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BOT projects - Risk Allocation and Security

Krasse, Emelie (2004)
Department of Law
Abstract
The private sector plays a more and more important role in securing the progress of infrastructure development. Private sector participation is believed to guarantee more efficiency in the supply of infrastructure services and cut down the cost of this supply. Project finance through the BOT model is an internationally well-recognised method to handle large infrastructure projects. The project method is common in Europe and the rest of the world and refers to a project where the contracting authority selects an investor or a private company to finance, construct and operate an infrastructure utility on behalf of the government. The investor has the right to operate the utility on a commercial basis and gain the profits for a specific term.... (More)
The private sector plays a more and more important role in securing the progress of infrastructure development. Private sector participation is believed to guarantee more efficiency in the supply of infrastructure services and cut down the cost of this supply. Project finance through the BOT model is an internationally well-recognised method to handle large infrastructure projects. The project method is common in Europe and the rest of the world and refers to a project where the contracting authority selects an investor or a private company to finance, construct and operate an infrastructure utility on behalf of the government. The investor has the right to operate the utility on a commercial basis and gain the profits for a specific term. The operator must estimate the revenues to be sufficient to repay the loans made to it for the purpose of building and operating the facility. It must also give the shareholders the envisaged return on their investment during the concession period, at the end of which it will transfer the assets and operations of the project to the host government. The ownership remains with the public sector throughout the contract and is not transferred at any stage. However, the BOT model brings with it many risks, both for the public and private sector. These risks have to be mitigated and allocated to the party best able to handle them for a successful project. The primary interest of the lenders is to have their money back plus interest. Here financial security will play a crucial role. Lenders' remedy in the event of project failure may depend largely on the effectiveness of the security created over project assets. However, the securities in BOT projects may often act as a shield rather than a sword since the security value of the physical assets may be minimal. This since normal enforcement realisation may be unrealistic as project assets such as pipelines, mines and cables, often are non-marketable. The Arlandabanan project is the first infrastructure BOT project in Sweden in over a century. For a long time it was obvious that the Governmnet (i.e. the taxpayers) should finance infrastructure. Therefore the BOT method was a whole new way of creating infrastructure in Sweden. The construction of the agreement with the Swedish state was such that all fixed assets goes to the state already by the completion. If interests and mortgages would become to heavy, there are no real assets in the project, apart from the concession. In other words, the project revenue is the only security of the project and that is why the project company was given exclusive traffic rights and a long concession. The Swedish Government is investigating the possibility to make future construction of infrastructure more efficient through the further use of BOT project finance. In Ds. 2000:65, the basis for the development of a model for future project financing was presented. (Less)
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author
Krasse, Emelie
supervisor
organization
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Bankrätt
language
English
id
1559236
date added to LUP
2010-03-08 15:55:23
date last changed
2010-03-08 15:55:23
@misc{1559236,
  abstract     = {The private sector plays a more and more important role in securing the progress of infrastructure development. Private sector participation is believed to guarantee more efficiency in the supply of infrastructure services and cut down the cost of this supply. Project finance through the BOT model is an internationally well-recognised method to handle large infrastructure projects. The project method is common in Europe and the rest of the world and refers to a project where the contracting authority selects an investor or a private company to finance, construct and operate an infrastructure utility on behalf of the government. The investor has the right to operate the utility on a commercial basis and gain the profits for a specific term. The operator must estimate the revenues to be sufficient to repay the loans made to it for the purpose of building and operating the facility. It must also give the shareholders the envisaged return on their investment during the concession period, at the end of which it will transfer the assets and operations of the project to the host government. The ownership remains with the public sector throughout the contract and is not transferred at any stage. However, the BOT model brings with it many risks, both for the public and private sector. These risks have to be mitigated and allocated to the party best able to handle them for a successful project. The primary interest of the lenders is to have their money back plus interest. Here financial security will play a crucial role. Lenders' remedy in the event of project failure may depend largely on the effectiveness of the security created over project assets. However, the securities in BOT projects may often act as a shield rather than a sword since the security value of the physical assets may be minimal. This since normal enforcement realisation may be unrealistic as project assets such as pipelines, mines and cables, often are non-marketable. The Arlandabanan project is the first infrastructure BOT project in Sweden in over a century. For a long time it was obvious that the Governmnet (i.e. the taxpayers) should finance infrastructure. Therefore the BOT method was a whole new way of creating infrastructure in Sweden. The construction of the agreement with the Swedish state was such that all fixed assets goes to the state already by the completion. If interests and mortgages would become to heavy, there are no real assets in the project, apart from the concession. In other words, the project revenue is the only security of the project and that is why the project company was given exclusive traffic rights and a long concession. The Swedish Government is investigating the possibility to make future construction of infrastructure more efficient through the further use of BOT project finance. In Ds. 2000:65, the basis for the development of a model for future project financing was presented.},
  author       = {Krasse, Emelie},
  keyword      = {Bankrätt},
  language     = {eng},
  note         = {Student Paper},
  title        = {BOT projects - Risk Allocation and Security},
  year         = {2004},
}