PRIVATE PARTICIPATION

IN POWER GENERATION PROJECT(S)

BUILD, OWN & OPERATE

(BOO)

ASEM ELGAWHARY

JANUARY 2018

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JANUARY 2018
1.0 INTRODUCTION

As most of the countries move forward in its economic reform program to a

more market-based economy, it joins the club of countries committed to private
sector participation in infrastructure projects. With the increase in electricity
demand and with the government’s need to shift its resources to other welfare
projects, plus the unavailability of required funds, the government has declared
that the private sector should participate in such projects.

However any Build, Own & Operate (BOO) project involves risks including
country risks, commercial risks, and force majeure risks. The developer carries
a risk as it provides 25-30 percent of the project’s capital, while the larger
burden falls on the lender who finances 70-75 percent of the project.

Finally, to ensure the smooth progress of the program and using BOO projects
as a tool for economic growth the following points should be taken in
consideration:

1. BOO should be regarded as an initial stage to develop the capital market.

2. It is essential in BOO projects that a clear communication channel exists
between the public sector and the private sector. Mutual trust is the basic
ingredient in any BOO project.
3. Private financing of power investments in a competitive market is feasible
only in a sound business environment. The overall key factor is to ensure
that private developers carry the risks that they can manage.

2.0 PRIVATE PARTICIPATION

There are three common approaches to achieving private participation in the

electric power generation:

1. Privatization of existing assets through the sale or transfer of ownership

(commonly involving the sale of stock shares through local stock
exchanges).
2. Long-term lease of public facilities for operation and maintenance by the
private sector.
3. Development, ownership and operation of new public facilities by the
private sector, using various schemes which vary in structure and format
such as Build-Own-Operate (BOO) concept

3.0 DEFINITION OF BOO

Under the BOO approach in developing infrastructure, a Project Company is

set up under private ownership or through a joint venture with a minority public
participation. This company plans, finances under limited recourse, designs,
constructs and operates the project facilities for a determined period under a
concession granted by the host government. Projects which have been
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proposed under the BOO model include power plants, airports, port facilities,
toll roads, metro systems, water treatment plants and submarine pipelines and
cables.

The underlying idea of this approach is the acceptance of a government to

benefit from the provision of services rather than seek the ownership of assets.

4.0 BENEFITS OF BOO

The BOO model offers several benefits to the host country as well as to private
companies. Some of the major advantages are:

- Under conventional government procurements, the government contracts

directly with a contractor then it carries out the operation and
maintenance by itself, which may results in a cost overrun. On the other
hand, under a project finance basis the construction risks and cost
overruns are borne by the private sector which is usually more efficient in
distributing the risks and running the plant.
- Loans for construction are arranged by the project company, thus
avoiding an increase in government debt.
- Technology transfer might occur during the construction, commissioning
and operation phases of the project. However, this is a function of the
market and the availability of local companies.
- Management competence is expected to increase with the involvement
of the private sector due to the high profit making incentive, which
implies that the project will be completed earlier than if undertaken by
the government.
- New employment opportunities will be available to the residents of the
power plant site and the project might even attract labor from other
residential districts to participate in construction work and related
services.
- It is expected that BOO will result in significant efficiency benefits due to
the obvious synergy of integrating the design, construction and operation
of the facilities. In addition, the removal of the government involvement
from the detailed planning design and construction of projects allows for
optimizing risk, minimizing construction and operating costs based on
commercial criteria, and encouraging innovation and creativity.

5.0 PARTIES INVOLVED IN A BOO AGREEMENT

Figure I give a typical brief illustration of the complicated relationship between

the parties involved in the agreement, the host government, who is the
purchaser of the electric power, and the project company (developer), who is
the electric power producer, or seller. Parties to a typical BOO agreement are
as follows:

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I. Power Energy Users: the most important participant in any BOO
scheme is to secure the appropriate Energy Users for the projects.

These users must be fully committed to the project, which must enter into
multiple of Power Purchase Agreement (PPA) with the Project Company.
This is intern will facilitate the project financing. The Egyptian Electricity
Transmission Company (EETC) can play an important role as user for
part of the project generated Energy based on previous approved tariff
and through a banking instrument as shown in attachments 1 of 2.

II. Developer (Project Company): the second important participant in the

contract is a financially strong, experienced sponsor or group of
sponsors who constitute the project company. Usually, the sponsors
form a consortium including the construction and engineering firm with an
operating arm responsible for plant operation and maintenance.

A. Engineering, Procurement & Construction (EPC) Contractor:

A BOO project involves heavy construction activities, as well as
the supply of heavy equipment. To assure equity investors and
lenders that the project will be completed at the pre-determined
time and cost, the construction contractor must represent reliable
and qualified companies with high expertise, financial strength and
similar experience in other places. The contract between the
contractor and the project company is a fixed price design-and-
build contract.
B. Equipment Suppliers: The equipment suppliers will operate as
subcontractors to the EPC contractor during the construction
phase. They enter into a contract of supplying spare parts during
the life of the project or at least the early life of the project at
reasonable cost. “Tried and Tested” technology is preferred in
BOO projects as equipment based on unproved technology carries
risks for both the government and the lenders.
C. Operation and Maintenance (O&M) Company: The developer
often subcontracts with an operations and maintenance contractor
to handle the O&M activities of the project. This contractor should
be involved in the project at an early stage to address
recommendations during the design phase, ensuring that the plant
is operated in the most efficient way.
The power purchaser is particularly interested in O&M activities
due to their impact on ultimate plant efficiency, thus it retains the
right to choose or at least acknowledge the O&M contractor and
indicates this explicitly in the Power Purchase Agreement (PPA).
The banks or investors taking part in the project must also be
convinced with the company’s capabilities. Normally, an O&M
arrangement is established among the consortium members of the
developer, determining the responsibilities of the developer,

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 possible future improvements and repairs, measurements of
performance efficiency and maintenance requirements.
D. Lenders: The sponsors contribute a sizable equity to the project
and the remaining required funds come mainly from commercial
banks, international financial institutions, and private international
and national investors.

Private power projects are usually undertaken with project

financing under a limited recourse or a non-recourse basis with
limited recourse being the most common form of financing. Under
project financing lenders and investors examine the project’s cash
flow for repayment of principal and interest and for returns on
investment and also take into consideration the assets available
as collateral in case of default.
Another important characteristic to be noted is that private power
projects are financed on a “project” basis because they are
developed by forming a new company that has no other assets
and no previous performance or credit standing. However, most
developing companies use their parent company assets as
collateral and financing security to lenders. From the lenders’
perspective, the strength of the parent company’s financial status
adds value to the developing company, reduces the level of the
associated risks and hence allows better financing terms.

6.0 TARIFF STRUCTURE

The price of the electricity purchased from a private power producer is known
as the tariff, and is separated into capacity and energy components. These are
defined as the costs of constructing and operating the power and desalination
plant respectively. The tariff structure is a two-part tariff which includes a
capacity charge and an energy charge (defined below and should yield mutual
benefits to the project developer and the power purchaser). With the provision
of the purchaser’s right to dispatch the plant, the purchaser will be held
responsible to provide a capacity payment to the producer in case the plant is
not called upon to provide energy. In case the plant is called on the purchaser
will pay for the energy provided in addition to the capacity payment. The
combined tariff should cover all the development costs in addition to providing
a satisfactory profit to the electricity producer.

A. Capacity Purchase Price:

Capacity charges are set to cover he fixed costs, project’s capital and investor
returns incurred by the project regardless of whether the plant is called on to
provide energy or not. The capacity purchase price will vary annually to the
level of plant reliability.

A typical capacity charge will include the following elements:

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  Project Capital Costs:
These include project development and construction costs including pre-
feasibility, engineering, legal and auditing services.
 Fixed operating and maintenance costs:
These include maintenance activities, spare parts costs, overhauls,
management fees salaries and any other operating costs.
 Financing costs:
Group the costs of servicing the debt interest and principal payments or
the total borrowing in addition to any extra financial fees such as letter of
credit charges, project monitoring costs, interest and exchange rate
hedging costs.
 Insurance costs:
Cover costs incurred for possible risks such as fire, theft, workers’
compensation, insurance, political risks and force majeure threats.
 Equity shareholder returns:
Comprise costs incurred to provide for returns to investors on their paid in
capital in the construction and operating phases. The return sought by
investors will vary according to their perceived risks.

B. Energy Purchase Price:

The energy charge is set to provide enough revenue to cover fuel costs and
variable operating and maintenance expenses. It will vary depending on the
amount of energy that is actually delivered to the power purchaser. This price
will only be paid in case the plant is called on to provide energy. A typical
energy charge will include the following elements:
 Fuel costs:
Refer to the costs incurred to obtain the fuel required to generate
electricity. Lower fuel costs can be achieved if the power purchaser is
responsible for ensuring quantity and the price was optimally set on the
basis of competitive supply.
 Variable operating and maintenance costs:
The costs incurred to generate electricity per unit running hour. They
can be forecasted on the basis of the expected level of output as
derived from the country’s least cost expansion plan. Other extra
costs might be incurred and charged as stated in the power
purchase agreement or as agreed upon informally.

As mentioned above, the obligations of the parties under this agreement will
be in effect only if the Fuel Supply Agreement is in effect. The company
cannot sell electric energy produced by the complex to any other entity other
than the identified parties by host government. Also under the terms of this
contract, the end users acknowledge that the project company may contract

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with another Construction Contractor and also with a specified Operations
and Maintenance Contractor.

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