A.
PRELIMINARY EVALUATION
AUDIT OBJECTIVES
A.1 To determine the risks
assumed by the government as
detailed in the contracts/
agreements signed by and
between the parties involved.
AUDIT PROCEDURES AUDIT ISSUES
A.1.1 Obtain copies of the contracts/
agreements signed by and between
the government and the project
proponent/operator
A.1.2 Establish the nature of the BOT
project entered into (BOT, BOO,
BOO, among ohters)
A.1.3 Establish the basic features of
the contractual arrangement
entered into based on the BOT law
(please refer to Part II -
Definition of Terms “ Contractual
Arrangements”)
A.1.4 Read through the basic provisions Are provisions contained in
of the contracts and agreements. the contract consistent with
Are these consistent with the the intent of the BOT Law for
intent of the law for such such contractual arrangement
contractual arrangement? Say, the
BTO arrangement calls for the
transfer of title to the
implementing agency once the
facility is commissioned
satisfactorily. Was title
transferred to the government
Agency? Was project financed by
the contractor?
A.1.5 Prepare a risk analysis based on Are risks assumed by the
the contract/agreement. Establish government acceptable and
who assumed the following risks normal for such contractual
arrangement and project type?
By major Category
------------------------
o Pre-Commissioning Risks
- Cost overruns
- Construction delay risks
- Delays in other required
infrastructure
o Post-Commissioning
- Warranties
o Project Lifetime Risks
AUDIT OBJECTIVES AUDIT PROCEDURES AUDIT ISSUES

- general political risks

- foreign exchange availability

convertibility risk

- shareholders/operators not
fulfilling responsibilities

- higher input prices

- strikes

By Risk Type
-----------------

o force majeure - related to

political events and
uninsurable events such as
earthquakes, typhoons,
tsunami, etc.

o inflation - pertains to the risk

that construction or operating
costs are greater than expected
costs due to price changes.

o foreign exchange

- parity risk - pertains to

possible mismatch between
the currency of revenue and
the currency of obligations

- convertibility risk - pertains

to inability to convert
revenues in local currency to
foreign currency.

o performance risk - pertains to

the risk that the implementing
agency would not perform its
obligations as outlined in the
Implementation Agreement.

o market risk - pertains to the

risk that the project will not
generate sufficient revenues to
meet obligations to suppliers,
lenders and shareholders.

o debt service or cash flow inter-

ruption risk - pertains to the
risk that cash flow may not be
enough at some time or another
to cover debt service.

o completion risk - pertains to

AUDIT OBJECTIVES AUDIT PROCEDURES AUDIT ISSUES

the risk that the project will

not be completed at all; on time;
or for the price stated.

o operating risk - pertains to

the risk that the project will
not perform to technical
specifications.

o political risk - pertains to

the risk that the host govern-
ment will not fulfill its
obligations to the BOT/BOO
project.

o insurable risk - ensures that

all insurable risks such as
casualty, liability and
business interruption are
fully insured.

o input risk - pertains to costs

incurred by each party by way
of assets, land, fuel, personnel
and others which are input to
the project.

A.1.6 Determine credit enhancements

offered to the proponent/operator
to mitigate the risks which they
have to assume:

o Force majeure

- Government assumes economic

consequences of this risk

- Commercial insurance, if
available

o Inflation

- During the construction

period - fixed price, turn-
key contract

- During the operating period -

price escalation clauses for
services provided; escalators
foreign exchange, interest
rates, inflation

o Foreign exchange

- Tarrifs payable to the project

company are in the same
Currency as its obligations
AUDIT OBJECTIVES AUDIT PROCEDURES AUDIT ISSUES

- Any conversion from local

Currency is done at pre-
Determined and fixed
exchange Rate

Note that ratio of foreign to

local currency debt service and
fixed charges differs signifi-
cantly per BOT project.

- power plants involve heavy

foreign debt service and
other foreign fixed charges

- water supply projects involves

approximately 60:40 between
capital equipment and civil
works

- toll road projects involve

heavy domestic debt service
and other local fixed charges
due to substantial civil works

o Performance

- national government backstops

implementing agency's obliga-
tions

o Market

- Road projects: no competing

roads will be built during
concession period

- Power plant projects: Take-or-

pay contract covering the
purchase of defined minimum
amount of power

- Other kinds of projects:

If unpredictable or unsuitable
revenue streams, market risk
is often covered through a
BTO arrangement

o Cash Flow Interruption

- Direct coverage by project

company via escrow account
for lender (contains 3 to
4 months of forward debt
service occasionally up to
12 months of forward debt
service)
AUDIT OBJECTIVES AUDIT PROCEDURES AUDIT ISSUES

- Commercial insurance for

business interruption risk
(covers "variety of technical
and non-technical perils" and
available in London and New
York Insurance Markets).

o Completion

- Fixed Price, date certain

lump-sum turn-key contract

- Penalties for delay and failure

to perform

- Maximum limit for pricing

is established

- Contract termination (lender's

right to replace contractor
if he fails to perform

- Assignment (lender's right to

replace sponsor if sponsor
fails to perform)

o Operating

- Warranty period: warranties

from the consortium of
construction contracts and
equipment suppliers

-Operating period: performance

guarantees given to project
company by the operator
through an operating and
maintenance contract

o Political

- Lenders: Export credit

agencies (US Exim Bank,
Japan Exim Bank World Bank
Guaranty Facility)

- Equity Investors: Multilateral

institutions [Multilateral
Investment Guaranty Agency
(MIGA); World Bank
Guaranty]

A.1.7 Summarize risks and credit

enhancements assumed by the
AUDIT OBJECTIVES AUDIT PROCEDURES AUDIT ISSUES

government. (Please refer to risks

normally assumed by the
government by type of project.)
Annex 1

A.1.8 Determine how risks assumed by the

government are mitigated based on
the contract or other subsequent
related contracts and agreements
drawn. For instance, operating
risks due to poor or inefficient
operation and maintenance can
cause plant performance to fall
below levels stipulated in the
agreement, as well as premature
wear and tear on plant
components. The proponent can
mitigate this risks by entering
into a long-term operating and
maintenance (O & M) contract with
a reputable operator. The O & M
contract should encourage good
maintenance and high plant
availability and should contain a
significant penalty clause
covering the operator's
performance obligations. (Please
refer to Annex 2 for discussion on
risks and risk mitigation.)

A.1.9 Evaluate how risks are mitigated

and establish possible
consequences of failure to protect
government's interest after
identifying risks where no
provisions were provided in the
contract to mitigate such.

A.1.10 Discuss these risks with

management and establish
supplementary controls introduced
to protect the government's
interest. If none, take note of
such fact.

A.1.11 Establish how such risks are Does the implementing

actually mitigated by the
implementing agency by performing
a walk-through of the project's
operating systems (only in areas/
phases where government can
participate).
agency ensure that risks
assumed are mitigated by way
of control measures which
are actually implemented?

For instance, how are input costs

controlled? How are operating
risks monitored? Are there
reports to prove such monitoring
 AUDIT OBJECTIVES
A.2 To determine the adequacy of
the contract awards and
implementation system actually
adopted by the agency
AUDIT PROCEDURES AUDIT ISSUES
activities? On what form are
payments made to the proponents
operators - are these in
accordance with the terms in the
contract relative to foreign
exchange currency requirements and
exchange rates?
A.1.12 Based on results of the risk
mitigation analysis and the walk
through analysis performed,
establish the audit areas which
will be pursued at a more
substantive level.
A.2.1 Interview the officials involved Is the system actually
in the contract award and implemented pursuant to the
implementation system. The system BOT Law? What are the
shall basically cover the implications if the system is
following phases: not implemented pursuant to
the BOT law?
- project identification and planning
- proponent selection and award
- construction
- right of way/land acquisition
- completion and operation
The interview shall be focused on
the extent of participation by the
government agency as far as these
phases are concerned.
A.2.2 Walkthrough the important
activities of the system based on
information obtained in A.2.1.
Obtain copies of sample documents
prepared or received after an
activity is supposedly performed
to prove that such activities are
actually performed.
A.2.3 Compare actual system with the
contract award and implementation
system as required in the IRR of
RA 7718.
A.2.4 Establish deviations and evaluate Are deviations material enough
effects of such deviations, as far to warrant a more detailed
as protection over the. evaluation of the transactions?
government's interest is concerned
A.2.5 Based on the results of
evaluations made in A.2.4 as well
as A.1.11, establish the audit
procedures which will be pursued
in the area selected.