BOOT / BOT / Management contracts /

TurnkeyINTERNATIONAL BUSINESS AND GLOBAL STRATEGY

• KHALED OMER• ALAA ABDELMONEIM• ALY ABDELMONEIM

Contents:• Public – Private Partnership

• Introduction • Reasons• Types of agreements

• BOT & BOOT Agreements• BUILT – OPERATE – TRANSFER (BOT)• BUILT – OPERATE – OWN – TRANSFER (BOOT)• Special Purpose Vehicle• Contractual Relationship• Degree of Private Sector Involvement• Advantages and dis-advantages.• Case studies

• Management Contracts• Definition• Advantages and dis-advantages.

• Turn-Key Contracts• Definition• Advantages and dis-advantages.

• References

Public – Private Partnership (PPP)

“Public Private Partnership means an arrangement between a government or government owned entity and a private sector entity, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the private sector and the public entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative.”

Introduction:

Public – Private Partnership Reasons:• MITIGATES AND PROPERLY ALLOCATES RISKS

• PROVIDE INCENTIVES FOR LOWERING COSTS

• ENSURES VALUE FOR MONEY

• ATTRACT THE RIGHT SKILLS AND MANAGEMENT EXPERTISE

• PROMOTES INNOVATION

• REDUCES CORRUPTION AND WASTE

• REDUCE BURDEN ON TAXPAYERS

Public – Private Partnership Types:

BOT – BUILD OPERATE TRANSFER

BOO – BUILD OWN OPERATE

BOOT – BUILD OWN OPERATE TRANSFER

DBF – DESIGN BUILD FINANCE

DBFO – DESIGN BUILD FINANCE OPERATE

DBO – DESIGN BUILD OPERATE

BTO - BUILD TRANSFER OPERATE

DBFOM – Design Build Finance Operate Manage

Leasing

Joint Ventures

OPERATIONS OR MANAGEMENT CONTRACTS

LROT – Lease Renovate Operate Transfer

DCMF – Design Construct Manage Finance BOOR - Build Own Operate Remove

BOT & BOOT Agreements

BOT & BOOT AgreementsBUILT – OPERATE – TRANSFER (BOT) :The BOT is a type of agreements where the government (project sponsor) allows a private entrepreneur (project promoter) to design, finance, and build an infrastructure facility.

In return, the project promoter is permitted to collect tolls (user fee) and operate the facility for a specified period (called the concession period), during which he is expected to recover all of his costs and earn a reasonable profit.

BOT & BOOT AgreementsBUILT – OPERATE – OWN – TRANSFER (BOOT) :A project based on the granting of a concession by a Principal to a Promoter who is responsible for the construction, financing, operation and maintenance of a facility over the period of the concession before finally transferring at certain or no cost a fully operational facility to the Principal

Special Purpose Vehicle (SPV)

A legal entity created solely to serve a particular function, such as the facilitation of a financial arrangement or creation of a financial instrument

The concession period is determined primarily by the length of time needed for the facility’s revenue stream to pay off the company’s debt and provide a reasonable rate of return for its effort and risk.

ProjectSPV

Sponsors

Banks

Power Off

taker

EPC and O&M Services Prepayment

Debt

PaymentsProducts

Fees

DividendEquity

Contractual Relationship

Degree of Private Sector Involvement

Degr

ee o

f Priv

ate

Sect

or R

isk a

nd

Resp

onsib

ility

7- Design-Built-Finance-operate

6- Design-Built-operate-maintain

5- Operation concession

4- Design-Built

3- Management contract

2- Service Contract1- Government

8- Built-Own-operate-Transfer

9- Built-Own-operate

10- Privatization

Degree of Private Sector Involvement

Types of Contracts

AssetOwnership

O&M CapitalInvestment

CommercialRisk

Duration (Yrs)

Service Contract Public Private & Public

Public Public 1-2

Management Contract

Public Private Public Public 3-5

Lease Public Private Public Private 8-15Concession Public Private Private Private 25-30BOT / BOOT Private &

PublicPrivate Private Private 25-30

Degree of Private Sector Involvement

BOT & BOOT AgreementsAdvantages of (BOT) & (BOOT) :

1. Use of private sector financing to provide new sources of capital2. Ability to accelerate the development of projects that would otherwise have to

wait for, and compete, for sovereign resources. 3. Use of private sector capital, initiative and know-how to reduce project

construction costs, shorten schedules and improve operating efficiency. 4. Allocation to the private sector of project risk 5. The involvement of private sponsors and experienced commercial lenders6. Technology transfer, the training of local personnel and the development of

national capital markets. 7. In contrast to privatization, government retention of strategic control over the

project, which is transferred to the public at the end of the contract period.

BOT & BOOT AgreementsDisadvantages of (BOT) & (BOOT) :

1. Transaction costs are high, they amount to 5-10% of total project cost. 2. Not suitable for smaller projects. Some Governments has suggested that projects

with a value of less than $15m are unlikely to gain benefits from BOT delivery method.

3. The success of BOT project depends upon successful raising of necessary finance. Various costs such as cost of construction, equipment, maintenance should be committed during the life of the project.

4. BOT projects are successful only when substantial revenues are generated during the operation phase.

BOT & BOOT Examples(BOT) : AL KURAYMAT INTEGRATED SOLAR COMBIEND CYCLE POWER PLANT

Project type: integrated solar combined cycle Construction startup : 2009Operation date: 2014Capacity:• 150 MW TURBINE• 70 MW STEAM TURBINE• 62 MW SOLARCost: 482 M$Owner: EEHC Egyptian Electricity holding companyConcession period: 20 years

BOT & BOOT Examples(BOOT): Sidi Krir COMBIEND POWER CYCLE POWER PLANT

Project Type: Combined cycle Agreement Date: 2005Operation date: 2008Plant capacity: 350 MW Cost: 540 M$Owner: Gaz De FranceConcession period: 20 years

Management Contracts

Management contract

Practice by which one company supplies another with managerial expertise for a specific period of time.”

Arrangement under which operational control of an enterprise is vested by contract in a separate enterprise that performs the necessary managerial functions in return for a fee.

Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involve actually doing them.

A management contract can involve a wide range of functions, such as technical operation and of a production facility, management of personnel, accounting, marketing services and training.

Definition:

Involved partiesOwner of a business and a third-party

management company

Two types of knowledge can be transferred through management contracts. The specialized knowledge of technical managers. The business-management skill of general managers.

Advantages of management services contracts.

Exploit an international business opportunity without having to place a great deal of its own physical assets at risk.

Government can award companies management contracts to operate and upgrade public utilities.

Government use management contract to develop the skills of local workers and managers.

DISADVANTAGES OF MANAGEMENT CONTRACTS.

International management in countries that are undergoing political or social turmoil can place manager´s lives in significant danger.

Suppliers of expertise may end up nurturing a formidable new competitor in the local market.

http://www.youtube.com/watch?v=QIVkI7SwvzE.

Turnkey contractsTurnkey operations are typically contracts for the construction ofoperating facilities in exchange for a fee. The facilities are transferred to the host countryor firm when they are complete. The customer is usually a government agency of, for example,a Middle Eastern country that has decreed that a particular product must be producedlocally and under its control. For example, Fiat built an auto plant in Tagliatti,

TURNKEY PROJECTS – PROFESSIONAL SERVICES Turn-key refers to something that is ready for immediate use

to describe a home built on the developer's land with the developer's financing ready for the customer to move in.

"Turnkey" is commonly used in the construction industry, for instance, in which it refers to the bundling of materials and labor

by sub-contractors.

Further used in motorsports to describe a car being sold with drive train (engine, transmission, etc.) to contrast with a vehicle sold without one so that other components may be re-used

An example

would be the creation of a "turnkey hospital" which would be building a complete medical centre with installed

high-tech medical equipment.

Turnkey projects

A turnkey project refers to a project in which clients pay contractors to design and construct new facilities and train personnel.

A turnkey project is way for a foreign company to export its process and technology to other countries by building a plant in that country.

Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy.

‘Turnkey plus' Turnkey projects can also be extended, known as

'turnkey plus', where there is perhaps a small equity interest by the

engineering firm or the main suppliers to ensure allegiance during the initial operational phases.

Once the turnkey phase is over and the engineering firm receives the 'completion certificate', (from the owner), the latter will work independently or with the licensor (if any).

Major advantages of Turnkey projects

is the possibility for a company to establish a plant and earn profits in a foreign country especially in which foreign direct investment opportunities are limited and lack of expertise in a specific area exists.

Disadvantages of a Turnkey project

for a company it include risk of revealing companies secrets to rivals,

takeover of their plant by the host country.

By entering a market with a turnkey project proves that a company has no long-term interest in the country which can become a disadvantage if the country proves to be the main market for the output of the exported process.

A turnkey project could involve the following elements depending on its complexity:

Project administration licensing-in of process design and engineering services subcontracting management control procurement and expediting of equipment; materials control inspection of equipment prior to delivery

Cont…

shipment, transportation control of schedule and quality pre-commissioning and completion performance-guarantee testing inventorying spare-parts training of owner's/plantsub-system operating and maintenance

personnel Advanced Loop Schemes (primary used in the Electric Utility

Industry)

References: http://ppp.worldbank.org/public-private-partnership/financing http://www.businessdictionary.com/definition/special-purpose-vehicleSPV.html#ixzz4A8HnzT2A http://www.slideshare.net/OECD-GOV/sbo pppfebruary2014session8peterliveseyunitedkindgom http://www.businessdictionary.com/definition/special-purpose-vehicle-SPV.html John Chu, (1999),"The BOOT approach to energy infrastructure management: a means to

optimise the return from facilities", Facilities, Vol. 17 Iss 12/13 pp. 492 – 498 en.wikipedia.org/wiki/Build–operate–transfer www.investopedia.com/terms/b/botcontract.asp http://globalenergyobservatory.org/geoid/5396 http://www.moee.gov.eg/english_new/EEHC_Rep/2011-2012.pdf