage Equity owing to the fact that Interest Component on Servicing of Debt Increase.

Risk Analysis of an Indian BOT Project

24 23 22 21 20 19 18 FIRR ( % ) 17 16 15 14 13 12 11 10 9 4300
Base Traffic 15% increase Traffic 15% Decrease Traffic

4400

4500

4600

4700

4800

4900

5000

5100

5200

TPC (Rs. Million)

For a constant value of Total Project Cost (TPC), the Financial Rate of Return increases with increasing traffic & vice-versa

Risk Analysis of an Indian BOT Project

24 23 22 21 20 19 18 FIRR ( % ) 17 16 15 14 13 12 11 10 9 10 20 30 40 50 60 70 80 90
Discount Rate FIIR(%)

Viable Range

Infeasible Equity Range

For the case study, it is found that the project is viable for maximum value of equity. Beyond 30 % of equity, project is not viable

Possible Mitigation Measures

S.N 1 2. Type of Risk Pre-investment Risk Delay in Closure Financial Mitigation Matrix Project Design by Qualified bidders Contract Awarded to Most Appropriate Design Funding is an Issue Avoid Short Term Finance Infrastructure Projects Funding from Insurance Sector Strong Policy towards Resettlement & Rehabilitation in order to substantially mitigate this risk. Mandatory Provision in the Contract for Compulsory acquisition of the required land by the Project Sponsor In order to mitigate this risk, there need to be a policy framework in place for Single Window Clearance. Risks of operating disruptions mitigated through O&M Contracts. Performance Guarantees from technology supplier & Evaluation of Credit Quality of Technology Supplier The Bidders are asked to present a Design compatible with Project Specifications & Ground Constraints

3. 4. 5.

Resettlement Rehabilitation Delay in Acquisition Permit/Approval Risks Operating &Technology Risk

& Land

6.

7.

Design risk

Possible Mitigation Measures

S.N 8. Type of Risk Cost Overrun Risk Mitigation Matrix Recourse to Bidders Design at the bid stage with provisions for price level variation, inflationary affects & also other Economic variation like Interest Rate would mitigate the risk. Overhauling of the Entire Regime of Policy Frameworks & Regulations related to Infrastructure. Strong Political will & Commitments to Infrastructure Development with Rewards/Penalties on Performances. Streamlining of the Necessary Federal Laws & Policies. Fast Track Legal Remedy through Separate Judicial Regime & Fast Tract Courts. Adequate coverage for Financial Issues like Currency Exchange Rate, fluctuations in inflation rate, Change in Cost of indemnities and insurance, frequent changes in taxes and import duties. Mitigated through Insurance Covers

9. 10. 11. 12. 13.

Schedule Risk Direct Risk Indirect Risk Legal Risk Financial Risk Political Political

14

Force Risk

Majaure

Possible Mitigation Measures

S.N 15. Type of Risk Partnering risk Mitigation Matrix Corporate level tie-up based on Past Performances and Records. Co-laterialization of the Contract. Appropriate Environmental Assessments in Consultation with all Stakeholders and Implementation of Mitigation Measures. Change in Environmental Regime. 17. 18. Physical Risk Demand/Market Risks Mitigated Through Adequate Insurance Cover Adequate Traffic Studies During the Bid Preparation. Also Sensitivity Analysis for Possible Variation. Contract Coverage Against Fall in Demand. Govt Mediated Agencies. Low Interest Loans from Multilateral

16.

Environmental Risk

19.

Funding Risk

20.

Management Risk

Core Team to Manage the Project.

Critical Success Factors in BOT Project

Entrepreneurship

Calculated risk taker Cultivating good will and relationship with host Government officials
Picking the Right Project Accurate prediction of critical need for project Lack of funds by host government Ideal candidate for privatization Potential to achieve near monopolistic advantage for the Products provided Strong Team of Stakeholders Form a multidisciplinary and multinational Team of Stakeholders Leadership from Key Entrepreneur or Corporation Financial Strength for Protracted Negotiations
29

Critical Success Factors in BOT Project

Innovative Technical Solution Simplicity Functional Innovative Cost-effective Competitive Financial Proposal Low construction costs Reasonably high debt-equity ratio Acceptable tariff level Short Construction and Concession Periods Forecasts of Future Demand Special Features of Bid Innovative Elements that Demonstrate Sincerity Toward Host Government
30

Conclusions
Facilitation to be Provided by Government to Ensure Efficient Execution Favorable Policy Towards Environment & Regulation Regime

To Develop a Broad Mechanism for Possible Mitigation Measures for Associated Risks

Way Forward

To Minimise the Total Project Cost by Innovative Effort

Flexible Project Structuring to facilitate adequate Funding of the Project

Detailed and Clear Definition of Project Design, Scope and Specifications

References
1. 2.

3.

4.

5.

6.

7. 8.

9. 10.

11.

Hierchical Structuring of PPP Risks using Interpretative Structural Modelling by Dr.K.C.Iyer & Mohammed Sagheer. National Roads & Highways Summit held in PHD Chambers of Commerce, New Delhi. Financial Risk Analysis of Project finance in Indonesian Toll Roads by Andreas Wibowo, S.M.ASCE and Bernd Kochendorfer Problems Facing Parties involved in Build, Operate & Transport Projects in Egypt by Mohamed M. Askar and Ahmed A. Gab-Allah. Highway Robbery? A financial Analysis of Design, Build, Finance & operate (DBFO) in UK roads by Jean Shaoul, Anne Stafford & Pamela Stapleton. Traffic & Revenue Forecast at Risk for a BOT Road Project by Swapan Kumar Bagui & Ambarish Ghosh. Risks and Guarantees in BOT Tender by Tiong, L. K. R. Risk Assessment of BOT Road Projects By Engineer Rinaj Pathan 7 Prof.Dr.S.S.Pimplikar. Risk Management in BOT Project by Hsu-Hsun Hsiano Risk Analysis of Infrastructure Projects- A Case Study on Build, Operate & Transfer Projects in India by Dr.Hirem M. Maniar Public Private Partnership Projects in India (Compendium of Case Studies) by World Bank.

32

Thank You