PSAKUIJIR Vol. 4 No. 2 (July-December 2015)

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1 Resonble Concession Period for Build Operte Trnsfer Contrct Projects: A Cse Study of Theun-Hiboun Hydropower Dm Project nd Ntionl Rod No. 14 A Project Pnysith Vorsing * nd Dr.Sounthone Phommsone ** Abstrct The Public-Privte-Prtnerships is generlly bsent to provide policy-mkers with pros nd cons bout PPP nd suitble form nd pproch to be pplied in Lo PDR. A mjority of infrstructure development projects pproved so fr were in ccordnce with individul negotition between the public nd privte sectors with cse-by-cse greement. And the concession period is one of the most importnt decisions to be mde for PPP project contrct is pplied to infrstructure projects s implemented under the build-operte-trnsfer contrct. This is the mesure for mking decision on the timing of ownership nd for delineting benefits, uthorities, nd responsibilities between the government nd privte investor. The durtion of the concession period directly ffects both the investor s level of return on investment nd the government s interests. In currently Lo very lck of reserch on this issue. Therefore this pper determined the suitble concession period for Theun- Hiboun Hydropower Dm Project nd Ntionl Rod No. 14A Project.The csh flow of the project ws pplied nlysis method nd lso nlyticl s regression nlysis nd Shen s model the for concession period. Keyword: Concession Period, Hydropower Project, Public-Privte Prtnerships, Rod No. 14A, Theun-Hiboun, Introduction Normlly mjor PPP infrstructure projects in Los were implemented under the form of the build-operte-trnsfer (BOT) procurement system, privte investor, or group of investors forming consortium, which is sometimes clled project promoter, provides funds for the construction of n infrstructure nd opertes the built infrstructure for given period of time on behlf of The Government. This rrngement is often referred to s the frnchise of the investor, by which the investor is to Build nd then operte the project within predetermined concession period nd then Trnsfer the project free of chrge to the host government t the end of the concession period. This type of contrct rrngement Hs been widely pplied to infrstructure projects throughout the world since the middle of the 1980s. The benefit of this contrctul rrngement is commonly considered to be the use of privte money for developing public infrstructure fcilities such s highwys, rilwys, ports, tunnels, irports, power plnts, hydrulic structures nd wter conservtion fcilities (Shen et l., 1996). Infrstructure projects normlly require lrge mount of initil investment nd spn long period of construction time, nd they normlly hve slow pybck rte, low profit rtio, nd high level of risk. Thus in the ppliction of BOT contrct the Investor is given the privilege of frnchise, which grnts, to some extent, monopoly power during the * KPP Design Co,Ltd, Lo PDR; Emil: hi_vorsing@hotmil.com ** Professor nd Director, Office of Reserch nd Acdemic Services, Ntionl University of Los ; Emil: s_phommsone@yhoo.com [17]

2 concession period. As the BOT pproch provides the mechnism for using privte finncing, it lso llows the government to be ble to build more infrstructure fcilities without using dditionl public funds. The BOT procurement system hs been developed with severl similr pproches in fmily, including privte finnce inititive, build-own-operte nd trnsfer, build-own nd operte nd design-build-finnce nd operte (Frnks, 1998). Over the lst 20 yers, the BOT contrct hs proven to be n effective method in finncing public infrstructure projects in both developing nd developed countries. In the erly 1990s, when the British government sought to privtize more public projects, the BOT pproch gined populrity (Frnks, 1998). In prctice, the government relies on the Py Bck Period (PBP) under the miniml Internl Rte of Return (IRR) s expected by the concessionire to determine the concession period (Shen nd Li, 2000). This enbles the PBP to be esily computed by the conventionl Net Present Vlue (NPV) method. As n lterntive, Ngee et l (1997) hve developed multiple liner regression model which enbles the vlue of ny concession item to be clculted when the other two items re known. Both these pproches, however, re dominted by high levels of risk nd uncertinty (fluctutions in interest rte, infltion, cost, revenue, etc.). An overly optimistic estimte bsed on the csh flow evlution, for instnce, could men tht the return rte expected by the concessionire my never be relized during the greed concession period. Therefore, when estblishing the concession items, due considertion of the effects of the risks nd uncertinties involved is needed. A further slient issue is the need to embrce the views of vrious stkeholders-the public prtner, the investor nd the end-users-when the concession items re determined. Most of the mjor public infrstructure projects in Hong Kong were built using the BOT system, which lso hs proven effective in ttrcting overses investments in developing countries such s Chin. For exmple, Lee nd Shen (1998) show the successful ppliction for underground ril nd highwy works in Chin nd suggest the future potentil of dopting the system in Chin. A quntittive mesure for determining concession period tht cn protect the interest of both the government concerned nd the privte investor is n importnt spect for win-win decision mking. There re specultions tht in BOT contrct the government benefits too little or the privte entity benefits too much. Generlly, longer concession period is more beneficil to the privte investor, but prolonged concession period my result in loss to the government. On the other hnd, if the concession period is too short, the investor will either reject the contrct offer or be forced to increse the service fees in the opertion of the project in order to recover the investment costs nd to mke certin level of profit. Consequently, the risk burden due to the short concession period will be shifted to the public who use the fcilities. Fig. 1 Involvement of mjor prticipnts in build operte trnsfer contrct process [18]

3 In trditionl prctice, the concession period is determined by csh flow nlysis normlly conducted by the investor, nd the government s interests re not necessrily incorported in the nlysis. Bsed on the nlysis, period such s 10, 20, or 30 yers or even longer will be dopted. For exmple, building the English-French Chnnel tunnel gives 55-yer concession period to the investor tht involves the investment cost of $10.3 billion (Jun, 1998). It is noticeble tht, side from the finncil compenstions to the investor, the interests of the government were not seriously considered in the nlysis. The rnge of lterntive concession period t c tht cn protect the interests of both the government concerned nd the privte investor defined in following model (Shen et l., 2002) IcR NPV ( t c) NPV ( F), (1) Where I c = investor s cpitl, R = investor s expecttion return rte from cpitl investment, NPV denotes the ccumulted NPV, nd F is the economic life of the project. In this pper, we im to estblish the concession period in BOT of hydropower dms project. Implementtion Process of Build Operte Trnsfer Contrct The implementtion process of BOT contrct involves mny prties, including the government, investor, finncing institutions, construction contrctor, nd operting firms. The involvement of the project prticipnts in typicl BOT-contrct process is highlighted in Fig. 1. The process of implementing BOT-contrct project cn be divided into four mjor stges: project fesibility study nd tendering, construction, opertion, nd post trnsfer. The concerned government nd its consultnts will be engged in the project fesibility study nd tendering stge. The mjor ctivities involved in this stge re to; (1) Initite project tht is often n infrstructure project requiring privte investment; (2) Exmine the project environment nd conduct fesibility study; (3) invite tenders privte investors to bid; nd (4) offer the frnchise contrct. The durtion of this stge is ffected by the vilbility of project informtion, project complexity, negotitions between Tenderers nd the government concerned, nd the public response to the project. Investors prticiption in this stge is to gin more understnding of the project in order to submit competitive tenders. The construction stge covers much wider rnge of ctivities such s project finncing, lnd cquisition, design, procurement of building mterils nd plnt, construction work, equipment instlltion, opertion test, nd trining for operting stff. The timing for this stge is minly ffected by the procurement process of building mterils nd plnt, size nd complexity of the project, nd construction methods selected. The project opertion stge ssumes the mjor prt of the BOT-contrct time nd concerns the dily opertion nd mintennce of the project. During the opertion stge, the project investor is ble to mke income from providing services such s provision of bridges nd highwys. The investor lso strts to py cpitl gins txes nd repyments to finncing institutions. The construction period nd opertion period form the concession period in BOT contrct. Upon the expirtion of the concession period, the ownership of the project will be trnsferred to the government concerned. Trnsfer nd post trnsfer involve the inspection of the project nd rrngement of trnsfer, opertion by government, nd finlly dismntling of the project. The [19]

4 Durtion of the post trnsfer opertion period depends on the project s type nd nture, its nturl nd economic life, mintennce nd mngement costs, nd so on. Cse Study Two BOT projects in Lo PDR were used to test the effectiveness of the proposed methodology for detrining the resonble concession period s describe the project detil s followings: Theun-Hinboun Hydropower Project In 1991, the Government of Los strted studies to identify suitble project in centrl Los to export power to Thilnd nd provide locl supply. The project, initilly, ws conceived s public sector project. A full fesibility study strted in 1992 nd foreign investors joined in Project implementtion strted in November 1994, nd the Project ws completed well by the totl project cost million USD. Commercil opertion commenced on 31 Mrch The project considered n implementtion period of five yers nd project life of 25 yers, s stipulted during project pprisl. All benefits nd cost re expressed in constnt terms. A stndrd conversion fctor of 0.90 ws used to convert finncil cost of non-trdble items into economic terms. The project incurred mintennce cost of bout $3.7 million in 1998, which corresponded to bout 1.5 percent of the $240.2 million cpitl cost of the project. During pprisl, the mintennce cost ws ssumed to be bout 2 percent of the pprised cpitl cost of $270.0 million. According to the Economic Internl Rte of Return of (Appendix A), the verge growth rte of the totl cost in opertion period of Theun-Hiboun Hydropower Project decrese $0.07 million per yer, nd by the regression nlysis the totl revenue stisfy the following formul Totl Revenue = t, (sig=0.000) (sig=0.000) Where t = 1998, 1999, 2000, The grph of the totl cost, the totl revenue nd the net csh flow re follows: Fig. 2 Totl Cost, the Totl Revenue nd the Net Csh Flow [20]

5 The negtive Net Csh Flow will occur in yer The ccumulted NPV, NPV of investor on the lst yer of concession (yer 2022) is $ million. Due to I = $240.2 million, suppose R = 15%, we found I c R = 36.03, nd ccording to inequlity (1), we lso found tht c I c R NPV ( yer 2003) = (2) This mens the investor of the Theun-Hiboun Hydropower Project gins 18 yers with $ million. On the other hnd, in the concession period, Lo government receives from the Theun-Hiboun Hydropower Project s Tx nd 5% Roylty, mount $127.5 million. Suppose the life time of the Theun-Hiboun Hydropower Project is yer 2048, fter concession period the ccumulted NPV of Lo government, NPV of gov, will $ million, nd found tht (see ppendix B) I c R = NPV ( yer 2022) = (3) Contrdiction or flse inequlity. The inequlity (1), see ppendix C, stisfy I c R = NPV ( yer 2016) = NPN of gov = This mens, the suitble concession period for the Theun-Hiboun Hydropower Project is 23 yers or yer 2017 should trnsfer to Lo government. The Rod 14 A Project The construction Rod No. 14A is one of project with in Phonthong District s development pln which ws connected to Chmpk District, the project strted point is Bn Huyphk, phonthong District nd finished point is Bn Phphin, Chmpsk District, Chmpsk Province. The totl distnce from strt to the end of project is 25 Kilometers, 9 meters wide nd the project pssed 12 villges which were 750 households. The fesibility study strted in 2007 by the privte locl compny nmely Dungdy Construction Sole Compny. Project implementtion strted in 2008, nd the Project ws completed well by the totl project cost 22,605, million USD. Opertion commenced on The project considered n implementtion period of five yers nd project life of 45 yers, s stipulted during project pprisl. All benefits nd cost re expressed in constnt terms. The Economic Internl Rte of Return of the Rod No.14A Project is: Tble 1 The Economic Internl Rte of Return of the Rod No.14A Project No. Yer Income Cost Net Vlue ,897, (12,897,073.00) ,784, (5,784,252.00) ,923, (3,923,761.00) ,812, ,950, (138,360.00) ,130, ,819, , ,696, ,687, ,008, [21]

6 Tble 1 (Con.) No. Yer Income Cost Net Vlue ,282, ,760, ,521, ,735, ,425, ,310, ,984, ,293, , ,936, ,050, , ,547, , ,435, ,841, , ,525, ,191, , ,079, ,608, , ,496, ,104, , ,991, ,513, , ,197, ,371, , ,258, ,391, , ,279, ,605, , ,493, ,051, , ,734, ,770, , ,658, ,817, , ,705, ,252, , ,140, ,150, , ,834, ,599, , ,486, By the regression nlysis the income of the Rod 14A Project stisfy the following formul income = t, (sig=0.000) (sig=0.000) where t = 2011, 2012, 2013, But the cost will periodic since yer The grph of income, cost nd the net csh flow re follows: Fig. 3 Income, Cost nd the Net Csh Flow re Follows [22]

7 The negtive Net Csh Flow will not occur. The ccumulted NPV, NPV (see ppendix), of investor on the lst yer of concession (yer 2052) is $494,040, Due to I = $22,605,086, suppose R = 15%, we found I c R = $3,842,864.62, nd ccording to c inequlity (1), we lso found tht I c R NPV ( yer 2025) = 9,249, (4) This mens the investor of the Rod 14A Project gins 27 yers with $484,790, Conclusions The concession period is one of the most importnt decisions to be mde when the build operte trnsfer (BOT) contrct is pplied to infrstructure projects. This is the mesure for deciding the timing of ownership nd for delineting benefits, uthorities, nd responsibilities between the government nd privte investor. The durtion of the concession period directly ffects both the investor s level of return on the investment nd the government s interests. The cse Theun-Hiboun Hydropower Project, suppose tht R = 15%, we found tht the investor cn trnsfer to Lo government on 6 yers fter commercil opertion or in yer For firly interest of both sides, investor should trnsfer to Lo government on 18 yers fter commercil opertion or in yer The cse Rod No. 14A Project, suppose tht R = 15%, we found tht the investor cn trnsfer to Lo government on 18 yers fter opertion or in yer Otherwise Lo government loss interest for 27 yers with $484,790,951. References Beijing Engineering Consultnt Corportion Guideline on the ppliction of BOT projects. Beijing: Erthquke Publictions. Frnks, J Building procurement systems. Brcknell: Chrtered Institute of Building. Jun, S The theory, method nd prctice of running BOT projects. MSc thesis, University Press, Southest Univ. Lee, R. nd Shen, L. Y Overview of Chinese government policies to ttrct BOT investment. J. Hong Kong Surveyor 9 (1): Shen, L., Lee, K. nd Zhng, Z Appliction of BOT system for infrstructure projects in Chin. J. Constr. Eng. Mnge. 122 (4): Shen, L., Li, H. nd Li, Q Journl of Construction Engineering nd Mngement. Tiong, R Risks nd gurntees in BOT tender. J. Constr. Eng. Mnge. 121 (2): Wlker, C. nd Smith, A Privtized infrstructure: The build operte trnsfer pproch. London: Thoms Telford. Appendix A Totl Totl Net Csh Yer Totl Cost Totl Revenue Net Csh Flow Yer Cost Revenue Flow (42.05) (15.31) (51.40) [23]

8 Totl Totl Net Csh Yer Totl Cost Totl Revenue Net Csh Flow Yer Cost Revenue Flow (96.97) (0.01) Appendix B Yer Totl Cost Totl Revenue Net Csh Flow NPV Roylty Tx NPV of gov (42.05) (42.05) (15.31) (57.36) (51.40) (108.76) (96.97) (205.73) (185.32) (134.02) (80.58) (29.09) [24]

9 Yer Totl Cost Totl Revenue Net Csh Flow NPV Roylty Tx NPV of gov (0.01) [25]

10 Appendix C Yer Totl Cost Totl Revenue Net Csh Flow NPV Roylty Tx NPV of gov (42.05) (42.05) (15.31) (57.36) (51.40) (108.76) (96.97) (205.73) (185.32) (134.02) (80.58) (29.09) [26]

11 (0.01) [27]

FINANCIAL ANALYSIS I. INTRODUCTION AND METHODOLOGY

West Bengl Drinking Wter Sector Improvement Project (RRP IND 49107-006) FINANCIAL ANALYSIS I. INTRODUCTION AND METHODOLOGY A. Introduction 1. A finncil nlysis hs been conducted for the proposed West Bengl