BOOM, BOOT, BOO, EPC, PPP, LSTK...
Forms of projects, classified on patterns of Ownership and Financing, are:
- BOT - Build Operate Transfer
- BOOT - Build Own Operate Transfer
- BOO - Build Own Operate
- BLT - Build Lease Transfer
- DBFO - Design Build Finance Operate
- DBOT - Design Build Operate Transfer
- DCMF - Design Construct Manage Finance
On the other hand, going by contracting/execution philosophy, projects are grouped into:
Why do we need to know and understand these jargon? Without a knowledge of these names and categories, we shall be unable to differentiate between different types of projects, and will also fail to capture the implications of these names in the way accountability devolves between owner, developer and contractor. Take for example, the two types under PPP and EPC, which can be discussed and distinguished. It will be an interesting comparison because The National Highways Authority of India (NHAI) has been using both these modes in their tenders for road projects in our country, over the last decade.
First, let us develop an understanding, and then we may analyse and compare these two terms. PPP is Public Private Partnerships, where a Government body and a private entity sign up to jointly develop, finance, execute and operate a (mostly) infrastructure project, and thus an entity called concessionaire is created (sometimes also called an SPV - special purpose vehicle). The contract demarcates the responsibilities of the two partners, and in most cases, the public partner assumes the preparatory works like land acquisition, statutory approvals, political resolution of issues, etc., in addition to overall tracking of the work to be done by the private partner. The public partner may or may not be bringing in any hard equity other than land, etc. The private agency invests money, obtains financing, executes the project and runs the assets thus created for a pre-defined period of time in order to realise a return on its financial investments. The Pvt Agency decides the contracting philosophy during execution, like say, EPC/LSTK/packages, etc.
EPC mode, on the other hand, is when NHAI competitively bids out a given highway on defined scope of Engineering, Procurement and Construction only, and the subsequent job of maintenance and toll collection, etc. can be tendered out separately. We can see that there is vast difference in scope between these two.
Primarily, projects which are financially viable are handed out as PPP's while others where prima-facie viability is in question, EPC bids are invited. In 2012-13, when many developers of road projects were reeling under huge debt-burden, and did not have appetite for bidding in new PPP road projects, NHAI had to resort to large-scale EPC tendering to keep up the tempo of building highways. In the urban transportation sector, in Mumbai, the two cases of Mumbai Metro Line One, which was tendered as a PPP project and the Monorail project, which was tendered as EPC Project, are also very good examples that amply illustrate this discussion. The first one, considered viable, was won by Reliance Infrastructure in a PPP-bidding process, while the other one, which was financially not so sound, was won by L&T-SCOMI on competitive EPC-bidding mode. In the end, however, both these two projects got inordinately delayed primarily due to right-of-way issues, leaving us none the wiser about which mode was better from execution perspective.
As we can see, any study of project management will remain incomplete without an understanding of various types of ownership, financing, and execution of projects. Why not, therefore, take a look at some other types!
A BOOT structure differs from BOT in that the private entity owns the works. During the concession period, the private company owns and operates the facility with the prime goal to recover the costs of investment and maintenance while trying to achieve a reasonable margin on the project. The specific characteristics of BOOT make it suitable for infrastructure projects like highways, roads, mass transit, railway transport and power generation and as such they have political importance for the social welfare impact but are not attractive for other types of private investments. BOOT and BOT are methods that find very extensive application in countries which desire ownership transfer.
Some advantages of BOOT projects are:
- Encourage private investment
- Inject new foreign capital to the country
- Transfer of technology and know-how
- Completing project within time frame and planned budget
- Providing additional financial source for other priority projects
- Releasing the burden on public budget for infrastructure development
In a BOO project, ownership of the project remains usually with the project company for example a mobile phone network. Therefore the private company gets the benefits of any residual value of the project. This framework is used when the physical life of the project generally coincides with the concession period. A BOO scheme involves large amounts of finance and long payback period. Some examples of BOO projects come from the water treatment plants. This facilities run by private companies process raw water, provided by the public sector entity, into filtered water, which is afterwards returned to the public sector utility to deliver to the customers.
Trying to define all these various types of projects and contracts may turn out to be quite lengthy, but before we sign off for the month, I would like to add here something from my experience in steel and cement sectors. Companies which have very strong engineering and project management and coordination set-ups, will like to save costs by implementing a large project thru many "Packages" and will take full ownership and accountability for its success or failure. Conversely, companies which are not so confident, or do not have strong project teams, or wishes to shirk responsibility, may opt for EPC contracts, and they have to accept an increase of at least 15 per cent additional cost for doing this. That is, truly speaking, the cost of coordination, management, and avoidance of accountability.
- SUMIT BANERJEE