18.8.2 Financial Viability
At the very start of a BOT project, its financial viability must be established, which
should be moreover maintained over its entire life duration. This is a “sine qua non”
for the potential equity investors and prospective lenders. This has the following
implications.
(a) The source of revenue to the project must be clearly determined from the start
and maintained over its life. It should be sufficient to
(i) service the debt, in the form of interests and principals over the loan periods.
(ii) provide a reasonable return on equity as a function of the short-term and
long-term risks that the equity investors are required to take.
(b) For a utility, the revenue can take the form of a guaranteed payment made on
agreed periodic terms or direct sales to consumers.
(c) The conditions from (a) imply that the total cost of the project should be clearly
determined before its presentation to investors and lenders so as to create their
confidence in the feasibility of the project, showing them that it can really be
constructed, and operated as planned.
(d) The planning of supply and construction of fixed plant and equipment is
essential. Normally this is effected on a fixed cost turnkey basis.
(e) The utilisation of proven technology should be ascertained. Lenders and investors, in any case, are less likely to approve the introduction of new technologies
in BOT schemes.
(f) The selection of suppliers of equipment, and civil works contractors should be
very clear. Only strong local or overseas industrial groups should be accepted,
with proven reliability and financial competence.
18.8.3 Debt Participants Requirements
The commercial banks, also called the “senior lenders” are usually primarily
concerned with their security; this should be considered a normal feature of a BOT
process. This is because BOT projects incorporate several levels of risks, namely a
high risk at construction stage, and a relatively lower risk at the commissioning and
operation stage. The security required by the bankers is in relation to the risk to be
taken; in return, they expect certain levels of rewards commensurate to these two risk
phases. Hence one of the keys of a BOT project is offering acceptable security to
lenders, and in what form.
The security may be in any or several of the following forms:
(a) Ability to exclude the project real estate, plant and equipment should any of the
partners default.
18.8 Structuring a BOT Financing Package
513
At the very start of a BOT project, its financial viability must be established, which
should be moreover maintained over its entire life duration. This is a “sine qua non”
for the potential equity investors and prospective lenders. This has the following
implications.
(a) The source of revenue to the project must be clearly determined from the start
and maintained over its life. It should be sufficient to
(i) service the debt, in the form of interests and principals over the loan periods.
(ii) provide a reasonable return on equity as a function of the short-term and
long-term risks that the equity investors are required to take.
(b) For a utility, the revenue can take the form of a guaranteed payment made on
agreed periodic terms or direct sales to consumers.
(c) The conditions from (a) imply that the total cost of the project should be clearly
determined before its presentation to investors and lenders so as to create their
confidence in the feasibility of the project, showing them that it can really be
constructed, and operated as planned.
(d) The planning of supply and construction of fixed plant and equipment is
essential. Normally this is effected on a fixed cost turnkey basis.
(e) The utilisation of proven technology should be ascertained. Lenders and investors, in any case, are less likely to approve the introduction of new technologies
in BOT schemes.
(f) The selection of suppliers of equipment, and civil works contractors should be
very clear. Only strong local or overseas industrial groups should be accepted,
with proven reliability and financial competence.
18.8.3 Debt Participants Requirements
The commercial banks, also called the “senior lenders” are usually primarily
concerned with their security; this should be considered a normal feature of a BOT
process. This is because BOT projects incorporate several levels of risks, namely a
high risk at construction stage, and a relatively lower risk at the commissioning and
operation stage. The security required by the bankers is in relation to the risk to be
taken; in return, they expect certain levels of rewards commensurate to these two risk
phases. Hence one of the keys of a BOT project is offering acceptable security to
lenders, and in what form.
The security may be in any or several of the following forms:
(a) Ability to exclude the project real estate, plant and equipment should any of the
partners default.
18.8 Structuring a BOT Financing Package
513