CHAPTER 6 IDENTIFICATION OF CRITICAL …shodhganga.inflibnet.ac.in/bitstream/10603/2589/15/15...104...

104

CHAPTER 6

IDENTIFICATION OF CRITICAL SUCCESS FACTORS

6.1 INTRODUCTION

The PPPs involve various kinds of risks [18] that may emerge at different stages in

the life cycle of a project. The PPPs are not merely a vehicle for governments to

develop infrastructure projects by transferring all the risks to the private sector and

thus shedding of all their responsibilities. Rather, they require appropriate allocation

and management of risks. Furthermore, private finance initiatives do not

automatically lead to successful infrastructure projects. The PPP schemes should be

well structured. Otherwise, resources could be wasted and depleted. [76]

Some researches have been conducted to identify CSFs for project success using

quantitative measures of various factors [121][122]. However, these factors are only

confined to the project management efforts. The same approach also cannot be

adopted to cover intangible factors or be used when hard performance data are not

available. Alternatively, CSFs have also been identified using expert opinions. The

impact of experience possessed by project key personnel toward project outcomes has

been widely recognized [121][123].

Zhang [76] has given a comprehensive summary of studies undertaken on Critical

Success factors for BOT projects and the lessons learnt from international Public

private partnership practices. Experience has been drawn from international PPP

practices. These include private finance initiative (PFI) projects in the United

Kingdom , BOT-type toll roads in the United States [10], BOT tunnel projects in

Hong Kong [97] and BOT-type projects in Mainland China [1], and project finance in

many other countries. These PPP projects include roads, bridges, ports, airports, and

railways in the transportation sector; power, telecommunication, water supply, and

105

waste disposal systems in the utilities sector; schools, hotels, hospitals, military

facilities, and prisons. In addition, lessons have been learned from some failed PPP

projects, such as the two BOT transportation projects in Thailand [44] and the failure

of Malaysia’s privatized national sewerage project [65]. The failure of this sewerage

project was due to a number of reasons: (1) the lack of competition and transparency

in the selection of the concessionaire, (2) low equity–debt ratio, (3) over-generous

“safety nets” extended to the concessionaire by the government, (4) Inefficiencies and

management blunders of the concessionaire, (5) frequent change of ownership of the

concession company in a short period, and (6) strong public opposition. The World

Bank has provided reasons why many partnered infrastructure projects have been

held-up: (1) wide gaps between public and private sector expectations, (2) lack of

clear government objectives and commitment, (3) complex decision making, (4)

poorly defined sector policies, (5) inadequate legal/regulatory frameworks, (6) poor

risk management, (7) low credibility of government policies, (8) inadequate domestic

capital markets, (9) lack of mechanisms to attract long-term finance from private

sources at affordable rates, (10) poor transparency, and (11) Lack of competition

[124].

In the present work, a systematic approach has been taken to identify and analyze

CSFs for BOT projects. Through literature survey and personal interviews of experts

and practitioners in India certain factors were initially identified which were

considered to be critical for the success of BOT project then a questionnaire based on

these success factors of BOT projects was developed, and the respondents were asked

to rank these factors on a scale of 1 to 5, 5 being the most important and 1 being the

least.

The analysis of the data obtained was done using the Relative Importance Index

method and the important CSFs as identified were further sent to the experts for a

second survey. The Analytical Hierarchy Process (AHP) method has been adopted in

the second survey to solicit consistent subjective expert judgment. The AHP

procedure developed by Saaty [104] has been widely used for multi-criteria decision

making. In the present study, a hierarchical model for BOT project success is

developed.

106

The analysis and results of the survey made to identify CSFs are presented in this

chapter. Top CSFs identified are compared with previous study. The results of the

survey are validated through Agreement analysis. The main CSFs identified in the

study except transparent selection procedure are discussed in detail in this chapter.

The selection procedure has been dealt in detail in the next chapter.

6.2 IDENTIFICATION OF CRITICAL SUCCESS FACTORS

THROUGH RELATIVE IMPORTANCE INDEX METHOD

6.2.1 Data Collection

To identify the critical success factors for BOT projects, two questionnaires were

developed for seeking the opinion of experts through postal survey. The first

questionnaire contained an exhaustive list of success factors for BOT projects. A total

of 39 success factors were considered for ranking by the Relative Importance Index

(RII) method. These success factors were grouped in 6 CSFs namely prevailing

environment, financial viability, concessionaire consortium, financial package, risk

allocation and technical solution.

Ninety respondents filled the questionnaire and submitted their opinion regarding the

relative importance of the success factors for BOT projects. The percentage of

respondents belonging to each category is shown in Table 6.1

Table 6.1 : Number of Respondents in Each Category

The respondents were asked to give their opinion depending upon the importance of

the factor with respect to the success of a BOT project on a scale of 1 to 5. If the

factor is of negligible importance, a value of ‘1’ was assigned and if the factor has

very large / significant importance, a value of ‘5’ was to be assigned. Values of 2 to 4

107

Rank RII Rank RII Rank RII Rank RIIprevailing environmentPublic awareness and support 7 0.77 8 0.77 7 0.76 6 0.77government support 5 0.8 5 0.8 4 0.81 4 0.80fiscal concession & investment policy 19 0.47 21 0.4 18 0.48 19 0.45environmental impact 17 0.5 22 0.39 20 0.46 20 0.45stable government 14 0.59 13 0.6 13 0.6 12 0.60predictable and reasonable frame work 31 0.28 32 0.26 30 0.29 31 0.28adequate local financial market 30 0.29 30 0.28 31 0.28 30 0.28

Contractor Consultant owner overallCSF

were to be assigned for factors for intermediate importance.

6.2.2 Analysis of Data by RII Method

The data received from the postal survey was analyzed by using Relative Importance

Index method in the manner as already explained in section 6.2.2. The analysis was

done independently for the three categories of respondents i.e. contractors, consultants

and owners. Based on the relative importance index of each success factor for BOT

project, ranking of these factors is done for the three categories. To obtain the final

ranking of CSFs, overall average was determined. The overall average was calculated

using the following expression:

321

321

NNN owner of RII N consultant of RII N contractor of RII N

Average)(Overall RII++

×+×+×=

where, N1 = number of contractors

N2 = number of consultants

N3 = number of owners

Table 6.2 presents the ranks for the success factors. The ranks have been calculated

for all the three categories of the respondents – contractor, consultant and owner. The

overall ranking along with the respective RII are also shown in the table.

Table 6.2 Relative Importance Indices (RII) and ranks for 39 different CSFs of BOT projects.

108

Rank RII Rank RII Rank RII Rank RIIfinancial viabilitysufficient long term demand 3 0.81 3 0.81 3 0.82 3 0.81limited competition 13 0.61 14 0.59 14 0.59 13 0.60Sufficient net cash inflow 6 0.78 6 0.78 8 0.74 7 0.77Long term availability of suppliers needed for the normal operation of the project 24 0.41 20 0.41 23 0.41 22 0.41

short construction period2 0.84 1 0.84 1 0.86 1 0.85

investment, payment and draw down schedule 33 0.25 31 0.27 32 0.26 32 0.26

concessionaire consortiumlead member of the consortium 11 0.69 9 0.73 9 0.71 9 0.71effective project organisation structure 28 0.3 27 0.32 29 0.3 29 0.31strong & capable project team 23 0.43 26 0.33 25 0.41 24 0.39leading role by enterprise 16 0.52 16 0.52 16 0.52 16 0.52selection procedure of concessonaire 1 0.86 2 0.82 2 0.84 2 0.84multi disciplinary participants 32 0.26 33 0.27 33 0.25 33 0.26partenering skill 35 0.24 34 0.26 34 0.25 34 0.25

financial packagefinancial strategy 4 0.8 7 0.78 6 0.78 5 0.79

availability of long term debt financing25 0.4 24 0.37 24 0.4 25 0.39

sufficient exit options to the lender 26 0.35 18 0.43 22 0.42 23 0.40appropriate toll/tariff levels and suitable adjustment formula 9 0.72 11 0.7 10 0.7 10 0.71sources and structure of main loans 34 0.25 35 0.25 35 0.24 35 0.25low financial charges 36 0.23 36 0.25 37 0.24 36 0.24fixed and low interest financing 39 0.2 37 0.25 39 0.23 38 0.23

risk allocationconcession agreement 10 0.7 4 0.8 5 0.8 8 0.77shareholder agreement 29 0.3 25 0.34 28 0.32 28 0.32design & construction contract 21 0.44 17 0.46 19 0.47 18 0.46operation & maintenance agreement 27 0.34 10 0.71 15 0.55 15 0.53loan agreement 8 0.74 12 0.64 11 0.65 11 0.68insurance agreement 37 0.23 39 0.22 36 0.24 37 0.23guarantees and support 38 0.22 38 0.23 38 0.23 39 0.23

technical solutioncost effective solution 15 0.53 19 0.42 17 0.49 17 0.48robust solution 12 0.62 15 0.54 12 0.62 14 0.59proven technology 20 0.46 29 0.3 26 0.35 26 0.37innovative solution 18 0.48 23 0.38 21 0.43 21 0.43safety considerations 22 0.42 28 0.32 27 0.34 27 0.36

Contractor Consultant owner overallCSF

`

It can be noted from the table that out of the 39 success factor considered, RII of 10

109

1 2 Contractor Consultant Owner

short construction period 1 39 38 2 1 1 1 1 0selection procedure of concessonaire 2 38 36 1 2 2 1 1 0sufficient long term demand 3 37 34 3 3 3 0 0 0government support 4 36 32 5 5 4 0 1 1financial strategy 5 35 30 4 7 6 3 2 1Public awareness and support 6 34 28 7 8 7 1 0 1Sufficient net cash inflow 7 33 26 6 6 8 0 2 2concession agreement 8 32 24 10 4 5 6 5 1lead member of the consortium 9 31 22 11 9 9 2 2 0appropriate toll/tariff levels and suitable adjustment formula 10 30 20 9 11 10 2 1 1

Success Factors (RII)

Maximum absolute difference in rank

Actual Absolute Difference in Rank

Rank by Maximum absolute

difference

Category RankingContractor- Consultant

Contractor- Owner

Consultant- Owner

success factors have a value less than 0.3 which indicates that most of the respondents

have found them of negligible importance. As such these success factors were ignored

and another field survey was conducted using lesser number of success factors which

were found to be of importance in the first survey.

6.2.3 Agreement Analysis

For validation and reliability of the study conducted, agreement analysis was made for

the rankings of all the three participants for all the 39 success factors taken together

and is shown in table 6.3. The percentage agreement determined varies from 86 % -

93 % for various cases. Therefore there is a good agreement in the ranking and

indicates that for obtaining the CSFs for BOT projects the opinions of the expert

within each category of the respondents is same.

Table 6.3. Agreement analysis for 39 Success Factors.

110

1 2 Contractor Consultant Owner

loan agreement 11 29 18 8 12 11 4 3 1

stable government 12 28 16 14 13 13 1 1 0limited competition 13 27 14 13 14 14 1 1 0robust solution 14 26 12 12 15 12 3 0 3operation & maintenance agreement 15 25 10 27 10 15 17 12 5leading role by enterprise 16 24 8 16 16 16 0 0 0cost effective solution 17 23 6 15 19 17 4 2 2design & construction contract 18 22 4 21 17 19 4 2 2fiscal concession & investment policy 19 21 2 19 21 18 2 1 3environmental impact 20 20 0 17 22 20 5 3 2innovative solution 21 19 2 18 23 21 5 3 2Long term availability of suppliers needed for the normal operation of the project 22 18 4 24 20 23 4 1 3

sufficient exit options to the lender 23 17 6 26 18 22 8 4 4strong & capable project team 24 16 8 23 26 25 3 2 1availability of long term debt financing 25 15 10 25 24 24 1 1 0proven technology 26 14 12 20 29 26 9 6 3safety considerations 27 13 14 22 28 27 6 5 1shareholder agreement 28 12 16 29 25 28 4 1 3effective project organisation structure 29 11 18 28 27 29 1 1 2adequate local financial market 30 10 20 30 30 31 0 1 1predictable and reasonable frame work 31 9 22 31 32 30 1 1 2investment, payment and draw down schedule 32 8 24 33 31 32 2 1 1multi disciplinary participants 33 7 26 32 33 33 1 1 0

partenering skill 34 6 28 35 34 34 1 1 0

sources and structure of main loans 35 5 30 34 35 35 1 1 0low financial charges 36 4 32 36 36 37 0 1 1insurance agreement 37 3 34 37 39 36 2 1 3fixed and low interest financing 38 2 36 39 37 39 2 0 2guarantees and support 39 1 38 38 38 38 0 0 0

Sum 760 108 72 54RAF max 19.49 2.77 1.85 1.38

Success Factors (RII)




difference

Category RankingContractor- Consultant

Contractor- Owner

Consultant- Owner

Percentage agreement 86.00 90.51 93.00

111

6.3 IDENTIFICATION OF CRITICAL SUCCESS FACTORS

THROUGH A HIERARCHICAL MODEL

Table 6.2 indicates that out of the 39 success factors, 10 SFs are having RII less than

0.3. It shows that SFs from rank 30 to 39 are insignificant for the project success and

hence these SFs were not considered in the second questionnaire and only the 29

Success Factors (SFs) were taken which were further grouped into 6 CSFs. The CSFs

are ; prevailing environment, financial viability, concessionaire consortium, financial

package, risk allocation and technical solution.

A hierarchical model for infrastructure project success is developed for a typical

project environment, and is shown in Figure 6.1. The first twenty nine success factors

identified by Relative Important Index method are grouped into six main critical

success factor aspects of BOT projects. Table 6.4 presents the 29 CSFs classed into 6

groups. The model is described below:

Level 1 : At the top of the hierarchy is the goal of “Project Success”.

Level 2 : The six main critical success factor aspects of BOT projects form the

second level of hierarchy.

Level 3 : In this arrangement each of the success factors occupy the third level of the

hierarchy corresponding to one of those six critical success factor.

Table 6.4 : Success Related Factors Considered for AHP Analysis

CSF Aspects Success factor

Prevailing Environment

(PE)

• Public Awareness and support (PE1)

• Government support (PE2)

• Fiscal concession and investment policy(PE3)

• Environmental impact (PE4)

• Stable Government (PE5)

Financial Viability (FV)

• Sufficient Long-term demand (FV1)

• Limited competition (FV2)

112

• Sufficient Net Cash Inflow(FV3)

• Long-term availability of suppliers needed for the

normal operation of the project (FV4)

• Short construction period (FV5)

Concessionaire

consortium (CC)

• Lead Member of the Consortium(CC1)

• Effective project organization structure (CC2)

• Strong and capable project team (CC3)

• Leading role by a key enterprise or entrepreneur (CC4)

• Selection procedure of concessionaire (CC5)

Financial package (FP)

• Financial strategy (FP1)

• Availability of long term debt financing(FP2)

• Sufficient exit options to the lender (FP3)

• Appropriate toll / tariff level(s) and suitable adjustment

formula (FP4)

Risk allocation (RA)

• Concession agreement (RA1)

• Shareholder agreement (RA2)

• Design and construction contract (RA3)

• Operation agreement (RA4)

• Loan agreement (RA5)

Technical solution (TS)

• Cost effective solution (TS1)

• Robust solution (TS2)

• Proven technology (TS3)

• Innovative solution (TS4)

• Safety considerations (TS5)

113

Figure 6.1 : Hierarchical Model for Project Success

6.3.1 Brief Description of CSFs.

6.3.1.1 Prevailing Environment Aspect

The private sector investors and lenders will be interested to develop public

infrastructure projects when the environment where these projects operate is

favorable. The private sector would like a favorable, political, legal, economical and

commercial environment. After establishing a business unit and a legal framework

within which the business unit would work, it must know how the risk is allocated

between parties and their consequences. The business units should have the

knowledge about the market within which it works. The government is in a better

114

position than any party in creating such environments, which largely eliminate fears

of the private sector concerning various risks, especially political risks such as

expropriation and nationalization. Country-specific and/ or project-specific

governmental guarantees and support may also be necessary to manage certain risks

that can be better handled by the government, such as change in law, foreign currency

convertibility, corruption, delays in approval of various permits, and certain force

majeure risks [125][1]. Harris explained the need for high-level political support,

addressing staff concern of losing jobs, need for the press to promote PPPs,

prioritization of projects, and need to choose project sectors for which it is possible to

develop a service based on output specification. With the existence of initiatives, acts,

and guidelines, streamlining PPP implementation is best realized when the

government capital planning process realizes the wide spectrum of delivery systems

that could be used for project development, and that the choice of one system over the

others should be based on the best value for taxpayer’s money. The institutional

framework needed to support PPPs within a jurisdiction requires development of

guidance not only to central government departments but also to local governments

and authorities. Successful implementation of PPPs requires the availability of diverse

skills and expertise in procurement, legal, and financial management. Appropriate

public relation strategies and activities are needed to win public understanding and

support [10].

Sensitive movements for environmental concerns, makes the investors hesitant from

investments in large infrastructure projects. Government support in such projects

plays a crucial role to attract the investors.

6.3.1.2 Financial Viability

Financial viability is critical to the success of any kind of project. In a PPP finance-

based approach, tapping private finance is a major objective to get the needed

infrastructure built when insufficient government funds are available.

For a BOT infrastructure project, it is dependent on a number of factors, particularly

on: (1) long term demand for the products/ offered by the project; (2) limited

competition from other projects; (3) sufficient profitability of the project to attract

115

investors (4) long term cash inflow that is attractive to the lenders; (5) long-term

availability of suppliers needed for the normal operation of the project [77]. In

addition, sensitivity analysis and simulation techniques have also been used in the

financial evaluation of large infrastructure projects [126].

Short construction period plays important role for financial viability of BOT projects

as not only the public would enjoy the benefits of the completed facility earlier but

the cash inflow starts earlier as well.

For projects that are not financially viable but of significant economic value and

political and environmental objectives, the government should provide necessary

flexible project-specific support and/or guarantees to make them financially viable.

These include viable gap funding, foreign exchange guarantee, fiscal benefits and

many other such initiatives.

6.3.1.3 Concessionaire Consortium

A critical issue in public–private partnerships (PPPs) in international infrastructure

development is the selection of the right private-sector partner. This necessitates the

establishment of a set of appropriate selection criteria. Private sector participants play

a paramount role in the successful implementation of particular BOT projects. In the

PPP service-based approach, the major emphasis is the optimization of the time and

cost efficiencies in “service” delivery through the utilization of private sector skills,

innovations, integration, and collaboration in project design, construction, financing,

operation, marketing, and management. Significant realignment of risks among

multiple project participants is a striking feature of the BOT scheme, in which the

concessionaire undertakes far more commitments and assumes much broader and

deeper risks than a mere contractor. Therefore, selection of the right concessionaire is

critical to the success of the project. This can be realized through a competitive

tendering process. Tender evaluation criteria and evaluation methods should be

transparent to ensure fair competition and to avoid criticism of any favoritism.

Transparency in selection procedure will reduce corruption and enhance competition.

Technical and financial strength are the most important success factors in competitive

116

tendering for a BOT project [71]. Technical assessment involves the evaluation of

designs and the planned facilities in a life cycle scenario. Value engineering

techniques can be deployed to improve benefit/cost profiles of potential technical

solutions, particularly in the assessment of unsolicited or alternative technical

proposals. In addition to strengths in formulating advantageous financial and technical

packages, the concessionaire should also have strong managerial capabilities,

including leading role by a key enterprise or entrepreneur, workable project

organization structure, good relationship with host government authorities, and a

strong and capable project team.

6.3.1.4 Financial Package

BOT-type projects usually use a nonrecourse or limited-recourse financing structure,

where lenders look primarily to the revenue stream generated by the project for

repayment and to the assets of the project as collateral for the loan. The lenders have

no recourse or only limited recourse to the general funds or assets of the project

sponsors because the concessionaire is a special-purpose vehicle, in which project

assets, project-related contracts, and project cash flows are segregated to a substantial

degree from the sponsoring entities. This special-purpose vehicle allows the investors

to reduce substantially both their financial investments by using debts and,

consequently, their exposure to project liability [14].

In view of the many responsibilities undertaken and the broad scope of risks assumed

by the concessionaire, and the characteristics of nonrecourse or limited-recourse

financing, it can be concluded that a strong financial capability of the concessionaire

is an important prerequisite for the successful development of a BOT-type project.

This necessitates the exploration of the key common dimensions of a concessionaire’s

financial capability for BOT-type infrastructure projects in general and the

identification of a common set of financial criteria against which these key

dimensions are evaluated. [76]

Public affordability is also a key test of financial package. The scope of long-term

service charges must be within public budget constraints. If users pay for a service,

appropriate toll/ tariff levels should be established, taking into account the users’

117

affordability. Otherwise, strong public opposition may ruin the project, as is the case

of the Tha Ngone Bridge project in the Lao PDR [127].

6.3.1.5 Risk Allocation

There are three principal participants in BOT-type procurement are :– (1) Procurer

usually Government; (2) Franchisee/ Sponsor and (3) Lenders. As the straight equity

participation is very low in PPP projects, the risk is borne by lenders which provide

finance or financial guarantees. The providers of finance look the cash flow of the

project as the source of funds for repayment as the financing is without recourse to

sponsor companies.

As an underlying principle, risks have been allocated to the parties that are best suited

to manage them. Project risks have, therefore, been assigned to the private sector to

the extent it is capable of managing them. The transfer of such risks and

responsibilities to the private sector would increase the scope of innovation leading to

efficiencies in costs and services.

The commercial and technical risks relating to construction, operation and

maintenance are being allocated to the Concessionaire, as it is best suited to manage

them. Other commercial risks, such as the rate of growth of traffic, are also being

allocated to the Concessionaire. On the other hand, all direct and indirect political

risks are being assigned to the Government.

The BOT transactions benefit from strong representation of all parties involved.

Various risks can be effectively managed by allocating them to parties best able to

control them through appropriate contractual arrangements, including a concession

agreement between the government and the concessionaire, and shareholder

agreement, design and build contract, loan agreement, operation agreement, and

contractual guarantees to address specific concerns of government [14][8].

118

6.3.1.6 Technical Solution

BOT projects focuses on the ‘what’ rather than ‘how’ in relation to the delivery of the

services by the concessionaire. This would require the requisite flexibility to the

concessionaire in evolving and adopting cost effective designs without compromising

on the quality of service for users. Cost efficiencies would occur because the shift to

output based specifications would provide the private sector with a greater

opportunity to innovate and optimize designs in a way normally denied to it under

conventional input based procurement specifications.

An imaginative technical solution is another CSF in winning the tender for a BOT

project. The element of an imaginative design must provide a simple and cost-

effective solution by using proven technology to meet the needs of the project. This

will create the competitive advantage against other proposals and make the proposal

highly attractive to the government. The winning technical solutions for the Sydney

Harbour tunnel crossing, and Hong Kong’s Eastern Harbour crossing and Tate’s Cairn

road tunnel were described by Burke, Turner, and Porter and Matson[128][129][13].

An innovative technical solution definitely provide the competitive advantage, and

these cases also illustrated that an innovative technical solution could make an

attractive financial package possible [110]. Public safety should also be given due

consideration while formulating the technical solution for a infrastructure project.

6.3.2 Data Collection

Data was collected through a questionnaire and CSFs were ranked using the

Analytical Hierarchy Process (AHP). The respondents were asked to make pair wise

comparisons of the success factors on the basis of level of importance on a scale of 1

to 9 as shown in table 3.1. The respondents were asked to fill 07 matrices by pair-

wise comparisons. One matrix at second level and 06 matrices at third level were

filled by each respondent. Duly filled questionnaire was returned by 60 respondents.

Appendix 4 gives the questionnaire sent to the respondents and appendix 5 gives the

list of respondents.

119

A 1.00 0.83 2.00 1.50 1.00B 1.20 1.00 2.40 1.80 1.25C 0.50 0.42 1.00 0.83 0.67D 0.67 0.56 1.20 1.00 0.50E 1.00 0.80 1.49 2.00 1.00

A B C D E

6.3.3 Calculations of Priority vector

Each of the seven matrices were filled by 60 respondents by making pair wise

comparisons. The average of 60 matrices for each type was obtained. For

each average matrix, eigen vectors were obtained which gives the ranking of

the factors which have been considered in that particular matrix. The

following steps were carried out for calculating the priority vector (ranking

vector) for all the success factors within a matrix (group).

1. Obtain the average pair wise comparison matrix (Table 6.6)

2. Obtain the synthesized matrix (Table 6.7);

3. Obtain the priority vector and obtain the normalized ranking vector;

(Table 6.8);

4. Calculate λ max;

5. Calculate the consistency index, CI;

6. Calculate the consistency ratio, CR;

7. Check the consistency ratio, if CR< 0.1. than the judgments are acceptable

otherwise ask the experts to revise the pair wise comparison matrix to increase

the consistency.

The above procedure is explained for illustration purpose for an average pair wise

comparison matrix obtained from questionnaire two for the CSF - Prevailing

Environment. As there are 5 success factors under this CSF i.e. prevailing

environment a 5x5 matrix as shown in table 6.5 has obtained.

Step 1. Pair wise matrix is obtained for prevailing environment.

Table 6.5: Pair-wise comparison average matrix for Prevailing Environment

120

A B C D EA 0.23 0.23 0.25 0.21 0.23B 0.27 0.28 0.30 0.25 0.28C 0.11 0.12 0.12 0.12 0.15D 0.15 0.15 0.15 0.14 0.11E 0.23 0.22 0.18 0.28 0.23 1.00 1.00 1.00 1.00 1.00

Synthesize Matrix

Here A, B, C, D and E represents each of the success factor for Prevailing

Environment.

A. Public awareness and support

B. Government support

C. Fiscal concession and investment policy

D. Environmental impact

E. Stable Government

Step 2. Synthesize matrix is obtained.

Synthesizing the pair-wise comparison matrix is performed by dividing each element

of the matrix by its column total. For example, the value 0.23 in Table 6.6 is obtained

by dividing 1(from Table 6.5) by 4.37, the sum of the column items in Table 6.5

(1.00+1.20+0.50+0.67+1.00). Similarly, the other elements of the synthesize matrix

are obtained and are shown in table 6.6

Table 6.6: Synthesized matrix for Prevailing Environment

Step 3. Calculating the Priority and ranking vector

The priority vector can be obtained by finding the row averages of synthesized matrix.

For example the priority value of A is calculated by dividing the sum of the row

(0.23+0.22+0.26+0.22+0.23) by the number of columns, i.e., 5, in order to obtain the

value 0.23. Similarly the other elements of the priority vector (Eigen vector) are

obtained. The ranking vector is obtained by normalizing the highest value of the

121

A 0.23 0.83B 0.28 1.00C 0.12 0.45D 0.14 0.51E 0.23 0.83 1.00

Ranking vector

Priority Vector

priority vector with 1. The priority and the ranking vector are shown in column 1 & 2

of Table 6.7.

Table 6.7 : Priority & Ranking Vectors for Prevailing Environment

Step 4. Calculating λ max;

The elements of pair wise comparison matrix (table 6.5) are multiplied by the

corresponding elements of the priority vector i.e. the 1st column elements of matrix as

shown in table 6.5 are multiplied by the corresponding 1st element of priority vector

and each element of the 2nd column of table 6.5 is multiplied by the 2nd element of the

priority vector and so on to obtain all the elements of weighted sum matrix. The

elements of weighted sum matrices are obtained as given below:

By dividing all the elements of the weighted sum matrix by their respective priority

vector element, we obtain the vector = (5.023, 5.023, 5.025, 5.021, 5.025)

λ max is then computed by taking the average of these values.

λ max = (5.023, 5.023, 5.025, 5.021, 5.025)/5 = 5.023

Step 5: Consistency Index is obtained from the expression as given below.

CI = (λ max – n) / (n – 1) = 0.0059

0.23

1.00 1.20 0.50 0.67 1.00

+0.28 +0.12 +0.14 +0.23 =

1.00 1.25 0.67 0.50 1.00

1.50 1.80 0.83 1.00 2.00

2.00 2.40 1.00 1.20 1.49

0.83 1.00 0.42 0.56 0.80

1.149 1.390 0.625 0.712 1.148

122

Step 6 : Calculate the value of Consistency Ratio (CR)

Selecting appropriate value of random consistency ratio, RI, for a matrix size of six

using Table 3.2, RI = 1.12 is obtained.

CR = CI /RI = 0.0053

As the value of CR is less than 0.1, the judgments are acceptable.

The procedure is repeated for all the 07 matrices to obtain the priority and ranking

vectors for all the success factor at level 3 and Critical Success factor at level 2.

6.3.4 Second Level Success- Related Factor

(i) Relative Importance of Success Factors of Prevailing Environment

The relative importance of various success factors of Prevailing Environment is

presented in Figure 6.2 and Table 6.8 with the weights normalized so that the most

important factor is given a unit value.

Government support has been considered to be the most significant success factor of

prevailing environment for BOT project. Stable political system and public awareness

and support are other important success factors. While the other two factors namely

fiscal concessions and investment policy and environmental impact have relatively

less importance.

Table 6.8: Relative Importance of Success Factors of Prevailing

Environment (normalized with 1 the most important factor)

* R.I. = Relative Importance

Success factor R.I.

A. Public awareness and support 0.83

B. Government support 1.00

C. Fiscal concessions and investment policy 0.45

D. Environment impact 0.51

E. Stable Government 0.83

123

A B C D EA 1.00 1.60 1.00 1.90 0.65 0.21 0.21 0.21 0.21 0.21 1.07 0.21 0.65B 0.63 1.00 0.63 1.19 0.41 0.13 0.13 0.13 0.13 0.13 0.67 0.13 0.41C 1.00 1.60 1.00 1.90 0.65 0.21 0.21 0.21 0.21 0.21 1.07 0.21 0.65D 0.53 0.84 0.53 1.00 0.34 0.11 0.11 0.11 0.11 0.11 0.56 0.11 0.34E 1.54 2.46 1.54 2.92 1.00 0.33 0.33 0.33 0.33 0.33 1.64 0.33 1.00 4.69 7.50 4.69 8.91 3.05 1.00 1.00 1.00 1.00 1.00 5.00 1.00

Ranking vector

TotalA B C D ESynthesize Matrix Priority

Vector

Figure 6.2: Relative Importance of Success Factors of Prevailing Environment

(ii) Relative Importance of Success Factors of Financial Viability

Table 6.9 presents the pair wise average matrix, synthesized matrix, priority and

ranking vectors; and Table 6.10 and Figure 6.3 presents the relative importance of

various success factors of financial viability..

Table 6.9 Pair wise (average matrix), synthesized matrix, priority and ranking vectors

for financial vialbility.(A,B,C,D and E are success factors for Financial Viability )

124

Table 6.10: Relative Importance of Success Factors of Financial Viability

(normalized with 1 the most important factor)


Figure 6.3: Relative Importance of Success Factors of Financial Viability

Short construction period is found to be the most important success factor for

financial viability of BOT project. Probably, the reason being that the cash inflow

starts earlier. Sufficient long term demand and sufficient net cash inflow are next

equally important success factors. Also limited competition Long-term availability of

suppliers needed for the normal operation of the project is significant for financial

viability of BOT project.

Success Factor` R.I.

A. Sufficient long-term demand 0.65

B. Limited competition 0.41

D. Sufficient net cash inflow 0.65

E. Long-term availability of suppliers needed for the normal operation of the

project 0.34

F. Short construction period 1.00

125

A B C D EA 1.00 3.00 1.71 0.86 0.60 0.21 0.21 0.21 0.21 0.21 1.05 0.21 0.60B 0.33 1.00 0.57 0.29 0.20 0.07 0.07 0.07 0.07 0.07 0.35 0.07 0.20C 0.58 1.75 1.00 0.50 0.35 0.12 0.12 0.12 0.12 0.12 0.62 0.12 0.35D 1.16 3.49 1.99 1.00 0.70 0.24 0.24 0.24 0.24 0.24 1.22 0.24 0.70E 1.67 5.00 2.85 1.43 1.00 0.35 0.35 0.35 0.35 0.35 1.76 0.35 1.00 4.75 14.24 8.12 4.08 2.85 1.00 1.00 1.00 1.00 1.00 5.00 1.00

Ranking vector

Priority Vector

TotalA B C D ESynthesize Matrix

(iii) Relative Importance of Success Factors of Concessionaire Consortium

Table 6.11 Pair wise (average matrix), synthesized matrix, priority and

ranking vectors for concessionaire consortium. (A,B,C,D and E are success

factors for Concessionaire Consortium )



various success factors of concessionaire consortium. Selection procedure of

concessionaire is found to be the most important success factor of a concessionaire

consortium. Leading role by a key enterprise or entrepreneur is next important success

factor along with lead member of the consortium. None the less, a strong and capable

project team is also considered significant factor. Effective project organization

structure is the least significant factor.

Table 6.12: Relative Importance of Success Factors of Concessionaire

Consortium (normalized with 1 the most important factor)

Success factor R.I.

A. Lead member of the consortium 0.60

B. Effective project organization structure 0.20

C. Strong and capable project team 0.35

D. Leading role by a key enterprise or entrepreneur 0.70

E. Selection procedure of concessionaire 1.00


126

A B C DA 1.00 2.00 1.40 1.33 0.34 0.34 0.34 0.34 1.35 0.34 1.00

B 0.50 1.00 0.70 0.67 0.17 0.17 0.17 0.17 0.67 0.17 0.50

C 0.71 1.43 1.00 0.95 0.24 0.24 0.24 0.24 0.96 0.24 0.71D 0.75 1.50 1.05 1.00 0.25 0.25 0.25 0.25 1.01 0.25 0.75 2.97 5.93 4.15 3.95 1.00 1.00 1.00 1.00 4.00 1.00

totalRanking

vectorA B C D

Priority Vector

Synthesize Matrix

Figure 6.4 : Relative Importance of Success Factors of Concessionaire

Consortium

(iv) Relative Importance of Success Factors of Financial Package



various success factors of financial package aspect.

Table 6.13 Pair wise (average matrix), synthesized matrix, priority and

ranking vectors for financial package. (A,B,C and D are success factors for

Financial Package )

The most important success factor of financial package is found to be financial

strategy. Appropriate toll / tariff level (s) and suitable adjustment formula is next

significant success factor. The remaining two factors have very less impact.

127

A B C D EA 1.00 2.86 5.00 2.50 1.67 0.39 0.39 0.39 0.39 0.39 1.96 0.39 1.00B 0.35 1.00 1.75 0.87 0.58 0.14 0.14 0.14 0.14 0.14 0.69 0.14 0.35C 0.20 0.57 1.00 0.50 0.33 0.08 0.08 0.08 0.08 0.08 0.39 0.08 0.20D 0.40 1.14 2.00 1.00 0.67 0.16 0.16 0.16 0.16 0.16 0.78 0.16 0.40E 0.60 1.71 2.99 1.50 1.00 0.23 0.23 0.23 0.23 0.23 1.17 0.23 0.60 2.55 7.29 12.74 6.37 4.26 1.00 1.00 1.00 1.00 1.00 5.00 1.00

Ranking vector

TotalA B C D ESynthesize Matrix Priority

Vector

Table 6.14: Relative Importance of Success Factors of Financial Package



Figure 6.5 : Relative Importance of Success Factors of Financial Package

(v) Relative Importance of Success Factors of Risk Allocation



various success factors of risk allocation aspect.

Table 6.15 Pair wise (average matrix), synthesized matrix, priority and ranking

vectors for risk allocation. (A,B,C, D and E are success factors for Risk Allocation.)

Success factor R.I.

A. Financial strategy 1.00

B. Availability of long term debt financing 0.50

C. Sufficient exit options to the lender 0.71

D. Appropriate toll / tariff level(s) and suitable adjustment formula 0.75

128

Table 6.16: Relative Importance of Success Factors of Risk Allocation (normalized

with 1 the most important factor)

Success factor R.I.

A. Concession agreement 1.00

B. Shareholder agreement 0.35

C. Design and construction contract 0.20

D. Operation & maintenance agreement 0.40

E. Loan agreement 0.60


Figure 6.6 : Relative Importance of Success Factors of Risk Allocation

Concession agreement has been identified as the most significant success factor for

risk allocation aspect. Second most important factor is the loan agreement.

(vi) Relative Importance of Success Factors of Technical Solution



various success factors of Technical solution aspect of BOT project.

129

A B C D EA 1.00 0.55 1.10 2.75 3.67 0.23 0.23 0.23 0.23 0.23 1.15 0.23 0.55B 1.82 1.00 2.00 5.00 6.67 0.42 0.42 0.42 0.42 0.42 2.08 0.42 1.00C 0.91 0.50 1.00 2.50 3.34 0.21 0.21 0.21 0.21 0.21 1.04 0.21 0.50D 0.36 0.20 0.40 1.00 1.33 0.08 0.08 0.08 0.08 0.08 0.42 0.08 0.20E 0.27 0.15 0.30 0.75 1.00 0.06 0.06 0.06 0.06 0.06 0.31 0.06 0.15 4.36 2.40 4.80 12.00 16.01 1.00 1.00 1.00 1.00 1.00 5.00 1.00

TotalSynthesize Matrix Priority

Vector Ranking

vectorA B C D E

Table 6.17 Pair wise (average matrix), synthesized matrix, priority and ranking

vectors for Technical solution. (A,B,C,D and E are success factors for Technical

Solution )

Table 6.18: Relative Importance of Success Factors of Technical Solution



Figure 6.7 : Relative Importance of Success Factors of Technical Solution

The Robust solution factor has been found to be the most important success factor.

Success factor R.I.

A. Cost effective solution 0.55

B. Robust solution 1.00

C. Proven technology 0.50

D. Innovative solution 0.20

E. Safety considerations 0.15

130

A B C D E FA 1.00 0.65 0.83 1.07 0.75 1.50 0.15 0.15 0.15 0.15 0.15 0.15 0.90 0.15 0.65B 1.54 1.00 1.28 1.65 1.15 2.31 0.23 0.23 0.23 0.23 0.23 0.23 1.38 0.23 1.00C 1.20 0.78 1.00 1.29 0.90 1.81 0.18 0.18 0.18 0.18 0.18 0.18 1.08 0.18 0.78D 0.93 0.61 0.78 1.00 0.70 1.40 0.14 0.14 0.14 0.14 0.14 0.14 0.84 0.14 0.61E 1.33 0.87 1.11 1.43 1.00 2.00 0.20 0.20 0.20 0.20 0.20 0.20 1.20 0.20 0.87F 0.67 0.43 0.55 0.71 0.50 1.00 0.10 0.10 0.10 0.10 0.10 0.10 0.60 0.10 0.43 6.68 4.34 5.54 7.15 5.01 10.02 1.00 1.00 1.00 1.00 1.00 1.00 6.00 1.00

Ranking vector

Priority Vector

A B C D FESynthesize Matrix

Total

Moreover, the solution apart from being robust should be cost effective and proven

technology based. Innovativeness of the solution and safety consideration factors are

found to be less significant.

6.3.5 Success – Related Factors of First Level

(i) Relative Importance of Different CSFs Aspects for BOT Project Success



different critical success factor aspects.

Table 6.19: Pair wise (average matrix), synthesized matrix, priority and

ranking vectors for different CSF’s aspects for BOT project Success.

(A,B,C,D,E and F are six critical success factor for BOT Project Success)

Table 6.20 : Relative Importance of Different CSF Aspects for BOT Project

Success

CSF Aspects R.I.

A. Prevailing Environment 0.65

B. Financial viability 1.00

C. Concessionaire Consortium 0.78

D. Financial Package 0.61

E. Risk Allocation 0.87

F. Technical solution 0.43

* R.I. = Relative Importance (weight) of Each CSF.

131

Figure 6.8 : Relative Importance of Different CSFs for BOT Project Success

Financial viability has been considered to be the most important success factor for

BOT project success followed by risk allocation and concessionaire consortium. Next

in order Prevailing environment and financial package are next significant factors.

Technical solution is of least significance.

6.4 RANKING AND COMPARISON WITH OTHER

STUDIES OF CRITICAL SUCCESS FACTORS

The ranking of critical success factors and the weights for each of the six success

aspects are combined in order to develop an overall priority ranking of success factors

to achieve the goal of BOT project success as shown in the last column of Table

6.21. The relative importance (RI) at the project success level is obtained by the

following expression.

RI at success level = RI at group level x RI of CSFs

For example: RI of government support” at success level = RI of “government

support” at group level x RI of CSF “ prevailing environment”

132

RI of “ government support” at success level = 0.28 x 0.15 = .041

Similarly the RI at success level of all the 29 success factors are obtained. The

ranking of the success factors along with the RI at success level is shown in table 6.21

Table 6.21 : Ranking of Success Factors

S. No. Critical Success Factors R.I. Rank

1 concession agreement 0.078 1

2 short construction period 0.076 2

3 selection procedure of concessionaire 0.063 3

4 Sufficient long term demand 0.049 4

5 Sufficient net cash inflow 0.049 4

6 financial strategy 0.047 6

7 loan agreement 0.047 6

8 leading role by enterprise 0.044 8

9 robust solution 0.042 9

10 government support 0.041 10

11 lead member of consortium 0.038 11

12 appropriate toll/tariffs 0.035 12

13 Public awareness and support 0.034 13

14 stable government 0.034 13

15 sufficient exit options 0.034 13

16 operation & maintenance 0.031 16

17 limited competition 0.031 16

18 shareholder agreement 0.027 18

19 Long term availability of suppliers 0.026 19

20 availability of long term debt 0.024 20

21 cost effective solution 0.023 21

22 strong & capable team 0.022 22

23 environmental impact 0.021 23

24 proven technology 0.021 23

133

25 fiscal concession 0.019 25

26 design & construction 0.016 26

27 effective project org. 0.013 27

28 innovative solution 0.008 28

29 safety considerations 0.006 29

Table 6.22 represents the top thirteen Critical Success Factors for BOT projects by AHP and

RII methods

Table 6.22: Ranking of Top Thirteen Critical Success Factors for BOT Projects

Critical Success Factors

Ranking

by AHP

Ranking

by RII

concession agreement 1 1

short construction period 2 8

selection procedure of concessionaire 3 2

Suficient long term demand 4 4

Sufficient net cash inflow 4 3

financial strategy 6 7

loan agreement 6 5

leading role by enterprise 8 16

robust solution 9 11

government support 10 6

lead member of consortium 11 12

appropriate toll/ tariffs levels and suitable adjustment

formula 12 10

Public awareness and support 13 9

134

CSF Subfactors AHP RANK RII RANKconcession agreement 1 1

short construction period 2 8

selection procedure of concessionaire 3 2

Suficient long term demand 4 4

Sufficient net cash inflow 4 3

financial strategy 6 7

loan agreement 6 5

leading role by enterprise 8 16

robust solution 9 11

government support 10 6

lead member of consortium 11 12

appropriate toll 12 10

Public awareness and support 13 9

stable government 13 14

sufficient exit options 13 23

operation & maintenance 16 13

limited competition 16 20

shareholder agreement 18 22

availability of suppliers 19 15

availability of long term debt 20 25

cost effective solution 21 19

strong & capable team 22 28

environmental impact 23 24

proven technology 23 17

fiscal concession 25 26

design & construction 26 18

effective project org. 27 29

innovative solution 28 21

safety considerations 29 27

6.5 AGREEMENT ANALYSIS FOR CSFS IDENTIFIED

The ranking of critical success factors for BOT projects is calculated independently,

based on the responses to the two questionnaires developed specifically for the

purpose, by two different methods, Relative Importance Index method and Analytical

Hierarchy Process. Table 6.23 indicates the ranking of critical success factors of BOT

projects by the two methods.

Table 6.23 : Comparison of Ranking of Critical Success Factors

135

In view of the difference in the ranking of CSFs identified, it is imperative to measure

the agreement in the ranking of these factors analyzed by the two different methods.

Okpala and Aniekwu provides a quantitative method for rank agreement analysis. In

this method, the “rank agreement factor” (RAF) is used. The RAF shows the average

absolute difference in the ranking of the factors between two groups. [120]

For any two groups, let the rank of the ith item in group 1 be Ri1 and in group 2 be Ri2

, N be the number of items, and j=N−i+1.

The RAF is defined as, N

|RR|N

iii∑

=

−

= 121

RAF

The maximum rank agreement factor (RAFmax) is defined as

N

|RR|N

iji

max

∑=

−

= 121

RAF

The percentage disagreement (PD) is defined as

100||

|| PD

121

121

×

−

−

=

∑

∑

=

=

N

iji

N

iii

RR

RR

The percentage agreement (PA) is defined as PA = 100 – PD

Value N = 29

The calculations for agreement analysis are shown in Table 6.24

136

AHP RJ by RIIRank by

RIIAHP - RII

concession agreement 1 27 26 1 0

short construction period 2 21 19 8 6

selection procedure of concessionaire 3 29 26 2 1

Suficient long term demand 4 18 14 4 0

Sufficient net cash inflow 4 26 22 3 1

financial strategy 6 17 11 7 1

loan agreement 6 24 18 5 1

leading role by enterprise 8 28 20 16 8

robust solution 9 19 10 11 2

government support 10 25 15 6 4

lead member of consortium 11 15 4 12 1

appropriate toll 12 22 10 10 2

Public awareness and support 13 20 7 9 4

stable government 13 13 0 14 1

sufficient exit options 13 23 10 23 10

operation & maintenance 16 14 2 13 3

limited competition 16 9 7 20 4

shareholder agreement 18 10 8 22 4

availability of suppliers 19 12 7 15 4

availability of long term debt 20 6 14 25 5

cost effective solution 21 11 10 19 2

strong & capable team 22 16 6 28 6

environmental impact 23 5 18 24 1

proven technology 23 7 16 17 6

fiscal concession 25 3 22 26 1

design & construction 26 4 22 18 8

effective project org. 27 2 25 29 2

innovative solution 28 8 20 21 7

safety considerations 29 1 28 27 2

Sum 417 97RAF max 14.379 3.345

Percentage agreement 76.739

Success Factors



difference


Table 6.24 : Calculations of Agreement Analysis of CSFs

137

The results of agreement analysis are presented in Table 6.25.

Table 6.25 : Result of Agreement Analysis

The percentage agreement (PA) for the CSFs identified by the two methods is

76.74%. Therefore, there is a good agreement in the ranking between the RII and

AHP methods and indicates the consistency of the two questionnaire survey.

6.6 COMPARISON WITH PREVIOUS STUDIES

Zhang identified critical success factors for infrastructure development by way of

public – private partnership in China [76]. The ranking of critical success factors is

done on the basis of ‘Significance index.’ The top ten critical success factors

identified in the present study are compared with previous studies as shown in table

6.26.

Out of the top ten critical success factors identified in the present study, eight factors

are also found to be consistent with the success factors identified by Zhang [76]

though by a different approach.

In essence, the comparison using two distinct approaches suggests that the AHP

method is a feasible approach to identify the critical success factors. In addition the

advantage of this approach is that both tangible and intangible factors can be

considered.

Agreement Analysis Parameter Value

1. RAF

2. RAFmax

3. PD

4. PA

3.345

14.379

3.34%

76.74%

138

Table 6.26 : Comparison of Critical Success Factors for BOT Projects

with Previous Study

6.7 DISCUSSION ON TOP TEN FACTORS AND

CONCLUSIONS

6.7.1 Concession Agreement

The concession agreement has been ranked as the top success factor. A concession

agreement can be defined as “An arrangement whereby a private party leases asset

for service provision from a public authority for an extended period and has

responsibility for financing specified new fixed projects during the period. The new

assets revert to the public sector at expiration of the contract.” . The concept of

financing in concession has a wider meaning than a simple payment for the lease of

government asset. It expands to a point where development right of the project as well

as property right may be given to the private concessionaire. The fixed expiration date

can also be extended indefinitely as in the case of Build-Operate-Own (BOO

projects). Further, besides tangible assets public organization, function, activities or

rights can be leased, sold or transferred to the private sector. The concession

agreement addresses the issues which are important for limited recourse financing of

139

infrastructure projects such as mitigation and unbundling of risk; allocation of risk

and rewards between the principal parties; precision and predictability of cost and

obligations; reduction of transaction cost; force majeure and termination. It also deals

with other important concerns such as transparent and fair procedures and financial

support from the government. The objective of Concession Agreement is to secure

value for public money and provide efficient and cost efficiencies and cost effective

services to the users. A proper concession agreement provides a regulatory and policy

framework and is therefore, a prerequisite for attracting private investment with

improved efficiencies and reducing cost, necessary for accelerating growth.

6.7.2 Short Construction

Short construction period will not only ensure the early use of the facility by the user

but also an early cash inflow which will enhance the profitability of the project. Short

construction period has been included as a sub factor of the critical success factor –

Technical solution by Tiong [71] because of the reason that the public would enjoy

the benefits of the completed facility earlier. Gupta and Narasimham [74] considered

this factor as extremely critical for the success of BOT projects. Zhang [76] has not

included this factor directly in his study, but has taken into account a factor naming

sufficient profitability of the project to attract investors. To understand the effect of

short construction period on the success of a BOT project, a cash flow analysis of a

large infrastructure project is carried out in the subsequent section.

6.7.2.1 Cash Flow Analysis of an Infrastructure Project

Infrastructure projects are, mostly, large projects which include several single projects

called sub-projects, such as a highway construction project that may include several

single projects, like several roads and bridges. Each sub-project is usually staffed with

some people who perform a limited number of tasks within a limited time to complete

the project. To manage multiple sub-projects, the project manager must develop an

overall construction schedule. These sub-projects may be related or unrelated. The

project manager can reduce the overall project duration by crashing the duration of

some sub-projects.

140

Considering an example of an infrastructure project that is estimated to cost Rs.

31000 millions as per 2006-07 rates. The project consists of six sub-projects and is

estimated to take a normal duration of six years as shown in Figure 6.9 The revenue

will start flowing in the seventh year. Assuming 10% inflation rate compounded on

yearly basis, the total project cost is Rs. 38950 millions. This cost includes

management and consultancy charges @ 3%, establishment and miscellaneous

expenditure @3%, contingency charges @ 5% and operating & maintenance charges

@ 1 % on the cost of project each year. The expenditure (outflow) is shown in Table

6.27. The interest is calculated @10 % compounded annually. Interest for the

income/expenditure incurred in a year is calculated for a period of half year only for

that particular year. The income (inflow) will start coming in the seventh year and it is

assumed that the income will increase @ 30% each year. The cash flow analysis is

shown in Table 6.28. The break-even is obtained in 12th year.

The project is now proposed to be completed in five years by crashing the sub-project

no. 1 by 1 year as a second alternative. This will result in early cash flow as the

income will start in the sixth year only. The total project cost is assumed to remain

constant. The revised expenditure (outflow) on the project and the revised cash flow

analysis are calculated for similar conditions of interest & inflation rates, and the

results are tabulated in Table 6.29 and Table 6.30. The break-even here is achieved in

the10th year.

As a third option, the project is proposed to be completed in four years by crashing

sub-project no. 1 by 2 years and sub-project no. 4 by 1 year. Assuming again that the

total capital cost of the project remains the same, the revised outflow and cash flow

analysis is made and the results are shown in Table 6.31 and Table 6.32. The break-

even in this case is obtained in 9th year.

The summary of the results of three options with the amount available in the 12th year

is shown in Table 6.33. By crashing the sub-project number 1 by 1 year, extra income

of Rs 639954 millions is generated which is more than 2.7 times the original value.

Therefore, it is clear that by reducing construction time even by spending more, it is

141

advantageous to the promoter as well as to the government in BOT projects. It

establishes the importance of short construction period as the critical success factor

for BOT projects.

Figure 6.9 : Schedule of a Infrastructure Project

* PMC Project Management and Consultancy

+ EST & MISC Establishment and Miscellaneous

++ O & M Operation & Maintenance

Table 6.27: Expenditure (Outflow) for Six Year’s Project Duration

142

Table 6.28 : Cash Flow Analysis for Six Year’s Project Duration

Table 6.29 : Expenditure (Outflow) for Five Year’s Project Duration

143

Table 6.30 : Cash Flow Analysis for Five Year’s Project Duration

Table 6.31 : Expenditure (Outflow) for Four Year’s Project Duration

144

Table 6.32 : Cash Flow Analysis for Four Year’s Project Duration

Table 6.33: Summary of Results

6.7.3 Selection Procedure of the concessionaire

Competitive bidding and a transparent selection procedure will ensure the value of

money to the public. Short listed bidders are normally required to specify only the

amount of grant sought by them whereas all the technical, managerial, financial

strengths of the bidder are considered only during short listing. Lowest bid may not

provide the best value to the owner/government. Pre qualification that is short listing

145

of the bidders, therefore, assumes a lot of importance for the success of BOT projects.

a model for prequalification of bidders and a model for selection of best value

promoter has been developed in the present study and are given in chapter 7.

6.7.4 Sufficient long term demand and Sufficient Net cash

inflow

The repayment of the debt and dividend to the promoter are to be paid only from the

revenue generated from the project. The project can therefore be bankable only when

it has sufficient long term demand and sufficient net cash inflow.

6.7.5 Financing Strategy and Loan Agreement

The financing of a BOT project depends on the anticipated financial performance of

the project as project earning are the only source of the repayment. A major

component of risk mitigation in BOT projects is the selection of the appropriate

financing strategy. Through the loan agreements the project sponsors try to achieve a

debt structure in which the long term debt is maximized to minimize the refinancing

risk.

Project sponsors face many risks when undertaking large infrastructure projects

particularly BOT projects. If one or more of the risks are not properly addressed it

will lead to failure of the project.

Kwak [131] analyzed 87 concession projects in Asia out of which 14 concession

projects valuing $19856 millions, approximately 30% of the total concession value,

were delayed, expropriated or even cancelled due to political, financial,

environmental, legal, and social problems. Schaufelberger [103] showed that 3

projects in North America, 6 transportation projects in Asia and 4 power generation

projects in Asia had faced serious problems due to the political, financial, and market

risks faced by project sponsors. The World Bank [5] surveyed 86 PPP projects in

India out of which 15 projects were completely abandoned. In most of them either

146

good offers were not received or private developers found them not profitable.

6.7.5.1 Risks in PPP Projects

Figure 6.10 typically illustrates the relationships between principal participants in

BOT-type procurement. Much of the risk of a PPP project comes from the complexity

of the arrangement itself in terms of documentation, financing, taxation, technical

details sub agreements etc involved in a major infrastructure venture, while the nature

of the risk alters over the duration of the project. For example, the construction phase

of the project will give rise to different risks from those during the operating phase

[102]. The risks can be broadly classified into: (1) elemental risks comprising

physical, design, construction, operation and maintenance, technology, finance and

revenue generation risks and (2) global risks, comprising political, legal, commercial

and environmental risks [18].

Figure 6.10 Typical relationships between principal participants in build operate transfer type

procurement. [79]

Most of these risks are common to any project financing activity, and apply with more

or less force depending on the project concerned and can be evaluated using much the

same basic techniques. The critical question, as always, is whether revenue streams

can cover operating costs, service debt finance and provide returns to risk capital.

147

Consider the case of infrastructure in the form of a water supply project. Sponsors of

the project borrow money to build a treatment and water supply plant. The sponsors

contract to supply water to utilities, projecting that the contract revenues will suffice

to pay debt service and generate profits. But risks abound. Will the plant actually be

built on time? Will the plant work? And will the market value of the contracts enable

participants to avoid an income shortfall? Can rates be raised to levels that more or

less equal the utility’s costs for providing water, an activity that has historically been

regulated by government? None of these questions can sensibly be dodged or ignored

in project evaluation.

Ultimately, the ‘bottom line’ (i.e. project default risk) is borne by the financiers, and

when considering future cash flows can be thought of as falling into two categories:

1. Moderate deviations from estimated cash flow projections, due to fluctuating prices,

costs, timing delays, minor technical problems etc.

2. Disasters to a project, due to a major cost overrun, downturn in the economy, change in

legal rulings, alteration to the political climate, environmental disaster etc, which could

lead to project failure and bankruptcy.

6.7.5.2 Risk Analysis

There are three principal participants in BOT-type procurement – (1) Procurer usually

Government; (2) Franchisee/ Sponsor and (3) Lenders. Fig. 6.11 provides a flow chart

of risk evaluation chart of the analytical approach from the perspectives of the main

parties of the project.

148

Figure 6.11 Flow Chart of Analytical approach [102]

It summarizes their risk perspectives, the key variables, the major risk they face, and

the risk analysis which is appropriate. It is important to look at the nature and

quantum of risk from the different perspectives of the main parties to the project.

From the viewpoint of Government the money should be spent economically,

efficiently and effectively. The government i.e. the public procurer seeks to utilize

private sector money and expertise and thereby achieve value for money which may

come from the private sector innovation and skills in design, construction and

operation of the project. Even though the Government transfers keys risks in design,

construction delays, cost overruns and finance etc. to a private sector entity, however,

risk transfer may be misleading. The project sponsor in PPP forms a highly geared

special purpose company (SPC) for the project vehicle and consequently, a reliance

on revenues to pay for operating cost cover debt financing, giving the requisite return

on the risk capital. PPP projects are viable only if continuous long term revenue is

assured otherwise it is the greatest risk to the viability of the project.

As the straight equity participation is very low in PPP projects, the risk is borne by

149

lenders which provide finance or financial guarantees. The providers of finance look

the cash flow of the project as the source of funds for repayment as the financing is

without recourse to sponsor companies.

In most of the infrastructure projects particularly, the highway sector, project assets

do not constitute adequate security for lenders. It is project revenue streams that

constitute the mainstay of their security. Lenders would, therefore, require assignment

and substitution rights so that the concession can be transferred to another company in

the event of failure of the Concessionaire to operate the project successfully.

Based on the analysis of case studies reported in the literature a decision model is

presented in which a project promoter can select an appropriate financial strategy

depending on the possible risk to be faced during the project life cycle. The decision

depends on the estimated quantum of financial, political and market risk and is shown

in table 6.34. [103]

Table 6.34: Appropriate Financial Strategy Depending On the Possible Risk

Risk

Conditions Financing strategies

Low Risk

Use high debt to equity ratio for maximum leverage and

maximum return on invested equity

Establish minimum contingency credit facilities to minimize

financing cost.

Use capital markets to procure debt financing to reduce interest

cost.

Procure long term financing early to reduce financing costs.

High

political

risk

Involve International firms or organizations to create leverage

with local government authorities.

Seek assistance from influential individuals or organizations

who have rapport with local government authorities.

Seek local government support and guarantees.

Procure insurance from government organizations

150

Establish contingency credit facilities.

High

Financial

risk

Obtain loans from international lending institutions

Use fixed rate or standardized rate debt financing

Denominate loans in local currency

Structure debt financing in the same currencies as anticipated

revenues

Structure revenues in both local and foreign currencies

Seek government support and guarantees.

Insert revenue escalation provision into the contract.

Establish a contingency credit facility to cover unanticipated

expenses.

High

Market

Risk

Finance early phases with equity and temporary loans and

refinance during the operation phase with lower cost long term

debt

Structure the debt repayment schedule to start low and escalate

during the initial years of operation

Negotiate contract terms that allow increases in user fees.

Establish a contingency credit facility to cover unanticipated

revenue shortfalls.

Restructure debt, if necessary, to solve cash flow problems

during the concession period.

6.7.5.3 Key Constraints to Private Financing Infrastructure

Financial sector constraints to private financing of Infrastructure projects are

complex, capital intensive, long gestation projects that involve multiple and often

unique risks to project financiers. Infrastructure projects are characterized by non-

recourse or limited recourse financing, i.e., lenders can only be repaid from the

revenues generated by the project. This limited recourse characteristic, and the scale

and complexity of an infrastructure project makes financing a tough challenge, which

is further compounded by two factors. First, a combination of high capital costs

during construction and low operating costs implies that initial financing costs are a

very large proportion of the total costs. Second, infrastructure project financing calls

151

for a complex and varied mix of financial and contractual arrangements amongst

multiple parties - the project sponsors, commercial banks, domestic and international

financial institutions (FIs), and government agencies.

6.7.6 Leading role of a key entrepreneur

A promoter with a strong managerial capability is required who should play a leading

role of a key entrepreneur to provide good relationships with host government

authorities and should have experience in international BOT project management. He

should be capable of managing multidisciplinary participants and should create a

strong project team. This will be one of the criteria while selecting the concessionaire.

6.7.7 Robust Solution

A robust solution would provide requisite flexibility to the concessionaire in evolving

and adopting cost effective designs without compromising on the quality of service

for users. Cost efficiencies would occur because the shift to output based

specifications would provide an opportunity to innovate and optimize the designs.

6.7.8 Government Support

The commercial and technical risks are being allocated to the private sector but all

direct and indirect political risks are assigned to the government. Government support

in providing a favorable environment is pre-requisite to the success of the BOT

project.

Government of India has introduced several innovative Schemes aimed at promoting

PPPs. While encouraging PPPs, six constraints have been identified:

1. Policy and regulatory gaps, specially relating to specific sector policies and

regulations;

2. Inadequate availability of long term finance (10 year plus tenor) – both equity

152

and debt;

3. Inadequate capacity in public institutions and public officials to manage PPP

processes;

4. Inadequate capacity in the private sector – both in the form of

developer/investor and technical manpower; and

5. Inadequate shelf of bankable infrastructure projects that can be bid out to the

private sector.

6. Inadequate advocacy to create greater acceptance of PPPs by the public.

6.7.8.1 Policy and regulatory constraints

1. Weakness in enabling policy and regulatory framework. Political and regulatory risks

are still perceived to be significant by the private sector. Slow and fragmented

approval processes create risk as a delay increase the overall cost of the bidder. There

should be specialized and efficient dispute resolution and arbitration mechanism.

Documentation of best practices and quicker assimilation and dissemination of the

practices to various levels of the Government is needed. There is a limited systematic

compilation analysis and transfer within the public sector and knowledge between

PPP projects, sectors and different govt.; to the extent that there is a lack of

confidence in civil servants to undertake PPPs. [5].

2. Adequate instruments and capacity to meet long term equity and debt financing is not

available. The govt of India has recently setup a corpus fund titled India infrastructure

project development fund (IIPDF) for supporting the development of credible and

bankable PPP projects. This is a welcome step robust evaluation mechanism is needed

to ensure that PPP programs are delivering value for money. The PPP projects

financed by investment bank should be properly monitored and evaluated. Techno

economic and financial appraisals made by the investment banks are useful to the

promoter, commercial bankers, and the concessionaires.

3. Lack of shelf of credible, bankable infrastructure projects. During a survey made by

World Bank 16 projects were found abandoned, mainly because the projects were not

bankable. This is mainly because of lack of capacity in public institutions and official

to manage the PPP process. Further, on one hand, the development is done where the

153

user can pay and on the other side because of the economical condition of the user the

projects are not bankable. For the overall development of the country the

implementation of such types of projects is utmost important. This could be achieved

by making suitable packages of two or more than two projects consisting of a

bankable and an unbankable project so that the total package becomes bankable.

6.7.8.2 Recommendations

To address these constraints perceived in the implementation of PPP projects the

following are recommendations:

1. Fiscal benefits in terms of tax holiday to infrastructure projects and tax incentives to

investors may be provided.

2. Approval mechanism including environmental clearance should be streamlined.

3. Systematic compilation, analysis and experiences should be made available and the

same be provided on the website which has been recently launched by the government

to exclusively devoted to PPPs. This will facilitate quicker assimilation and

dissemination of best practices to various levels of govt.

4. Preparation of standard documents such as model concession agreement,

prequalification and procurement processes.

5. A specialized and efficient dispute resolution and arbitration mechanism may be

created.

6. Institutions may be created solely for the purpose of promoting PPP projects at the

central and state level.

7. A robust transparent evaluation mechanism may be provided to ensure that PPP

program are delivering value for money.

8. Facilitating equity financing by improving exit policy and better corporate

governance.

6.8 CONCLUSIONS

In the first stage Relative Importance Index method was used to identify the Critical

Success Factors (CSFs) from the data of first questionnaire in which the opinion of

the experts was sought on a scale of 1 to 5. Based on the result of RII method, the

154

second questionnaire was developed using the Analytical Hierarchy Process (AHP)

method. The CSFs identified were found to be consistent with previous studies.

Personal interviews of the project managers, contractors, government executives were

also conducted after identification of critical success factors from the field survey.

The experts interviewed were of the opinion that BOT method of procurement does

not imply a hands-off approach on the part of the government. BOT arrangement only

transfers the risks from the government to the private promoter. From the viewpoint

of Government the money should be spent economically, efficiently and effectively.

The government i.e. the public procurer seeks to utilize private sector money and

expertise and thereby achieve value for money which may come from the private

sector innovation and skills in design, construction and operation of the project. Even

though the Government transfers keys risks in design, construction delays, cost

overruns and finance etc. to a private sector entity, however, risk transfer may be

misleading. The project sponsor in PPP forms a highly geared special purpose

company (SPC) for the project vehicle and consequently, a reliance on revenues to

pay for operating cost cover debt financing, giving the requisite return on the risk

capital. PPP projects are viable only if continuous long term revenue is assured

otherwise it is the greatest risk to the viability of the project.

As the straight equity participation is very low in PPP projects, the risk is borne by

lenders which provide finance or financial guarantees. The providers of finance look

the cash flow of the project as the source of funds for repayment as the financing is

without recourse to sponsor companies.

Further, the failure of these projects leads to a loss to the public in general and

therefore the government also. The success of a BOT project, therefore, depends

crucially on the pro-active role of the governments by an appropriate allocation of

risks at an early stage of the conceptual phase of project. It is validated by the

identification of ‘Government support’ as one of the CSFs in the top ten critical

success factors for BOT project. Hence, there exists a need to develop some

155

guidelines that helps the government in providing a supportive legal, political and

commercial environment for the BOT project.

In the present study, two critical success factors namely short construction period and

selection procedure of concessionaire are identified among the top ten factors for the

success of BOT projects. These two factors were not considered in the previous study

made by Zhang [76]. The CSFs found for BOT projects are quiet different than CSFs

for traditional projects. All the participants of a BOT project are having a common

goal and their interests are not clashing resulting in better coordination during the

construction phase of the project. The top ten success factors identified in this study

have been discussed details.

CHAPTER 6 IDENTIFICATION OF CRITICAL …shodhganga.inflibnet.ac.in/bitstream/10603/2589/15/15...104...

Documents

Transcript of CHAPTER 6 IDENTIFICATION OF CRITICAL …shodhganga.inflibnet.ac.in/bitstream/10603/2589/15/15...104...