CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND POLICY STATEMENT OF ORIGINALITY FOR RESEARCH PAPERS NAME OF STUDENT: Zaid Mahayni MATRICULATION NUMBER: 009943036 PROGRAMME: LL.M. in Petroleum Law and Policy TITLE OF THE RESEARCH PAPER: Negotiating BOT Arrangements: A Sponsor's Checklist in Ensuring Bankability ABSTRACT OF THE RESEARCH PAPER: Contract is the law of the parties to a BOT project. Banks will not accept to lend to a project company that is bearing heavy obligations, which cannot be assumed. The project must be viable. Other parties to a BOT project such as the host government, the construction company and the offtaker must all carry a reasonable amount of the risks. This paper will examine the typical contracts of a BOT arrangement and will describe the terms that must be included to enhance bankability. The sponsors must be conscious that without consideration to bankability, the project may just never materialize. WORD COUNT: 4,020 PRESENTED TO: Professor Stephen Dow TITLE OF THE COURSE: International Project Finance (GB 353) I, Zaid Mahayni, have read the Code of Practice regarding plagiarism contained in the Students’ Introductory Handbook. I realise that this Code governs the way in which the Centre for Petroleum and Mineral Law and Policy regards and treats the issue of plagiarism. I have understood the Code and in particular I am aware of the consequences, which may follow if I breach that code. Signed:________________ Date:__________________
Transcript
CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND POLICY
STATEMENT OF ORIGINALITY
FOR RESEARCH PAPERS
NAME OF STUDENT: Zaid Mahayni
MATRICULATION NUMBER: 009943036
PROGRAMME: LL.M. in Petroleum Law and Policy
TITLE OF THE RESEARCH PAPER:
Negotiating BOT Arrangements: A Sponsor's Checklist in Ensuring
Bankability
ABSTRACT OF THE RESEARCH PAPER:
Contract is the law of the parties to a BOT project. Banks will not accept to lend to a
project company that is bearing heavy obligations, which cannot be assumed. The project
must be viable. Other parties to a BOT project such as the host government, the
construction company and the offtaker must all carry a reasonable amount of the risks.
This paper will examine the typical contracts of a BOT arrangement and will describe the
terms that must be included to enhance bankability. The sponsors must be conscious that
without consideration to bankability, the project may just never materialize.
WORD COUNT: 4,020
PRESENTED TO: Professor Stephen Dow
TITLE OF THE COURSE: International Project Finance (GB 353)
I, Zaid Mahayni, have read the Code of Practice regarding plagiarism contained in the
Students’ Introductory Handbook. I realise that this Code governs the way in which the
Centre for Petroleum and Mineral Law and Policy regards and treats the issue of
plagiarism. I have understood the Code and in particular I am aware of the consequences,
which may follow if I breach that code.
Signed:________________
Date:__________________
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1
Table of Contents
List of Abbreviations ------------------------------------------------------------------ 2
PLI/Comm ----------------------------------- Practising Law Institute Commercial Law and
Practice Course Handbook Series
PFI -------------------------------------------- Project Finance International
UNCITRAL --------------------------------- United Nations Commission on International
Trade Law
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1. Introduction
In the 1970s Governments had difficulty funding large public works due to fiscal
shortcomings. Not only, it didn’t have the means to build new structures but it also could
not maintain already existing structures. The private sector was indeed needed but not in
a way that would jeopardize State control over certain industries: transportation, energy,
water, etc.1
BOT schemes (Build – Own – Transfer), developed in 1984 by Turkey, seemed
a very attractive solution to the problem. It offered a great compromise between the
interests of the private parties (make profits) and those of the governments (direct control
of certain industries).
Under the BOT scheme, a concession is granted to a concession holder
(sponsor). The sponsor is empowered with the right to build a specified infrastructure,
operate it for a determined period and at the end of the period transfer it back, at no cost,
to the person that originally granted the concession. The duration of the concession may
be established in either one of two ways. It may either be an expiry date, fixed in time, or
it could be a variable date, dependent upon the recovery by the concessionaire of a certain
amount of revenue or profit.2
The BOT structure involves a large amount of parties and an important number
of contracts.3 The sponsor is the centre of practically all of these contracts.
The sponsor must first be created. This will involve the signing of a consortium
agreement and a shareholders’ agreement between the individual constituents of the
sponsor.
1 Adefulu, A., Downstream Energy Financing in Developing Countries: Are BOTs the Answer?,
3 [1999] 3 CAR, http://www.dundee.ac.uk/cepmlp/main/html/car_article1.html. 2 Ibid. 3 Please refer to annex A for the representation of a typical BOT structure.
Apart from the concession agreement, the sponsor must also sign a loan
agreement, a construction contract, an operation contract, a supply contract and a sales
contract. This list is not exhaustive and will vary from a project to another.
In negotiating these contracts, the sponsor is faced with important constraints.
One would be that lenders must be satisfied with the overall project in order to make an
investment decision. The lenders will therefore impose on the sponsor their own
parameters and conditions in the negotiation of agreements with the other parties. This
paper will examine the contractual terms that the sponsor must negotiate in order to
secure a loan and hence, render the project “bankable”.
This paper will be structured in three main sections, according to the
development phases of a typical BOT project: the pre-development phase, the
construction phase and the operational phase. The development phase will cover the
consents needed, the shareholder’s agreement and the concession agreement. The
construction phase will cover the construction contract. And, finally, the operational
phase will cover the operation and maintenance agreement, the input agreement with
suppliers and the output agreement with purchasers.
2. The Pre-Development Phase
2.1 General Considerations
It is important to keep in mind that BOT arrangements are a form of project
finance. This implies that the lenders look primarily at the earnings of the project as the
source from which the loan is payed. Credit assessment should therefore be mostly axed
towards the project and not towards the creditworthiness of the borrowers. The fact that
BOTs are a type of project finance also implies that lenders have only limited recourse
against the borrowers since security taken by the banks is mainly confined to the assets of
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the project.4 For these reasons, lenders will carefully scrutinize all contracts to make sure
that the loan can in fact be repaid.
As a general rule, banks will refuse to carry risks that cannot be quantified or
assessed.5 Banks will therefore not tolerate investments in politically risky regions. This
risk is not only an issue in third world countries and developing countries. In fact, even
democratic countries can contain political risk. For example, one significant factor that
led to the abandonment of the Channel Tunnel project in 1975 was the 1974 change in the
UK government from Conservative to Labour. With this change, support to the project
was lost at a critical stage.6
As a rule, bankability will require a solid legal infrastructure. According to
Robert Pritchard, the solidity of a legal system is dependent upon three components:
“1) The first and most basic is the guarantee of the rule of law, manifested by a
published and stable body of laws, readily interpretable and supported by effective
administrative bodies and judicial recourse.
2) The second is an efficient body of business laws to support a market economy. These
include the right to own property, the right to pledge assets in order to raise capital, and
readily enforceable contract laws to govern business relationships.
3) The third is a specific law to authorise and delineate a process of competitive
procurement and to support the resulting arrangements.”7
Lenders will accept to carry general changes in law (e.g. the rate of profit tax).
However, these will not tolerate the risk of changes in law that are designed to
specifically discriminate against the project company.8
The sponsors of a BOT project may sometimes obtain by the government
assurances that legal changes will be restricted. However, the value of such assurances
4 UNCITRAL, Possible Future Work: Build-Operate-Transfer Projects, Twenty-Ninth Session,
A/CN.9/424, April 19, 1996, http://www.uncitral.org/english/sessions/unc/unc-29/acn9-424.htm. 5 G., Vinter, Project Finance: A Legal Guide, Second Edition, p. 85. 6 C., Walker, and A. J., Smith, eds., Privatized Infrastructure: the BOT Approach, pp. 150-151. 7 R., Pritchard, Downstream Energy Financing and the Limitations of BOT Projects, [1997] 5
OGLTR 149, p. 151. 8 G., Vinter, supra note 5, p. 78.
can be doubtful since governments can later decide to adopt a different policy.9 The
lenders will hence have to look for a clear sign by the government in question to
encourage long-term investment.10
Lenders will also avoid investing in projects situated in areas prone to violence,
wars or even labour disputes. For instance, the June 4, 1989, Tiananmen Square incident
delayed until 1991 the syndication of loans for the Guangzhou-Shenzhen-Zhuhai
superhighway.11
A few words on the force majeure clause12 should be said at this point even
though it will be analysed in detail throughout this paper. Basically, lenders want to keep
the project company rolling. Hence, force majeure has to be negotiated generously in
favour of the project company and strictly in favour of contracting parties: (construction
company, suppliers and purchasers).
On the issue of currency, banks will be wary of projects in countries with poor
currency stability or with strict currency convertibility restrictions.13 Hedging contracts
can be a possible solution. Otherwise, the offtaker should bear the risk. Usually, this will
be done through an increase of the tariff payable in local currency.14
2.2 Consents
Authorizations and consents issued by governmental bodies other than the one
awarding the concession must be negotiated so that they are given for the duration of the
project. Moreover, regulators should not be able to alter the terms of the authorizations.
Banks will want to see the association of any permit delivered with the project and not
9 C., Walker, and A. J., Smith, eds., supra note 6, p. 151. 10 UNCITRAL, supra note 4. 11 C., Walker, and A. J., Smith, eds., supra note 6, p. 151. 12 “Force majeure is a commercial law concept (alien to loan agreements) which exonerates a
party to a contract from the consequences of a failure to perform his obligations by supervening
events.” Definition reproduced from: G., Vinter, supra note 5, p. 88. 13 Baker & McKenzie, Project Finance: The Guide to Financing Power Projects, pp. 24-25. 14 G., Vinter, supra note 5, p. 79.
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with the project company. This way, the project may keep running if the banks decide to
enforce their security.15
2.3 The Shareholders’ Agreements
Banks will impose certain requirements on shareholders’ agreements or even on
the company’s constitutional documents. It is not in their interest to see any deterioration
of relationships between the shareholders. This is especially possible where the body of
shareholders includes the host government or the construction contractor. Therefore,
detailed rules on conflicts of interests, non-competition, pre-emption rights must be
established.16
Moreover, banks will usually insist that the shareholders’ agreements establish
contingent capital contributions by the sponsors. Indeed, it is rare for banks to provide
alone all capital needed for the project. Basically, the relevant sponsors will enter into an
equity agreement with the banks whereby they agree to subscribe capital in the project
company at specified amounts and timing.17
As scholars have noted it, equity ownership will provide an incentive to the
sponsors to stay actively involved in the project.18
Often, it will be required that equity contributions be made up-front. However,
in practice banks will tolerate phased and sometimes even back-ended contributions if the
creditworthiness of the sponsors is satisfactory.19 Also, contributions might sometimes be
in kind. However, valuation of individual contributions may prove difficult especially in
emerging markets with no free markets and exchange control mechanisms. 20
15 Ibid, p. 94 16 G., Vinter, supra note 5, p. 34. 17 P. R., Wood, Project Finance, Subordinated Debt and State Loans, p. 19. 18 Baker & McKenzie, supra note 13, p. 29. 19 G., Vinter, supra note 5, p. 34. 20 Ibid., p. 34.
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It should be noted that if the banks are asked to lend extra amounts of money for
cost overruns, then it will usually be required that the sponsors make equity injections
into the project company in accordance with the project’s initial debt:equity ratio.21
Similarly, the sponsors might be required to inject equity into the project if
insurance companies refuse to provide cover. This will often be the case with untested
materials and machinery used in the project. For example, insurance companies refused
to provide cover for General Electric’s new 9F turbines that were, at the time, still during
the commissioning phase. Since lenders did not want to carry the risk, project sponsors
were obliged to provide themselves loans to the project company to repair possible
damage during the commissioning of the turbines.22
Banks will often keep, in the case of a default under the loan agreement, the
possibility to terminate the loan agreement and to call in any equity contributions not yet
made. Also, if the concession is terminated, due to a default by the government for
example, then, any compensation to be paid should be enough to repay the banks.23
2.4 The Concession Agreement
The concession is essentially a licence granted by a governmental or quasi-
governmental body. Typically, national law will establish a specific procedure for the
selection of the project company. Under some national systems, it is in principle
obligatory to use the public tendering system. Under others, unsolicited proposals are
generally accepted.24
Under the public tendering system, the relevant body of law will detail the
content of any invitation to tender and will establish criteria for the evaluation of the
21 Ibid., p. 96. 22 Ibid., p. 96. 23 Ibid., p. 95. 24 UNCITRAL, supra note 4.
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tenders. In the case of unsolicited proposals, laws may provide a procedural framework to
govern all negotiations.25
It should be noted that, most often, the project company is not yet established
when the project consortium is selected. Therefore, laws will usually impose on the
project consortium the obligation to establish itself legally within a specific period of
time. Failure to do so will permit the government in question to select another
consortium.26
There are certain terms that the sponsors must negotiate so that the whole project
looks more acceptable to the banks. First of all, the terms of the concession must be fixed
for the life of the project. Secondly, there must not be any unreasonably onerous terms
imposed on the sponsors unless these can be passed on to a certain degree to other
contracting parties. For instance, liquidated damages provisions included in the
concession agreement might be excessively high, however these can be passed through to
the construction contractors.27
Furthermore, the grantor of the concession should accept the risks of any
changes in law. For example, if stricter environmental legislation delays project
completion, then all adequate extensions should be made available.28
The clauses on termination must also be carefully considered. Typically, the
grounds for termination are: mutual consent to terminate, end of the concession period,
death, dissolution of the concessionaire, bankruptcy of the concessionaire and
repurchase.29 The enforcement of any bank security should not be able to terminate the
25 Ibid. 26 Ibid. 27 G., Vinter, supra note 5, p. 96. 28 Ibid. 29 UNCITRAL, supra note 4.
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concession agreement. Force majeure also should not terminate the concession and the
appropriate extension periods should be accorded. 30
If the concession agreement is indeed terminated, then the banks should be able
to step-in and claim the transfer of the concession. Also, if any compensation is to be
paid, due to a default by the host government for example, then the amounts in question
should be sufficient to reimburse the banks.31
3. The Construction Phase
Construction contracts involve a number of considerations specific to BOT
projects. The banks will look for the following in a construction contract:
3.1 Reputation of the Contractor
The identity of the constructor is primordial. The banks will insist on having a
credit-worthy contractor with a solid reputation in the field. This is to ensure that all
contracted obligations can indeed be assumed. It is important to note that under some
legal jurisdictions, the sponsors will not be able to sue sub-contractors that are not party
to the main construction contract.
3.2 Design and Cost of the Construction
The construction contract, typically, will have to be a turnkey design. It should
be able to reflect the back-to-back arrangements with other interdependent contracts such
as the output and the operation and maintenance agreements.32 Another option could be
to create a construction consortium composed of all contracting parties. The advantages
of such a solution is that responsibility is shared and does not rest on the shoulders of one
single party.33
30 G., Vinter, supra note 5, p. 97. 31 UNCITRAL, supra note 4. 32 Electronic Construction Law Journal (ECLJ), Build Own Operate Transfer (BOOT) Projects,
The contract cost of construction should be fixed and should be open to the least
possible number of re-evaluations. The price should be paid in one lump sum upon
completion. If this cannot be negotiated then the contract may establish stage payments
on specific achievement milestones. These milestones should have some reference to the
work done and must contain as much price retention as possible. 34
3.3 Completion Obligations
On the issue of completion, the contract must fix a date in time at which this
must occur. Traditionally in BOT contracting practice, if the construction contractor is
responsible for any delays, then no extension should be allowed and no extra payments
should be made. Force majeure events justifying delays should be limited. If a contracted
force majeure event does actually occur, then the principle should be to allow an
extension but no extra amounts of money.35
If it is the sponsors themselves that cause delays then the situation is more
complex. Typically, the sponsors will have to bear the risk and provide any delay costs.
However, the financial capacity of the special project vehicle is often limited. The banks
will therefore want to see the risk on more ‘supportive’ shoulders. One solution would be
to back-to-back the obligations of the sponsor with take-or-pay provisions in the output
agreement.36
The banks also want to define completion under the construction contract as
dependent upon completion under the concession contract. Contractors will feel
uncomfortable to include such a clause, especially since they are not part to the
concession agreement. Nevertheless, banks will insist on such back-to-back provisions
and their inclusion will definitely enhance bankability.37
33 G., Vinter, supra note 5, p. 46. 34 Ibid., p. 98. 35 Electronic Construction Law Journal (ECLJ), supra note 32. 36 Ibid.
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If the constructor has not completed the project by the fixed date, then liquidated
damages should be paid. These should at least be able to repay, for a reasonable period,
the interest payments on the loan.38 To avoid problems between the contracting parties,
the construction schedule should be generous and should include sufficient schedule
cushions to cover risks of delays.39
Interestingly, under some legal jurisdictions, constructors benefit from an
automatic security on the project once construction is completed. Such a security does not
need to be published and will have, for a certain proportion, priority on other securities. If
these legal rules are suppletive, then the banks must ensure that the contract is drafted in
a way that their own securities are prioritized.40
3.4 Quality of the Construction
The construction contract must establish specific rules in case of a failure by the
constructor to deliver the project as specified. Underperformance may lead to serious
consequences especially to the government and to the banks. On the one hand, the
government might have structured its capital expenditure program on the successful
completion of the project. On the other hand, banks may see their security on the project
diminished.41
As a general rule, the sponsors will be entitled to liquidated damages depending
on the level of underperformance. These damages should include consequential losses
incurred in other agreements such as the output agreement, the operation and
maintenance agreements and even the loan agreement. Therefore, the constructor might
be exposed to damages exceeding the value of the contract.42
37 G., Vinter, supra note 5, pp. 49-50. 38 Ibid., pp. 99-100. 39 Baker & McKenzie, supra note 13, p. 34. 40 Civil Code of Quebec, Articles 2726, 2727 and 2952. 41 Electronic Construction Law Journal (ECLJ), supra note 32. 42 Ibid.
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The requirements of the completion tests should be clearly enunciated in the
contract. An independent qualified engineer should certify the performance of the
equipment used in the project.43
The contractor should offer extensive guarantees and these should last for a
reasonable amount of time after completion. Usually, guarantees will last two years for
mechanical and electrical work and five years for civil work.44
The banks should be able to step in the contract if certain events arise, such as
the termination of the loan or output agreements. A step-in right in favour of the banks is
actually beneficial to the constructor as well. Indeed, through step-in, the constructor sees
the execution of the sponsors’ contracted obligations.45
4. The Operational Phase
In the examination of the operational phase, three main types of agreements
must be discussed: the operation and maintenance agreements, the input agreement (often
referred to as the supply agreement) and the output agreement (often referred to as the
offtake agreement). These will be presented in the following sections.
4.1 Operation and Maintenance Agreements
Here again, banks will require a reputed and financially sound operator. The
resources and capital available can therefore greatly enhance bankability.46
There are many ways to structure the operation and maintenance of a project.
Firstly, the project company can carry out itself the operation and maintenance. Secondly,
a third party can, by contract, carry out these functions. Or, thirdly, operation and
43 Baker & McKenzie, supra note 13, p. 52. 44 G., Vinter, supra note 5, p. 99. 45 Electronic Construction Law Journal (ECLJ), supra note 32. 46 Baker & McKenzie, supra note 13, p. 58.
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maintenance duties can be shared between the project company and a third party.47
Whoever is in charge must be given adequate incentive to properly run the required
duties.48
The operator will have a contractual role on the project even before the project is
transferred. Indeed, the operator will be asked to estimate the necessary staffing levels,
work programs and administrative structures.49
Describing the obligations of the operator in the contract is not an easy task.
This is especially true due to the multiplicity of duties and due to the long-term nature of
the contract. Circumstances may change with time and it is difficult to predict the factors
that can come into play.50 Moreover, the contract must determine whether the operator
must achieve minimum operating levels and standards, spelled out in the contract, or,
whether the operator is bound instead by general operating obligations such as those
implied in ‘good utility practice clauses’.51
The penalties in case of a fault should be severe. The provisions on default
should be clear and detailed. For example, the operator may be responsible for poor
output, availability or for unreasonable number of outages. If the default is too great or
inexcusably extended in time, then the sponsors and even the banks should be able to
either step-in or terminate the contract.
If, on the other hand, the obligations of the operator are increased by external
factors such as changes in law for example, then the operator should not be justified to
benefit from an increase in payment entitlements. The contract price should be fixed as
much as possible.
47 G., Vinter, supra note 5, p. 61. 48 Ibid., p. 101. 49 Electronic Construction Law Journal (ECLJ), supra note 32. 50 Ibid.
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4.2 Input Agreements
As Graham Vinter notes:
“It is important to realise that one man’s supply contract is another man’s offtake
agreement.”52
Therefore, what is said in this section is extremely relevant to the topic of the
next section on output agreements. Here, the following points can be said:
The availability of a reliable supply source is essential to the success of any
BOT project. To achieve this, the banks will often insist on a detailed appraisal of
adequacy of fuel reserves53 or on the accessibility to other sources of supply. Supplies
may be either purchased under long-term contracts or from the open market. One
disadvantage of buying from an open market is that the prices are not as stable as those
under long-term contracts.54
Ideally, the supply contract should not contain take-or-pay provisions as they
can become very onerous especially if they become more expensive than open market
(spot market) prices. This is especially possible in a market undergoing liberalisation and
in which competition is being introduced. If take-or-pay provisions are inevitable, then
price re-evaluation clauses should be included on a reasonable basis.
The force majeure should be drafted in a way that the supplier is not easily
justified to interrupt contracted obligations. On the other hand, it must be drafted in a way
that incorporates elements of other project contracts. In other words, the force majeure
clause should include such things as a terminated concession rights, delays in
construction, etc.
51 G., Vinter, supra note 5, p. 63. 52 Ibid., p. 65 53 Baker & McKenzie, supra note 13, p. 65. 54 Ibid., pp. 60-61.
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Ideally, the supplier should take full responsibility for compensating the project
company for revenues lost or liabilities incurred due to supply failure. In practice,
however, suppliers will only accept responsibility for the additional cost of replacement
fuel.55
4.3 Output Agreements
The output agreement, or the offtake agreement is key to the success of any
BOT project. Every BOT project has a good or service produced that needs to be sold.
The negotiated price must be enough to pay for the entire project. It must also give the
adequate rate of return sought. As the Electronic Construction Law Journal (ECLJ) notes:
“The viability of the project and in particular its bankability will depend upon the
reliability of the cashflow under the offtake agreement, and the government agency and
sponsor performing their respective obligations.”56
It must be reminded that the product or service can be either sold on a spot basis
or can be sold to an individual offtaker. If it is sold in a spot market, then the contract will
be dependent on the rules of the spot market in question and might vary on a case-by-case
basis. This paper will rather analyse the long-term offtake agreement, which usually is
negotiated with a government agency. Certainly, the offtaker must be creditworthy and
must have the capacity to pay.
The aim of the sponsors and of the banks is to minimise market risks in order to
guarantee the profitability of the project. The practice has shown that for this purpose the
cashflow must be structured in two parts, an availability fee and a usage fee.57
The availability fee must cover all or a substantial part of the fixed costs. On the
other hand, the usage fee will be mainly composed of variable costs.58
55 Ibid., p. 63. 56 Electronic Construction Law Journal (ECLJ), supra note 32. 57 Ibid. 58 Ibid.
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The higher the negotiated availability fee, the lower the market risks. The fixed
costs in the calculation of availability are re-estimated every year. These are, as a general
rule, composed of such thing as:59
- the amount of the banks’ loan due to be repaid in that year including the interests;
- the non-variable operating costs for that year;
- taxes payable by the project company for that year;
- insurance premiums payable in that year;
- the project company’s overheads for that year;
- the equity return for that year.
On the other hand, variable costs are mainly composed of such things as the cost
of fuel and other input elements. It must be stressed that all costs, fixed and variable
must be passed through to the offtaker. Moreover, take-or-pay provisions should
definitely be included.60
The tariff charged to the final offtaker must be adjusted in the case of unforeseen
circumstances. If, for example, a new environmental legislation imposes higher costs
then, these must be passed through to the offtaker. It is not the occurrence of any event
that justifies an adjustment. Obviously, this is left to negotiation of course. However,
such things as tax changes are not usually included in the list of events.61
As for the force majeure clause, it must be negotiated in a way that the offtaker
carries as much of the risk as possible. Basically, the sponsors’ negotiation plan must be
aimed at the payment of tariffs whether or not the project is producing.
5. Conclusion
As Philip Wood remarks,
59 G., Vinter, supra note 5, p. 73. 60 Electronic Construction Law Journal (ECLJ), supra note 32. 61 Ibid.
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“Banks lending to a BOT project will ensure that both the performance and financial
obligations of the project company to the grantor are matched by corresponding
obligations on the part of the sub-contractors owed to the project company and that the
relevant sub-contracts impose no greater liability on the project company to the sub-
contractor than that owed by the grantor to the project company under the concession
agreement.”62
The project company should not be over-burdened with obligations and should
not carry an unreasonable amount of risks. If this is the case, the banks’ security on the
project company is likely to be reduced. It must be reminded that BOT arrangements are
a form of project finance. Banks want to make sure that the cashflow is adequate for the
reimbursement of the loan along with the interests.
The sponsors must negotiate BOT arrangements in accordance with the terms of
the banks. Otherwise, these will just find the whole deal unattractive.
62 P. R., Wood, supra note 17, pp. 11-12.
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Annex A
The Typical Structure of a BOT Project
(Reproduced from C., Walker, and A. J., Smith, eds., Privatized Infrastructure: the BOT Approach, p. 5)
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Bibliography
1. Secondary Sources
1.1 Books
Baker & McKenzie, Project Finance: The Guide to Financing Power Projects, (England:
Euromoney Publications, 1996).
Bodie, Z., and, Merton, R. C., Finance, Preliminary Edition, (Upper Saddle River, New
Jersey: Prentice-Hall Inc., 1998).
Brealey, R. A., and Myers, S., C., Principles of Corporate Finance, Sixth Edition,
(London, England: McGraw-Hill Companies, 2000).
Milbank, Twees, Hadley & McCloy, Project Finance:The Guide to Financing
International Oil and Gas Projects, (England: Euromoney Publications, 1996).
Vinter, G., Project Finance: A Legal Guide, Second Edition, (London, England: Sweet &
Maxwell, 1998).
Walker, C., and Smith, A. J., eds., Privatized Infrastructure: the BOT Approach,
(London, England: Thomas Telford Publications, 1995).
Wood, P. R., Project Finance, Subordinated Debt and State Loans, (London, England:
Sweet & Maxwell, 1995).
1.2 Articles
Beardsworth, J. Jr., Negotiating Power Purchase Agreements: Fundamentals for Risk
Allocation and Dispute Resolution, [1995] 707 PLI/Comm 27.
Berry, C., Criteria for Successful Project Financing, 1991/1992 PFY 15.
Brown, T., et al., The Shandong PRC Milestonem [1999] 165 PFI 52.
Davidson, P., Political Risk Insurance – Commercial, 1991/1992 PFY 43.
Dow, S., and Andrews-Speed, P., Considerations for Foreign Investors in China’s
Electricity Sector, [1998] OGLTR
Ingham, R., Risk Management, 1991/1992 PFY 35.
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