The - risk - identification - and - management - of - the - overseas - BOT - thermal - power - project

发布时间：2011-03-19 00:06:38

The Risk Identification and Management of the Overseas BOT Thermal Power Project

LONG Yun#1, WANG Dong-rong*2

#CSG Dispatch & Communication Centre，Guangzhou, 510623, China

1longyun@csg.cn

*China Power International Holding Limited, Beijing, 100080, China

2drwang@cpibj.com.cn


Abstract: This paper briefly outlines the definition, characteristics, organizational structure and contractual relations of BOT project. Based on the analysis of the overseas BOT thermal power project, this paper elaborates the major project risks and introduces the risk management and elusion measures in accordance with the risk categories.

I. Introduction

The acronym “BOT” stands for “build, operate and transfer” or “build, own and transfer”, which is in essence a model of project financing and management. In a BOT project, the sponsor is given a concession to design and build a facility, and also be responsible for financing and operating the facility. When the concession period comes to expiry, the project company will transfet the ownership of the facility to the local government, usually at no cost or only at nominal cost [1].

The BOT project is essentially a concessional project financing with limited recourse or without recourse. In the first place, the sponsor will be granted by the host government the concession right, including the varying degrees of host government cooperation and support, to finance, design, construct, own, operate, maintain and transfer the facility, and takes the facility’s revenue stream to pay off the debt and provide a reasonable rate of return for its effort and risk. In the next place, the lenders essentially look to the project’s assets and revenue stream for repayment rather than to other sources of security such as government guarantees or the sponsor’s assets, that is, a BOT project is finance on either a limited recourse basis or a non-recourse basis.

The BOT approach has many potential advantages such as being capable of attracting of external source of capital, reducing public budget, accelerating the development of critical projects, allocating the project risk and burden to the private sector, technology transfer and so on. In recent years the BOT approach played a growing role in the implementation of industrial and infrastructure projects, especially the power projects, in the developing countries. At the same time, with the rapid growth of Chinese power industry and the implementation of “Going Global Strategy”, some enterprises begin to invest in oversea power industry, which cause the BOT scheme to draw increasing attention. This paper is focus on the risk identification and management of oversea BOT thermal power project.

II. The General Principles of Risk Identification and Management of the Overseas BOT Project

The overseas BOT project is complex from both the financial and legal points of view, since it has numerous participants and complicated interrelationships which requires relatively longer period of time to develop and negotiate. There are all kinds of project risks through the entire process of the BOT project, reflecting on each of project participant. The identification and management of project risks play a key role in BOT project. It is very important to identify all the project risks and allocate them to the participants who are most suitable to undertake the risks in a proper manner, so as to ensure the success of the project.

Fig. 1 illustrates a typical overseas BOT thermal power project organizational structure and contractual relationship.

Generally, the risks of BOT project can be divided into several categories in different ways. They can be divided into the risks of construction phase, the risks of operation phase and the risks of the concession period in terms of the different phases of the project. They can be classified into political risk, legal risk, construction risk, operating risk, finance risk, market risk in accordance with the different sources of risk. They also can be divided into internal risks and external risks as the capability of control on risks by the sponsors. Some articles propose project risk assessment models and assessment methods [2-5]. The overseas BOT thermal power projects have different contents of risks identification and management for each case depending on the political, economic and legal environments of different countries. Some articles have made a conclusion on the methods and practices of the overseas BOT power projects implemented by Chinese enterprise [6-8].

There are three basic principles of risk management of the BOT project. Firstly, a particular risk should be borne by the party most suitable to deal with it. Secondly, a particular risk should be borne with least influence and costs. Thirdly, the level of risk undertaken should be proportional to the economic returns. The combination of all project agreements defines the risk allocation and management of the project among all the participants.

III. The Risks Allocation between the Host Government and the Project Company

The basic risk allocation is defined in the concession agreement between the host government (or a government entity) and the project company, in which defines the commitments of each party, including how risks should to be allocated or shared between them is deternined. With the competitive bidding approach used in a BOT project, usually, the host government will makes it clear in the instructions to bidders on the project risks, concessions and warrants that the government will take, and room for negotiating relavant terms and conditions of the concession agreement may be limited. The possibility of negotiating the terms and conditions of a concession agreement will be much widened while the government adopt the negotiated procurement. The experience in regard to negotiation of project agreements has clearly shown that it may lead to long delays in reaching the agreement and therefore add to the project cost, both in real terms and in terms of lost opportunity.

In order to allocate the risks between the government and the project company properly, especially the risks shared by both parties, the project company could take the following measures. First and foremost, sponsors and host governments must be convinced that the project will be successful throughout its lifetime, that is, a feasibility study must conclusively demonstrate the financial and economic viability of the project under different scenarios. Secondly, all substantial project risks have to be identified and analyzed to define the party and mechanism most suitable to deal with it. Thirdly, referring to the standardized agreements and similar project agreements can simplify the negotiation and reduce the project cost. The UNIDO (United Nations Industrial Development Organization) provide standardized BOT project agreements for many developing countries [2], and lots of infrastructure project have been successful implemented under a BOT scheme in many countries. Finally, experienced legal, financial and engineering consultants can assist both parties to arrange the overall distribution of project risks efficiently.

During the procedure of negotiation, all contracts in the contract package constraint each other mutually, the delay in an individual contract negotiations will lead to a chain reaction, affecting the whole progress of negotiations. Meanwhile, changes of the external environment, such as the promulgation of new laws, changes of domestic and international economic situation and the fluctuations of the primary energy supply, may affect the project negotiation negatively. In the past, the long time spent in and high cost of negotiations have been a major drawback and have kept a number of BOT projects from going forward. Effective measures taken to control the negotiation procedure are essential. Firstly, the host government's political, legal and economic environment must be examined carefully. Secondly, there must be strong government support and a detailed and feasible process of negotiation. Thirdly, a long-term stable team must be setup to ensure the continuity of negotiation. Fourthly, the project company could cooperate with local enterprises and international finance institution to get the dominant position in the negotiation. Finally, experienced consultants must be employed to improve the negotiation efficiency.

IV. The Project Risks Borne by the Host Government Entity and Relevant Parties

Since BOT thermal power projects are placed in a monopoly position to a certain extent, most of the project risks come from government acts such as change in law, price control and so on, the government’s guarantee and stable legal framework are essential for the risk control. The government is also required to sign the power purchase agreement based on a long-term contract providing inflation adjustment, foreign exchange convertibility and exchange rate protection, as well as solving the challenges from public opposition and social impacts. Basically, the political risk, legal risk should be borne by the host government entity and relevant parties, while the construction risk, market risk, finance risk and force majeure risk should be share with the project company.

The project company needs to sign a number of contracts with different government entities and relevant parties, including the central government, local government, and functional entities at all levels, the state-owned power companies and coal companies, all of which demonstrate different administrative competence, benefit demand, and corresponding capability to take risks. Over the last decade, as the political and economic reform, particularly reform of state-owned enterprises have taken place in many developing countries, the conflict of different interest has been increasing among the various government departments and the state-owned enterprises, which leads to oppose and obstacle to the implementation of BOT project.

There are several measures to release or reduce such risks. Firstly, the project company must have the government‘s warrant helping to overcome various administrative, and legal restraints. Secondly, the project company could accept some important state-owned company related to the thermal power project as sponsor to overcome such obstacles. Thirdly, the project company should negotiate with the appropriate government party for different contract to optimally allocate different project risks. Finally, the project company should make reasonable benefits arrangements for government entities and relevant parties to reduce or resolve potential conflicts or risks associated with the project

The government entities and relevant parties should not bear the project risk excessive to their actual affordability and it is essential to avoid ambiguity in the contracts. The past actual cases show that making use of the host country's urgent needs, or the imperfect laws and regulations to get no-risk or confuse terms of the agreement deviated from the actual political and economic situation will be very difficult to implement during the concession period.

V. The Project Risks Management of the Project Company

A. The definition of BOT thermal power project’s boundary conditions

The definition of basic boundary condition of the thermal power projects is the focus of negotiations, which includes the construction range, the coal supply scheme, the overall projects costs and revenue. If the project company can easily exceed the basic condition, then the actual rate of return will be much higher than the set value, leaving the premise meaningless. At the same time, the less predictable the total costs and revenue, the more difficult will be the negotiation on power purchase content, and the more the lenders will insist on commitments from the sponsors or the host government, the more risky the project is perceived to be. It’s in the project company’s favor when the project boundary conditions been set as soon as possible. The preconditions for the determination of the conditions are as follows: firstly, a detailed project feasibility study must be developed and audited, and secondly, the negotiation process must be arranged properly to reach consensus on some uncertain boundary conditions as early as possible.

B. The market and revenue risks

The BOT thermal power project must have a dependable source of revenue that will be sufficient to cover the project debt and interest payment and provide a return on equity, which is normally related to the generating capacity of power facilities and the tariff level, at the same time, the lenders also concern about the arrangement of demand risk, operation default risk, exchange rate risk and so on.

There are several measures to release or reduce such risks. First, the power purchase agreement must be developed based on a long-term off-take contract with a government power authority. Secondly, the tariff rate must have an adjustment mechanism linking with the coal price, inflation and exchange rate, to avoid external risks. Thirdly, the project company should employ experienced operators to improve the plant operation and maintenance performance. Fourthly, the project company must define the resolve mechanism on potential competition.

C. The risks on coal supply and transportation

The BOT thermal power project depends on long-term stable coal supply, the quantity and quality of the coal determines the generating capability and operating performance, while the coal price influences the project revenue. The confirmation of the coal supply agreement is the prerequisite of other key project contracts.

There are several arrangement schemes on the coal supply. The supply party can be the local coal company, the host government or the project company (sign a supply agreement with the third party). The price mechanism can be fixed or alterable. The linkage mechanism between the coal price and electricity tariff is one of the core contents of the negotiations. If the coal needs to be imported, the quantity, quality, transportation, and prices are all factors may have significant impact on the project, particularly in the current imbalanced environment on the coal supply and demand. The project company should give full consideration to the risks of coal supply, transportation and price fluctuations.

There are several measures to resolve or release such risks. Firstly, the project company should choose the coal supply sources and means of delivery carefully and make a detailed evaluation on the coal supply and transportation. Secondly, the coal supply agreement must be a long-term supply contracts with an appropriate mechanism for price fluctuation to transfer part of the coal supply risk to the supplier. Thirdly, the project company should reach a consensus with the government on the basic terms and conditions of the coal supply contract to get exemption on the coal supply defaults out of the project company’s control and transfer part of the price fluctuation risk to the buyer. Finally, alternative fuel supply scheme shall be developed in case of emergency.

D. The construction risks

The BOT thermal power project is expected to be completed within its budget and in accordance with the schedules, and be inspected and tested for acceptance successfully; otherwise, it will lead to a project company’s event of default under the agreement and seriously affect the project's expected revenue stream. The project company should apply for associated approvals and authorization from the government entities in time, develop technical design and design drawings of construction in accordance with the local economic and technological criteria, and sign a fixed-price EPC contract with experienced contractors to avoid and release such risks.

In the developing countries, the associated-infrastructure risks can be especially high. These risks are associated with facilities outside the responsibility of the project company, such as approaching roads, transmission lines, operation water supply and infrastructures for the coal. If one of the associated-infrastructure can not put into operation as the time scheduled, or the performance can not reach the design requirements, it will seriously affect the schedule of the main project and the performance of the power plant. The project company should take the following measures to prevent and reduce such risks: firstly, to devide the infrastructure construction scope of all participants as early as possible; secondly, to formulate the risk allocation mechanism of the supporting infrastructure among relevant parties; thirdly, to draft a detailed and reasonable work schedule with government entities; fourthly, to employ an independent engineer to record the construction process and to conduct the test analysis for acceptance of the infrastructure facilities, finally, to define the compensation mechanism on defaults of each parties.

E. Force majeure risks

Force majeure risks denote losses from certain exceptional types of events beyond the control of the parties to the BOT project, including natural events such as fire, flood, and social or government events such as war, strike and lockouts. The coal supply and transportation, as well as the operation water supply outside the thermal power plant are also subject to such risks.

The project company can avoid or relieve such risks by insurance, or turn to the government by special compensation or extending concession period, or share the losses with relevant parties in accordance with resolution mechanism outlined in the project contracts. Since the extension of the force majeure event is difficult to determine, especially on social issues and the events outside the host country, the project company should make a consensus with government on the definition of force majeure and the losses allocation mechanism as early as possible.

VI. Conclusion

The BOT approach to power project investment has many advantages and is a more favorable investment mechanism for Chinese enterprises to implement in most developing countries than the traditional foreign project-contracting and labor services cooperation. It is the very important factor to the success of BOT thermal power project that all project risks throughout the whole concession period should be identified, analyzed, evaluated and allocated to the corresponding participants in a rational way.

References

[1] WANG Shou-qing. The application of BOT scheme. International Project Contraction and Labour Service, 2003

[2] UNIDO BOT Guidelines. United Nations Industrial Development Organization, 1996.

[3] LIU Jing. The analysis of risk recognition and applying for the BOT project. Technological Development of Enterprise, 2005.10

[4] MA Si-Hai. The fuzzy comprehensive assessment model and application of BOT project risk. Technology Economics, 2007.10

[5] LIU Yan. Risk analysis in financing project in China. Journal of Taiyuan University of Technology (Social Sciences Edition), 2007.12

[6] LI Zhi-Xiong. The research on the investment risks of hydro power project in the Southeast Asia. Yunnan Water Power, 2007.3

[7] HUANG Lei. A study of the risk management for oversea BOT project. International Marketing, 2007.2

[8] LI Ye-Chang. A risk analysis of Chinese enterprises’ BOT model investment in Vietnam infrastructure. Around Southeast Asia, 2005.7


The - risk - identification - and - management - of - the - overseas - BOT - thermal - power - project

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