positive management of differences for risk reduction in bot projects

Positive management of di�erences for risk reduction in BOTprojects

K.T. Yeoa,*, Robert L.K. Tiongb

aSchool of Mechanical and Production Engineering, Nanyang Technological University, Nanyang Avenue, 639798 SingaporebSchool of Civil and Structural Engineering, Nanyang Technological University, Nanyang Avenue, 639798 Singapore

Received 12 June 1998; accepted 21 January 1999

Abstract

This paper proposes a risk reduction strategy in winning and managing build±operate±transfer (BOT) concession throughpositive management of di�erences between enterprise stakeholders, proactive control of variation of critical risk factors and

internal competency through strong and entrepreneurial leadership of consortium teams. The concepts and proposed proceduresare derived from applying a relevant systemic approach to the real world of BOT concession and supported by cases. Thesystemic approach is a proactive process of problem de®ning and solving which can lead to a signi®cant reduction in bothbusiness and project risks and enhanced performance. 7 2000 Elsevier Science Ltd and IPMA. All rights reserved.

Keywords: Build±operate±transfer (BOT); Negotiation strategy; Risk reduction; Risk management; Soft systems methodology (SSM)

1. Introduction

The build±operate±transfer (BOT) concession modelhas been seen as a major trend during the recent twodecades in the privatization of public sector infrastruc-ture projects. This is particularly so in the rapidlydeveloping regions. Though the recent ®nancial andcurrency turmoils in Asia have caused a slowdown intheir economies, most promoters and lenders of BOTprojects are still con®dent of the role of the privatesector in funding infrastructure projects. This isbecause the BOT mechanism o�ers host governmentsan opportunity to accelerate infrastructure develop-ment without incurring large public expenditure andborrowing. At the same time it also creates newbusiness openings for the private sector, especially theconstruction industry, to participate more positively inthe world economic development and contribute to thequality of life of the community. However, the road to

winning a BOT concession is by no means easy. Prea-ward negotiation is often protracted and arduous.Postaward implementation is usually subjected tounforeseen uncertainties. In the recent ®nancial crisis,a few mega-sized infrastructure projects, such as theBakun Dam in Malaysia and power plants in Indone-sia, were canceled or suspended inde®nitely due tofunding di�culties.

The promoting entrepreneurs must take a long viewin such contract negotiation, because of the long dur-ation and high capital costs of infrastructure projectsand changing priority of the host governments. Uponsuccessful construction of the projects, the actual con-cession period can last for 10±50 years depending onthe type of project. During these operational phases,the maintenance of throughput and tari� rates in linewith original forecast remains an area of great uncer-tainty and challenge to the promoters. BOT projectsare a high-risk and high-return business. A substantialrisk premium, signi®cantly exceeding the normal mini-mum attractive rate of return, is usually expected bythe entrepreneurial promoters.

The aim of this paper is to propose a risk reduction

International Journal of Project Management 18 (2000) 257±265

0263-7863/00/$20.00 7 2000 Elsevier Science Ltd and IPMA. All rights reserved.

PII: S0263-7863(99 )00018 -6

www.elsevier.com/locate/ijproman

* Corresponding author. Tel.: +65-791-1744; fax: +65-791-1859.

E-mail address: [email protected] (K.T. Yeo).

framework based on relevant ideas of systemic think-ing, especially the soft systems methodology (SSM) [3].Case examples of successful and unsuccessful BOTprojects are selectively used to illustrate elements ofthe framework. The proposed risk reduction frame-work is addressed under the following three aspects:

1. Positive management of di�erences to achieve con-vergence for results.

2. Proactive control of variation in critical variables.3. Strong entrepreneurial leadership and consortium.

The ®rst is the dominant theme, as indicated by thepaper's title. The second on control of variation is asubset of the ®rst. Though the former is more qualitat-ive in nature while the latter quantitative. The ideasare both systemic and systematic because they arebuilt on the concepts of both soft systemic thinkingand the `harder' systems analysis and systems engineer-ing. The third idea of a strong entrepreneurship andconsortium as `human actors' could be a decisive fac-tor in overall risk management and reduction. The per-ception and resolution of risk are relative to theproblem solving capability of the human actors.

2. Positive management of di�erences

This is a qualitative approach aimed at better under-standing and appreciation of the reality in BOT con-cessions. The purpose is to encourage a positivemanagement of di�erences among the key stakeholdersin terms of their perception and expectation. The`di�erences' in a negative sense are the sources of risk.In BOT concession, the key players are the representa-tive authorities of the host government, the entrepre-neurial promoter, the bankers and other secondarystakeholders. Failure to manage these di�erences pre-vents rapid convergence to agreement and contractaward. Irreconcilable di�erences are particularly dama-ging and often the main causes of protracted delaysand eventual collapse in negotiations. For example,attempts by foreign investors to uncritically transposeand implement the Western BOT model in China haveled to frequent delays and collapses in negotiation andmuch frustration on the part of the foreigners. In theseinstances, the Chinese parties are equally unsure of therisks to be retained and have set about searching for amodel contract that could meet their needs andaddress their concerns of what constitute a fair returnto the foreign investors. To succeed foreign promotersmust have a deep awareness and appreciation of thehost government's experience and understanding ofsuch BOT arrangements, its political will to succeed,its support and commitment to BOT agreements, andits current policies such as those concerning tari�s andthroughput guarantees, and its tender evaluation prac-

tices. Section 2.1 describes a number of case examplesof unsuccessful proposals mainly due to government'spolicy and support.

2.1. Cases of unsuccessful proposals

Case 1 (Kafco Fertilizer Project, Bangladesh). Thisproject, which was ®nanced in 1990 by Japanese bankswith Citicorp as arranger was delayed following therefusal of the government to issue a guarantee inrespect of an export credit to Japan's Export andImport Bank. As a result, the bankers refused torelease funds. The project became a political issuewhen a new government took control and set up areview of the project. The review found `irregularities'and `unfavorable provisions' in the contract [1]. Thelack of political stability and changing expectation ofthe host governments can be major sources of risk.

Case 2 (Very Fast Train (VFT) Project, Australia).This A$10 billion project was proposed by KumagaiGumi of Japan and BHP of Australia to link Sydneyand Melbourne. It failed because the governmentrefused to grant signi®cant tax concessions to the pro-ject promoter which would involve changing the taxlaws to allow the investors to write o� the project'scost during the ®ve-year construction phase [2]. Thelack of political will and the willingness to share riskcan be problematic for the would-be promoters.

Case 3 (Kumbulan Water Supply Project, Indonesia).The Kumbulan water supply project in Indonesia waswon by the consortium of Northwest Water and MottMcDonald of UK. The proposal later ¯ounderedbecause the government did not have the political willto accept a realistic tari� nor was it willing to providesubsidies. It was not willing to support payment obli-gations by the local authorities. In Indonesia, govern-ment policies are controlled by presidential decrees.Future increases in tolls or tari�s are beyond thepowers of the local authorities and would have to beapproved and signed by the President. In addition, thegovernment wanted to retain too much control overthe concession agreement [1].

Case 4 (Skytrain Project, Thailand). A consortiumwhich lost in the tender for the Bangkok Skytraincited the lack of clear assessment criteria and question-able contract evaluation practices by the host auth-orities as the main causes of their failed bid. Theindecision by the government to announce a winnerand the protracted negotiation caused a 6-year delayto the award of the contract. This project was laterabandoned when the winning Lavalin Consortium

K.T. Yeo, R.L.K. Tiong / International Journal of Project Management 18 (2000) 257±265258

Fig. 1. Soft systematic negotiation model for BOT concession projects.

K.T. Yeo, R.L.K. Tiong / International Journal of Project Management 18 (2000) 257±265 259

failed to sign a shareholders agreement by the deadlinein June 1992. The consortium had asked for guaran-tees for loans and investments by the Thai governmentin the project due to the political uncertainty causedby the May 1992 riots in Bangkok and the resultingcaution among investors. The requests were rejected bythe government which instead decided to `nationalize'the project and planned to use public funds to im-plement the project [2]. The case example again showsthat BOT projects are susceptible to political risk es-pecially in the developing countries.

Case 5 (Akkyku Nuclear Power Plant, Turkey). ThisUS$650 million project was ®rst proposed on a BOTbasis in late 1970s. The Turkish government and theproject promoter, the Atomic Energy Board of Canadaand Krafwerk Union of Germany did not reach a ®nalagreement and the project not implemented. The mainpoints of disagreement among the parties were relatedto the distribution of risks: that the government wasnot willing to provide a security package satisfactoryto export credit agencies of Germany and Canada.Without such guarantees, the banks involved in the®nancing could not provide the required export credits[2].

The above case examples show that the mainreasons why BOT proposals fail to reach a successfulconclusion are due to: lack of political will and politi-cal stability, lack of understanding and support fromthe host governments, unrealistic requirements and ex-pectation among the stakeholders, lack of properassessment criteria and evaluation practices. Govern-ments wanting too much control and unwilling to pro-vide guarantees can also cause di�culties.

2.2. A proposed systemic approach

Di�erences in perception and expectation are par-ticularly problematic in BOT concession since thestakes are extremely high for the promoters. Skillfulmanagement of di�erences is essence. It is a systemicproblem solving process which is anticipative andproactive in nature. Such a process can be developedon the basis of a soft systems methodology accordingto Checkland and Scholes [3]. Fig. 1 represents a pro-posed step-wise systemic process which includes pro-blem identi®cation, expression and analysis;conceptualization; communicating and multilearningby linking and comparing the real world issues andconstraints with `idealized' conceptual models for pro-blem resolution pertaining to the process of BOT con-cession negotiation and award. The emphasis is onmultilearning among the stakeholders and positivemanagement of di�erences.

2.3. Appreciating the reality of BOT concession

The systemic inquiry process takes into account theroles, perception and in¯uence of key stockholders.Real-world issues faced in BOT negotiation are com-plex, as evident in the cases cited in Section 2.1. Theyare likely to be complicated by many of the subjectiveaspects of human interpretation and judgment whichare in¯uenced by their value systems and motives. Theprocess gives special emphasis to the human players oractors as the key to problem resolution and achievingproject success.

To provide a useful basis for taking a more roundedview of the business process and e�ective stakeholdermanagement, the systemic approach suggests a set ofsix elements (CATWOE) [3] represented by customer(C), actor (A), transformation (T) process, worldviews(W), owner (O) and environment (E), respectively. Theintention is to ®nd ways to minimize the danger ofirreconcilable di�erences in the perception among thestakeholders, and to enhance chances of success. Thereasons why the soft systems methodology (SSM) ischosen as a framework for the management of di�er-ence for risk reduction are: its ¯exibility in use, itsemphasis on separating the reality from concepts andits attempt to bridge the gaps or di�erences in knowl-edge and perception through intense debates and mul-tilearning, both systemically and culturally, beforerealworld actions are contemplated.

The process is represented by a series of systemicinquiry, problem formulation and solving steps. Step1±4 represent the `fact ®nding' stages. These stepsinquire and surface the real-world situations, interplayof the CATWOE elements and imply certain key suc-cess factors.

The process begins at step 1 with an appreciation ofthe potential of a BOT business opportunity. The pro-moter is keenly aware of the urgent and critical needsof a host country for infrastructural development, saya power plant for electricity generation. This is aboutpicking the right project. The initial decision is ap-preciated in relation to the promoter's own need tocreate new business openings in infrastructure con-struction and investment (step 2). The fact-®nding taskhelps to structure and express the promoter's ownbusiness objectives, the scope and requirements of pro-ject. Such ®ndings and interpretation can be translatedinto a business brief or proposal (step 3).

2.4. CATWOE analysis

The CATWOE elements provide a convenientframework for investigating the systemic reality of theworld of BOT concession. The application of CAT-WOE elements to a BOT situation is illustrated in step4 of Fig. 1.


First, the authority of the host government as theultimate owner (O) of the project must be recognized.The owner has the ultimate power to initiate, alter,suspend or terminate the project and the authority toaward the BOT concession to a promoter of hischoice. The purchasing and bargaining power of thecustomers (C) or end-users must be immediately andaccurately assessed to determine the level of consump-tion and tari�s to be a�orded. It is important to ap-preciate that there will be a political cost to the hostgovernment if it allows the consortium to charge arate that is perceived to be excessive by the consumersor community in the host country.

The promoter must understand the culture andworldview (W) or value of the host country, its gov-ernment and her representatives. It may be necessaryto cultivate a long term strategic partnership with thehost for future projects. It is wise to appreciatewhether a strong political will exists within the leader-ship of the host government. The e�ectiveness and e�-ciency of the administering bureaucracy must also becarefully gauged as this will in¯uence the cost andlength of negotiation [4]. The bene®t of educating thehost to cultivate goodwill must be carefully balancedwith the risk of loss if the host decides to give awaythe promoter's ideas to other competitors.

The promoter must have good knowledge of thebusiness transaction and transformation (T) process inthe award of BOT contracts. This includes initial pro-ject conceptualization, preproject de®nition, nego-tiation, concession award, owning and operating thefacilities and transferring the project to the host gov-ernment at the end of the concession (in the case of abuild-own-operate (BOO) concession, no transfer ofthe facilities to the host government is required).

The whole process can be protracted and it rep-resents a long-term commitment of the promoters tothe host country. Such long-term engagement rep-resents both opportunities and uncertainties. The lattermay come from the external macroenvironment (E) interms of political and economic stability. Changes ingovernment and policies towards privatization of pub-lic services and long term economic prospects in thehost country are potential sources of risk. The possi-bility of substitution and emergence of competitors asalternative service providers are also potential threatsto the long term viability of the concession.

In the ®nal CATWOE analysis, it is the competenceand capabilities of the promoter or actor (A) himselfand his team as a turnkey solution provider that mat-ter. An entrepreneurial spirit must exist in the promo-ter company which is attracted to the idea of BOTconcession as a viable business endeavor and willing torisk its own funds by holding equity in the new ven-ture. The entrepreneur promoter is required to assem-ble a strong consortium of stakeholders who can o�er

a combination of resources and skills in ®nance engin-eering, large-scale construction and operations.

Case 6 (Redeveloping the JFK International Arrivalsbuilding). This is a case of public±private partnershipunder a BOT type arrangement. A multidisciplinaryteam of 80 ®nanciers, lawyers, accountants, engineersand project managers went through a long and exhaus-tive process to negotiate and sign an MOU for the lar-gest public/private funded airport deal in the US. Theconsortium initiated a thorough due diligence phasewhen ®nancial, legal, operational and security audits,sta�ng, environmental and regulatory matters werecarefully investigated [5]. The essence of the projecttranslated into demand and market-share potential,was a motivating and driving force of the consortiumpartnership. The AirPort Authority's goals from theonset of the search for a private sector partner hadbeen achieved. These goals are: construction of a newairport terminal, competitive rates for the airlines, re-liable revenue base and upside sharing potential,appropriate risk sharing and minimal contribution ofcapital and no Port Authority-backed debt.

The proposed framework of a systemic negotiationprocess is relevant that it encourages the assembly of acore team of experts to give multidisciplinary inputs tothe proposals. It allows the establishment of clear andcredible goals, selection criteria and a set of baselineplans early in the process and be committed to them.The case example illustrates that the essential planningand preparation process will necessarily be intense,thorough and multidisciplinary as required andencouraged when using the soft systems methodology.

2.5. Comparing reality with concepts

The negotiation process leading to concession awardo�ers a positive learning and problem solving experi-ence for the participants. In principle, the systemicmethodology in action encourages such positive pro-blem-solving spirit so that the stakeholders can mean-ingfully achieve convergence to mutually acceptableand well thought-out solutions for sustainable bene®ts.The process should also promote better mutual under-standing and appreciation of each other's needs andmotivation.

The systemic approach can be best employed inpluralist contexts, especially where there is a basiccompatibility of interests, even though the values andbeliefs of participants may di�er [6]. The probability ofgenuine accommodation and compromise must bereasonably high to justify the e�orts to be put in bythe promoter. Such possibility of success may requirecomparing and surfacing the di�erences and its resol-ution between the `idealized' conception and the rea-


lity. The idealized conception is inevitably in¯uencedby the availability of past experience and currentknowledge in the BOT negotiation and award pro-cesses.

The reality as appreciated and found out in step 1±4can be used to formulate a `root de®nition' in step 5.The root de®nition serves as a statement of strategicintents or a project mission statement, on the part ofpromoter. Such intents guide the promoter to developa proposal that o�ers the most attractive ®nancialpackage and most cost-e�ective technical solution.

The statement can be interpreted as idealizedbecause it is an expression of desired intents and ex-pectation, as a driving force to launch the promoterinto such business proposition. The proposition shouldrealistically include a viable technical solution thatadequately meets the demand for the services, and a®nancial plan that could support a competitive level oftari� speci®ed.

A comprehensive project mission statement can alsohelp to reveal any critical issues that needed to beaddressed, to clarify the rationales and assumptions, toidentify the key stakeholders, their responsibilities andrewards, to appreciate the environmental issues asexternal and less controllable forces. The root de®-nition used as a mission statement expresses the logicalrelationship among the CATWOE elements in a stra-tegic and meaningful way.

Step 6 is concerned with the construct and recon-struct of `idealized' conceptual models as road mapsfor further actions. The construct of the conceptualmodels is guided by the root de®nition, and developedwith inputs from relevant systems concepts and ideas.Other inputs should include prior experience, bench-marking, consultants' suggestions, even innovativeideas and creative insights.

The relevant systems concepts can be both hard sys-tematic and soft systemic in nature. The systematicapproach heavily relies on systems analysis for the set-ting of clear and credible objectives, and evaluationand selection of viable alternatives. For instance, thelong-term commercial viability of the proposed conces-sion as a system will be studied; and a scenario analy-sis may be conducted. The soft systemic approach willgive emphasis to ill-structured human related pro-blems, social, environmental, and political issues per-taining to the host country. These formulatedconceptual models are to be used as road maps in thereal world, and in this case, to guide the preprojectnegotiation as well as postaward mobilization, ex-ecution and operation of the BOT concession.

2.6. Learning and reconciling

The process of purposeful learning is raised to ahigher level in step 7 when comparison is made

between the idealized models and the `reality' asexpressed in steps 3 and 4. Internal and external con-tradictions will be surfaced when the idealized modelsor scenarios are invalidated by the constraints of rea-lity: for example, over government guarantee of futuretari� increases, or compensation in case of forcemajeure risks. Such contradictions may cause intensedebates and disputes. In a positive sense, this debatingprocess should cause multilearning, concentratedrethinking and searching; this may result in the orig-inal models be modi®ed or reconstructed. The modi-®ed conception may also encourage the promoter toretain more risks and to negotiate more aggressivelywith the view to in¯uence the outcome of events. Thedebating, learning and rethinking process brings theidealized conception closer to the perceived `reality'.This process should contribute to the resolution of po-tential or existing contradictions or con¯icts.

While comparing the conception with reality, a listof di�erences can be prepared with questions to beclari®ed and answered. This helps to develop thenecessary negotiation strategy and contingencies. Step8 aims at ®nding out what would be the feasible andpractical changes and adjustments resulting from theperceived di�erences. With this learning and prep-aration, serious negotiation may begin in step 9. Thenegotiation can be protracted and iterative, dependingon, among other things, the will to succeed and thepreparedness of the negotiating parties. The willingnessto accommodate and make compromises are also im-portant in a successful negotiation, as illustrated in thefollowing case example.

Case 7 (Johore Water Supply Project, Malaysia). Inthe negotiation of the M$500 million Johore WaterSupply Project in Malaysia, the government and thepromoter had signi®cantly di�erent projections on thedemand for water due in part to the de®nitionsemployed and the assumptions in water loss. Thesearch for a convergence resulted in the following com-promise between the two parties: ®rst, using the mid-point demand projection; second, phasing the develop-ment in three stages with the ®nal stage reaching alevel that meets the actual demand for treated water inthe concession area; and third, the adopting of a tari�structure that is adaptable to changes in demand andoperating costs. The compromise was made and agree-ment achieved because both sides wanted the projectto succeed.

As a further illustration, the promoter in the projectwas able to demonstrate its commitment to the projectby injecting substantial equity, up to 23%, into theproject company. The government was willing to com-promise its initial requirements by allowing the promo-ter to inject the equity funding in stages. This wascritical as the concessionaire was a new company


which needed time to raise the large sum of ®nancerequired [7].

Step 10 re¯ects the experience and will to succeed inBOT negotiation where redesign, repackaging andrenegotiation are often necessary. Step 11 representsthe successful conclusion of negotiation which leads tothe ®nal and ®rm award of the BOT contract to thepromoter. The ®nal and next logical step 12 is thepreparation of a de®nitive master plan for the con-struction of the project and the assumption of projectownership as the operator of the facilities that are tobe built under the concession agreement.

3. Control of variations in key variables

This is a subset of the positive management ofdi�erences by suggesting the use of some quantitativemethods in the planning and formulation step. Thebene®t of quantitative methods is to systematicallyidentify and proactively control variations of risk vari-ables. Examples of such variables are concessionperiod, tari�s, interest rates, throughput, constructionand operating costs. The risk reduction strategy is tomake such control an integral part of the conceptualmodel formulation, comparison and negotiation pro-cesses as highlighted in steps 6±10 in Fig. 1.

3.1. Value of a quantitative approach

The value of such quantitative analysis is to facili-tate learning and appreciation of potential areas ofrisk with the view to sharpen judgment in decisionmaking. A commonly used technique is a dynamic risksimulation cash ¯ow and project ®nance model. Themodel consists of two submodels for economic evalu-ation and project ®nance analysis. Such a model isusually capable of generating probability distributions,sensitivity or variance analysis of project outcomes interms of cost, net present value (NPV) or internal rateof return (IRR) [8].

For example, a sensitivity or variance analysis of apower plant BOT project might clearly highlight thatthe most sensitive factor is the tari� rate to be chargedfor electricity sales, followed by unit fuel cost. Such®ndings are not at all surprising but they serve toheighten a sense of criticality in negotiating for ®rmagreements in order to limit the scope of future vari-ations. For instance, a ®rm tari� agreement on initialrate and provision for future increases is critical.

Such modelling techniques and its ®ndings can beshared with the host government o�cers to promotetransparency and mutual knowledge and understand-ing. The host government authority could be wary ofthe promoter gaining a `windfall' at the expense of the

host government and the community. Such numericaltransparency may convince the host government tobetter appreciate the expectation of the promoter for areasonable minimum attractive rate of return, and notto unilaterally impose an arbitrary cap on the rate ofreturn a�orded to the promoter.

3.2. Risk reduction strategy in negotiation

Risk reduction strategy is usually understood as losscontrol. The loss is measured as the di�erence or vari-ation of the actual outcome or payo� from expec-tation. The focus is on systematic control of variancesof critical risk factors (CRFs) which are de®ned asthose few important factors that can cause success orfailure of the venture. The CRFs are those few mostsensitive factors which, if properly negotiated and con-trolled, can contribute signi®cantly to the rate ofreturn from the concession.

The negotiation strategy is to concentrate on thesefew CRFs. For instance, in the case of BOT powerplant concession, and as mentioned earlier, the focus ison an acceptable initial tari� to be paid by the powerpurchasers in the host country and the subsequentescalation of such tari�. A sustainable fuel supply, saycoal, at a negotiated price to be charged by thenational suppliers, is equally critical. The strategy wasalso used in a water supply project in Malaysia and ahighway project in Canada described below.

Case 8 (Labuan Water Supply (LWS) Project, State ofSabah, Malaysia). In the M$120 million LabuanWater Supply (LWS) project, the BOT concessionairemanaged to obtain protection against increases in theinput cost of electricity and chemicals for treating thewater, which account for the bulk of the operatingcosts. Such negotiated protection contributed to thecontrol of variation in operating costs and gave muchcomfort to the investors and lenders in their perceptionof a reduction in project risk. In fact, in this project,the State government also bore the demand and pricerisk. The privatization contract provided for monthlypayments to be made to the operator according to a®xed price schedule on a take-or-pay basis. Thisamount will be paid whatever the volume of wateractually utilized by the public. In exchange the oper-ator is bound to make available to the government thecapacity to supply a certain volume of water as speci-®ed in the government needs statement. The arrange-ment e�ectively removes the demand and price riskfrom the concession company [9].

Case 9 (Highway project in Nova Scotia, Canada). Incontrast, in a highway project in Nova Scotia, the pro-vincial government was not prepared to assume all ora portion of the revenue risk or the volume of tra�c


¯ow. To overcome the anticipated ®nancial risk, thesuccessful promoter and its ®nancial lenders enteredinto an agreement in which the private sector wouldassume the revenue risks in exchange for certain ®nan-cial commitment, in the form of equity and line ofcredit, from the Province. This proactive managementof risk enables the project company to structure thedebt repayment schedule to match the projected reven-ues and to meet the Province's desired toll levels [10].

Other risk reduction measures may include earlycommissioning of installed facilities to achieve earlycash in¯ows and control of overall construction costs.The basic negotiation strategy with the host govern-ment is to control the extent of variations of these fewCRFs and to keep potential future ¯uctuations withina controlled range. In essence, the objective of risk re-duction strategy in negotiation is to attain a robustand predictable level of cash ¯ows that are so criticalin the successful raising of project ®nance and to theultimate success of the concession.

4. Entrepreneurial leader and consortium

The importance of human factors in risk manage-ment is conceived on the belief that there is a strongcorrelation between risk reduction and a high level ofcompetence at individual, team and organizationallevels. Risk and uncertainty are not wholly exogen-ously given. Risk perception and outcome can indeedbe a function of problem solving capability of theactor(s) [11].

4.1. An entrepreneurial leader

The role and drive of a single visionary entrepreneurin leading the consortium cannot be underestimated.There is no lack of past cases where the entrepreneur-ial promoter has, by strength of personality, contribu-ted to eventual success of BOT projects [12].

4.2. A strong and competent project team

It is critically important for the consortium to be ledby an experienced prime promoter organization. Theconsortium team members contribute complementaryskills, both hard and soft, to meet all technical, ®nan-cial, legal and political requirements. The internalcapability of the consortium can contribute to overallrisk reduction. Conversely, a weak project organizationand leadership can be a major source of risk anduncertainty. It could also cause a loss of con®dence bythe lenders and government, and lead to unsuccessfultender proposal. The following cases would bear theseout:

Case 10 (Eastern Harbour Crossing, Hong Kong).Nishimatshu was one of the shortlisted consortia but itlost the project to Kumagai Gumi. The cited reasonsfor the failed bid were: high debt/equity ratio used bythe promoter, high initial toll charges, late preprojectplanning and inferior design submission in comparisonto the winning rival. As a result, these lead to the lackof support of banks and equity investors [2].

Case 11 (KL Monorail Project, Malaysia). The con-struction of the US$80 million project was scheduledto commence in mid-1991, but it was then boggeddown by funding and joint venture relations problems.The local partner could not ®nd bankers to ®nance itsshare of the venture. Part of the problem stemmedfrom the project's escalating cost estimates; part fromits lack of a track record in handling such big projects.The venture's experienced foreign partner pulled outafter relations between the two partners turned sour[2].

Other areas of competency can be demonstratedtypically in the following manifestations:

. E�ective exploitation of proven technology andfunctional designs: the strategy of using cost e�ec-tive functional design is to minimize technical vari-ations and allow the use of the same design indi�erent projects or locations repeatedly to achieveeconomy of scale and shorter construction time, forinstance in power plant design and installation.

. Careful selection of project location: selection ofproject location has both technical and ®nancial im-plications. It a�ects the accessibility to raw materialsand skilled manpower, proximity to `moneyed' pur-chasers, overall construction and transmission costs.

. Skillful balancing of stakeholders' interests: thought-ful management of multistakeholders' interests isvital and depends on positive management of di�er-ences in perception and expectation as demonstratedearlier on in the paper. The e�ective stakeholders'management and the resulting suppleness in re-lations are indications of a strong team and leader-ship.

5. Conclusion

BOT concession o�ers a viable vehicle for rapidlydeveloping economies to privatize public sector pro-jects and to accelerate the pace of infrastructure con-struction and further economic development. BOTconcession negotiation is a complex process, plaguedwith uncertainty, especially for the promoters. This


paper o�ers some systemic ideas on how the associatedrisks and uncertainties can be more e�ectively mana-ged and reduced. The proposed soft systems processencourages proactive management of BOT negotiationand concession, especially in the positive managementof di�erences and control of variations, and the pro-blem solving capability of an entrepreneurial promoter.The process enables the government representatives,promoters and bankers to meaningfully achieve con-vergence to mutually acceptable and viable solutionsfor sustainable bene®ts for the stakeholders. Furtherstudies may be required to operationalize these ideasusing both systematic and soft systemic approaches.

References

[1] Neal J. Financing of BOT projects. M.Sc. lectures, Nanyang

Technological University, Singapore, 1993.

[2] Tiong RLK. Evaluation and competitive tendering of BOT pro-

jects. Unpublished dissertation, Nanyang Technological

University, Singapore, 1993.

[3] Checkland P, Scholes J. Soft systems methodology in action.

John Wiley, 1991.

[4] Yeo KT. Planning and learning in major infrastructure develop-

ment: systems perspectives. International Journal of Project

Management 1995;13(5):287±93.

[5] Vignola D, Smyth RJ. Redeveloping the JFK International

Arrivals Building: a public±private partnership. Public Works

Financing 1997;108:17±24.

[6] Flood RL, Jackson MC. Creative problem solving. John Wiley,

1991 Chap. 8 on Soft systems methodology.

[7] Issen R. Financing of BOT projects. M.Sc. lectures, Nanyang

Technological University, Singapore, 1996.

[8] Chee TS, Yeo KT. Risk analysis of a build±operate±transfer

(BOT) power plant project. In: Proceedings, IEEE Engineering

Management Conference, Singapore, 1995. p. 275±80.

[9] Rabinone D. Financing of BOT projects. M.Sc. lectures,

Nanyang Technological University, Singapore, 1994.

[10] Thomson W. New ®nancing model for highway 104. Public

Works Financing 1996;97(June):23±4.

[11] Yeo KT. Strategy for risk management through problem fram-

ing in technology acquisition. International Journal of Project

Management 1995;13(4):219±24.

[12] Tiong RLK, Yeo KT, McCarthy SC. Critical success factors in

winning BOT contracts. ASCE Journal of Construction

Engineering and Management 1992;118(2):217±28.

K.T. Yeo is currently Head, Division

of Systems and Engineering Manage-

ment, School of Mechanical and Pro-

duction Engineering, Nanyang

Technological University, Singapore.

He received his PhD and MSc from

the University of Manchester

(UMIST) in engineering project man-

agement and an MBA from Strath-

clyde University. He has published

widely in project management, systems

thinking and systems practices, oper-

ations management, management of

technology and innovations.

Robert Tiong is currently a senior lec-

turer at Nanyang Technological Uni-

versity, Singapore. He holds First

Class Honours in Civil Engineering,

Master's Degree in Construction En-

gineering and Management from Uni-

versity of California, Berkeley and

PhD from Nanyang Technological

University. He teaches International

Project ®nancing to MSc students as

well as to Chinese construction pro-

fessionals under a World Bank spon-

sored training project. His current

research interests are in Project Risk

management, International Project Financing and Privatisation of

Infrastructure Projects with special emphasis on Build-Operate-

Transfer (BOT) including a monograph on ``The Structuring of BOT

Projects'' and a recent research report on ``Evaluation of Risks in

BOT Projects''.


positive management of differences for risk reduction in bot projects

Documents