Build Operate Transfer (BOT)

Project Delivery System in

Saudi Arabia

Presented at:
AACE International
Arabian Gulf Section of AACE

Wednesday, May 14, 2003

InterContinental Hotel,Al-Jubail

Mohammed Jalaluddin
King Fahd Univ of Pet & Min (KFUPM)
 Background

In Saudi Arabia, provision and financing of large-scale

infrastructure projects has been predominantly undertaken by the
Government.
However, unlike the past ,the new thinking in Saudi Arabia is
that the private sector has an important role to play in financing
major projects.
Saudi Arabia needs about $10 billion/year to build,operate and
finance new power plants,toll roads,desalination plants,airports
etc.

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 2
 Background

The Kingdom has ambitious infrastructure plans to meet future needs

for electricity,water,roads, and other areas. (In Electricity sector alone
$ 117 billion will be needed in next 2 decades)
Budgetary
BudgetarySources
Sources Private
PrivateFinance
Finance

(Some
(SomeForm
Formof)
of)
Public/Private
Public/PrivatePartnership
Partnership

Construction Operation/ Construction/

Construction/
Construction Operation/
Maintenance Rehabilitation/
Rehabilitation/
Maintenance
Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM Maintenance
Maintenance
3
 BOT Concept
Build-operate-transfer (BOT) requires the private sector to
finance, design, build, operate and manage the facility and then
transfer the asset free of charge to the government after a
specified concession period.
First coined in 1984 by the Turkish PM Turgut Ozal within
the framework of the privatization of Turkish's public sector
projects.
Captured the world's attention especially of developing
countries, e.g. Malaysia (NS Highway), Thailand (LTR),
China (Laibin), HK (Tunnel), Australia (Tunnel), UK &
France (Eurotunnel).
Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 4
 BOT Projects
Location Project Contract Cost (US$ millions)

France/United Kingdom Channel Tunnel BOT, 55 years 19,000

Taiwan (China) Taipei Mass Rapid Transit system BOT 17000

Japan Kansai International Airport BOT 15,000

Buenos Aires water and Sewer ROT, 30 years 4,000

Services
Argentina
Telecom Asia communication Network BTO, 25 years 4,000

Thailand
Daya Bay Nuclaer Power Plant, Phase 1 BOO 3,700

China

Malaysia North-South Toll Expressway BOT, 30 years 3,400

Mexico Petacalco Coal –fired Power Plant BOT 3,000

Bangkok Elevated Road and Train BOT, 30 years 2,981

System
Thailand

BOO= Build-Own-Operate: BOT=Build-Operate-Transfer: BTO=Build-Transfer-Operate:ROT= Rehabilitate-

Operate-Transfer

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 5
 Literature Review

 Critical Success Factors (CSF)

 Major Sources of Finance.

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 7
 Critical Success Factors (CSF)

 Right project identification

 Strength of consortium
 Financial package differentiation
 Initial level of tolls/tariff
 Future tolls/tariff increases
 Financial commitments by promoter’s bankers
 Length of concession period
 High equity by promoters
 Profits and revenues sharing with government

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 8
 Major Sources of Finance

 Equity
 Islamic Finance
 The applicability of Islamic finance to
large infrastructure project was first
demonstrated in 1993 with the Hub river power
project in
Pakistan.

 Debt
Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 9
 Identification and Assessment of Factors
affecting Use of BOT in Saudi Arabia
United Nations Industrial Development Organization(UNIDO) in the
recently published guidelines for the successful implementation of BOT
described,

“ a critical challenge is to identify the factors that

effect the application of BOT ”
Identification ,assessment and evaluation of factors conducted in Saudi
Arabia showed two sets of factors, influence the use of BOT in Saudi
Arabia:
A positive set of factors,
A negative set of factors

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 10
 Strong Govt.
Commitment
Privatization
Policy Factor Govt. Incentive &
Support

Sound Macroeconomic
Stability

Stable & Free

Economic Convertable Saudi
Factors Riyal
No Restrictions on
Repatriation of Profits
Efficient Capital
Markets
Availability of Soft
POSITIVE Financial Factors
Loans
FACTORS Availibility of Equity

Tax Reduction

Demand for
Infrastructure Projects

Establishment of SAGIA
Legal Factors
Right to Own Land by
Foreign Investors

New Foreign
Investment Law

Avl of large & Expd

Construction
Organizations
Technical
Factors Availibility of
Equipment & Material

Availability of Modern
Infrastructure
Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 11
 Negative Factors Hindering The Use of BOT
Lack of Owner's
awareness of BOT
concept

Lack of
Knowledge
Contractor's
Problems
Experience in BOT

Lack of Financing
Experience in BOT
Projects

Management &
Control

Absence of
Legislation dealing
NEGATIVE with BOT
Regulatory
FACTORS Problems
Lack of
Independent
Regulatory Body

Legal &
Regulatory
Framework

Service Fee

Financial Limited Capital

Considerations Market

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 12
Market Risk
 Development of Model(s)

BOT projects are characterized as complex web of contractual

agreements.
For Saudi Arabia, BOT concept is relatively new and there is no prior
experience with BOT schemes in the country.
Models are defined as representation of complex situations
Model describing the procedural framework and tools that various role
players in BOT delivery system can use for effective implementation of
BOT projects in Saudi Arabia.
The model intends to help the government and policy makers in adopting
the BOT strategy for Saudi Arabia.

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 13
 BOT Development Process
The model suggests a methodology to be adopted throughout the stages of BOT
projects. The model is organized in 6 distant phases. The Figure shows the BOT
development process.
PHASE I
Project Indentification

PHASE II
Feasibility Study

PHASE III
BOT Prequalification
DEVELOPMENT
PROCESS
PHASE IV
Evaluation & Selection of Concessionaire

PHASE V
Negotiations

PHASE VI
Execution & Implementation
Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 15
 Project Identification
Framework
PROJECT IDENTIFICATION

TRANSPORTATION POWER WATER SECTOR OTHERS

- Highways - Generation - Desalination - Telecommunication
- Bridges - Transmission - Water Supply - Schools
- Tunnels - Distribution - Waste Water - Universities &
- Railways Treatment Technical Colleges
- Ports - Health Related
Industry
- Computer Systems
- IT
- Others

Identify Sector Demand & Assess The Revenue Generating

Capacity of Project

List Suitable Projects & Prioritize Those Projects/Sectors

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM
Formulate Development Team/Committee 17
 PROJECT IDENTIFICATION PHASE I

BOT MODEL IS
CONSIDER OTHER

Framework for PROJECT

FEASIBLE
No
METHOD
PHASE II

Development Yes

and APPLY BOT METHOD

Implementation ISSUE REQUEST FOR

PHASE
III

of BOT projects PREQUALIFICATION (RFQ)

in Saudi Arabia ISSUE REQUEST FOR

PROPOSAL (RFP)

EVALUATION
PROCESS
EVALUATION OF
PROPOSALS
FINANCIAL
PHASE
TECHNICAL IV

SELECTION OF
CONCESSIONAIRE/
PREFERERED BIDDER

NEGOTIATE WITH
SELECTED/PREFERRED PHASE V
CONCESSIONAIRE

SIGN THE CONCESSIONS

AGREEMENT & EXECUTE PHASE21VI
Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM
THE PROJECT
 Conclusion
It is becoming clear that the investment requirements are huge and immense and
Government alone cannot bear the burden
In the current environment, BOT is found to be most attractive and desirable
option for the development and expansion of power generation, water
desalination, roads, ports, airports and railways.
The assessment and evaluation of the factors, conducted in Saudi Arabia proved
positive for application of BOT .The major positive factors for application of
BOT in Saudi Arabia are

Strong government commitment

Availability of soft loans from SIDF to the private sector up to
50% of total project cost.
Demand for projects such electricity generation, water desalination,
etc.
New foreign investment law.
Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 22
 Conclusion

The major obstacles in Saudi Arabia for the application of BOT are identified as
Lack of adequate awareness among owners and contractors regarding
BOT concept
Lack of independent regulatory body
Low Service Fees (insufficient cost recovery)
The study indicated that across all the types of infrastructure projects, power
generation and water desalination appear at present to leading the push for
application of BOT delivery method.
The power generation in particular represents one of the attractive market with in
a estimated investment of SR 438,000 million ($117 billion) required over the
next decades.
There are considerable opportunities for the private sector to be involved in BOT
type infrastructure projects across railways, roads, and airports.

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 23
 Recommendations
Establishment of BOT center can be the key to design and structuring of BOT
projects. A BOT center should be established with the following objectives:
To disseminate information and knowledge regarding the public-
private partnership practices
To serve as main conduct between the private sector investors and
government with aim of coordinating the implementation of BOT
projects.
To pool specialized resources and specialists to provide better
understanding of fundamentals of BOT arrangements.
To promote BOT investment opportunities to the project promoters
locally & internationally.
To gain better understanding on drafting concession agreements/ and
PPA and other contractual aspect related to BOT.

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 24
 Recommendations

Need to create independent regulatory bodies in each of the

infrastructures sectors, namely Power sector, water sector, and transport
sectors.
There is a need for legislation dealing with the implementation of BOT
projects. Existence of such legislation would provide guidelines for
potential private sector participation. The legislation should include,
evaluation criteria, procurement rules of tenders/proposal, the role of
government support, sectors where BOT project are allowed, etc.
Investigate the suitability of Islamic finance for BOT projects. A study
be carried out to identify and design Islamic financing instruments

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 25
 Thank You

Build Operate Transfer (BOT) Project Delivery System in Saudi Arabia KFUPM 26