BOT (Build, Operate and Transfer) an alternative to traditional data conversion and management

BOT (Build, Operate and Transfer) an alternative to traditional data conversion and management

Robert W. Brown
President
AGRA Baymont, Inc.
14100 58ti Street North
Clearwater, Florida 33760

Peter Schmidt
Senior Project Manager
Booz Allen& Hamilton
8283 Greensboro Drive
McLean, Virginia 22102

Introduction
Anyone embarking on an AM/FM project today will have several key questions to answer, as this kind of project will cost significant dollars, affect most functional departments, and require diligent and effective project planning and management.

Most projects follow one of two traditional execution strategies: 1) internal contract management; or 2) prime contractor. The primary objective of this paper is to address a third alternative, which has been adapted from the engineering-construction industry, and is called "BOT," or Build- Operate-Transfer.

Overview of discussion
Upon the initial review of your AM/FM project, if you answer "yes" to any of the following questions, then potentially, a BOT execution strategy maybe a viable approach for you.

Is turnkey project financing a problem for the project?
Does your user need exceed the budget constraints?
Would the capital investment be greater if the operator were to be brought in on a profitsharing basis?
Do you have less internal resources than needed to properly manage and execute the project?

Because an affirmative answer to one or more of these questions can seriously affect your ability to properly complete a comprehensive AM/FM project, this paper will introduce BOT as a possible solution.

First, the paper will describe the two most common and traditional methods of executing AM/FM/ projects employed today. They are:

Internally managed through multiple contract awards.
Internally managed through the use of a single prime contractor or integrator.

Multi-contract project methodology
The first flowchart, Chart A, addresses the basic steps to implement an internally managed, multi award contract strategy.

Flowchart A - AM/FM Multi-Contract Project Methodology

Advantages	Disadvantages
maximum corporate infuence fits traditiona utiity type matrix technoogy transfer maximized control with owner allows project fexibiity	most resources requires significant AM/FM knowedge more scheduing more contract management contract conficts and change orders

Prime project methodology
The second most popular execution strategy is to select a prime contractor who will lead the implementation of the overall project. The prime takes the financial and project risks, including those of the supporting sub-contractor(s). This prime company can be the technology provider, a systems integrator, the application provider, data conversion company, or professional agent. Flowchart B describes the basic steps in using a prime instead of administrating your project internally.

Flowchad B - AM/FM '*Prime"Project Methodology

Advantages	Disadvantages
1) Only one contractor to deal with in regards to: contracting schedule production problems integration issues	1) You may not get the exact solution you want. 2) You may get built-in bias for seection of vendors. 3) Through onerous terms, may get negative project team environment. 4) More onerous contract T&C'

BOT project methodology
A third alternative, which can possibly provide a combination of flexibility, shared risk and partnering, is the "Build-Operate-Transfer" or BOT approach.

What is it?
Build-Operate-Transfer is a project financing and operating approach that has found an application in recent years primarily in the area of infrastructure privatization in the developing countries. For these countries, financial markets are shifiing the way in which debt capital is raised to fund the development of infrastructure. In the past, debt was raised directly from multilateral and export credit agencies or from sovereign governments themselves to provide turnkey financing. Recently, infrastructure developers have turned increasingly to portfoliostyle credit in the form of capital pools, operating concessions and stand-alone utilities. This has changed the traditional contractor's role from being a service provider to being a business partner in the operation of the enterprise. Given the success of the BOT approach in the capital- intensive, high-risk credit environment of international infrastructure development, there may be a real opportunity for the application of the BOT approach in the operation of utilities and other businesses in a domestic setting also. BOT as used in this paper actually refers to several financing and operating approaches which are outlined later, however the term BOT will be used in it's descriptive generic sense.

How does it work?
While the term BOT is a relatively new one, the concept has been in operation for centuries. Most of the early turnpikes and canals in this country operated on the principle that a grantor, usually but not always a government body, would offer an operating license to a concessionaire for a long term contract to develop and operate a transportation company with exclusive rights to a length of road or river. Over time, the concept was extended to include frontier postal services, local telephone services, electrical utilities and many municipal service functions such as land management. In this way, infrastructure upgrades were financed without public finding, and a method of long-term payback from operating revenues was established with a contract period deemed lengthy enough to make the operating concession a lucrative project.

In the modern setting, a cash-strapped corporation, municipality, county or state will enter into a profit sharing agreement with a concessionaire. This profit sharing principle is the key aspect differentiating the BOT approach from the outsourcing arrangements commonly undertaken in this country. The concessionaire will operate as an independent business organization contractually accountable for a series of technical, operational and service related goals. The contract will often be setup such that the risk of revenue fluctuation is offset to the concessionaire by means of a fixed fee payment obligation to the owner. The upside to this arrangement, however, can be considerable if revenues are better than anticipated. Obviously, a well-crafted business plan for the concessionaire including carefid financial modeling and disciplined cost-control procedures will be essential.

A number of variations on the Build-Operate-Transfer theme have emerged from the experience of international infrastructure development. These differ mainly in the exact ownership and payment arrangement between the owner and the concessionaire on completion of the construction portion of the contract. The main approaches are summarized below:

Build-Transfer-Operate	Build-Own-Operate	Build-Transfer-Operate	Build-Lease-Transfer
The contract will specifi the upgrade and operation of the enterprise by the concessionaire for a fixed period of time followed by the transfer of all facilities and equipment back to the owner.	The concessionaire is essentially buying the basic facility in installments from the owner, with the facility and it's upgrades provided as security over the repayment period. On completion of the contract, ownership reverts to the concessionaire.	The concessionaire builds and transfers a facility to the owner but exclusively operates the facility on behalf of the owner by means of a management contract.	The concessionaire builds a facility, leases out the operating portion of the contract, and on completion of the contract, returns the facility to the owner.

How long would it last?
The capital required for equipment or facilities upgrades will be the main determinant in setting the length-for a BOT contract. Infrastructure- development projects funded by means of BOT contracts in developing countries will typically require capital investments of $50 million or more and an operating period of greater than 10 years. A number of dynamic factors affect the overall structure of the contract and particularly the length of time required for the concessionaire to achieve a break-even on the capital investment. In proposing a BOT concession to an existing owner, the following factors m-ust be considered and allowed for:

Factor	Consideration
Capital Requirement	Capital The greater the capital amount required to upgrade the facility or Requirement purchase equipment, the longer the operating contract period should be.
Profit Sharing Formula	A 50:50 profit sharing formula is a useful starting point and is quite Formula a common arrangement in international projects. The impact of other factors will increase or decrease the proportional breakdown.
Business Operating Risk	The nature of the enterprise will dictate a longer or shorter period of return based on a risk factor used within that industry. Similarly, for the concessionaire, risk may be mitigated or augmented by lengthening the period of the operating contract.
Cost of Capital	Lower cost of capital will allow the concessionaire to achieve a break-even point in a shorter period of time, all things being equal.
Nature of Revenue Stream	Certain types of revenue offer greater security in terms of a con- tinuing revenue stream. Enterprises in which the customer usage levels are discretionary (customers have a choice of competitors or may choose to forego the service being offered) entail a higher level of risk and will impact the other factors.

In the case of a BOT project, the project team, acting as the releasing authority for the work, must establish the financial feasibility of the BOT project as a stand-alone business operation. This will entail the collection of the necessary detail to allow a bidding consortium to develop a business plan for their intended operation of the work. The key information for the project team will be the necessary return on investment to be derived from the profit-sharing scheme. This will determine how the revenue will be distributed once a consortium undertakes the work. An RFP will then be put out for tender and a list of bidders, each providing a business plan, will respond. The bidders will typically represent a consortium of companies, each bringing a particular skill to the team. The proponent consortium will be selected from the bidders based on what capital upgrade is being offered and how large a revenue cut is being proposed for the operator. Flowchart C illustrates this arrangement.

Flowchatt C - AM/FM BOT Project Methodology

Some thoughts regarding the BOT approach:
When applied to infrastructure development, the BOT approach is often referred to as a publicprivate partnership. In essence, this partnership is the distinguishing characteristic, whether applied to a public or a private enterprise. The BOT approach represents an expansive and flexible means to leverage the capability of the concessionaire while reducing the operating expense and increasing the service performance for the enterprise owner.

Often, the most effective means of mobilizing resources to undertake a BOT project is the formation of a consortium of participating companies around a project company formed specifically for the duration of the project. This approach requires each participant to subcontract to the project company and offers the advantage of reducing the risk for individual participants.

While infrastructure development projects really developed as national level opportunities, the clear trend has been toward implementing the same project financing and operating models on a smaller and smaller scale, making the BOT approach a possible option for many undertakings previously thought of as unsuitable. More opportunities will be found at the local government and private industry level as a result of the growing awareness of the advantages that the BOT approach has to offer.