ANALYSIS OF EPC CONTRACT AS BOT

MODEL FOR THE PROPOSED WATER

TREATMENT PLANT

S.Vaitheeswari1

PG Student,Construction engineering and

Management,

Sona college of technology,Salem

636005&Tamilnadu

S.Priscil Nidhu2 Asst.Professor,

Sona college of technology,

Salem-636005

Tamilnadu

Abstract-Over half of the world's infrastructure

investment is now taking place in developing

countries for which, BOT model shall be

considered as a way of facilitating private

provision to help meet an increasing demand for

public infrastructure. BOT model can be

implemented for Water treatment plants and will

be more effective than EPC with O&M contracts.

The private party shall incur cost of design, if

included in scope, construction and recurring cost

on operation and maintrenance. The Private party

shall get back the entire cost along with the

interest through collecting from domestic and

industrial users based on their intake during the

agreed concession period.It may be noted that

most of the project risks related to the design,

financing and construction would stand

transferred to the private partner .

Key words:BOT,EPC,PPP,WTP,Financial feasibility.

I.INTRODUCTION

Governments in most developing countries

face the challenge to meet the growing demand for

new and better infrastructure services. As available

funding from the traditional sources and capacity in

the public sector to implement many projects at one

time remain limited, governments have found that

partnership with the private sector is an attractive

alternative to increase and improve the supply of

infrastructure services.

The partners in a PPP, usually through a

legally binding contract or some other mechanism,

agree to share responsibilities related to

implementation and/or operation and management of

an infrastructure project. This collaboration or

partnership is built on the expertise of each partner

that meets clearly defined public needs through the

appropriate allocation of,

• Resources

• Risks

• Responsibilities, and

• Rewards

1.1KEY CHARACTERISTICS OF EPC

• Single point of responsibility

• Time

• Contract price

• Procurement

• Quality/performance guarantees

• Owner’s involvement

• Defective works and services

1.2KEY CHARACTERISTICS OF BOT

• A key characteristic of BOT projects is

raising of finance entirely by the private

sector without the involvement of

government. The private sector is fully

responsible for a design, construction,

finance and operation and maintenance

• BOT projects are complex structures

comprising multiple interdependent

agreements among the various participants.

• BOT projects are typically large-scale

infrastructure projects. Transaction costs

amount on average 5 to 10% of total project

cost.

• BOT projects are associated with

uncertainties and high risk.

• BOT projects transfer the risk to the private

sector.

• BOT formula can be applied to any sector of

the economy. But it has been used widely in

power plant sector, transportation and

telecommunications.

1.3ISSUES RELATED TO EPC

• EPC project are highly schedule driven

where phases are overlapped to complete the

project as early as possible.

• EPC project are massive, utilize high skill

and well train employee, acquires complex

and complicated methodology/ technology.

• Needs fast information flow between

different phase and close collaboration of

multidiscipline as well.

• EPC project are facing serious problems like

crew idleness, rework and management

dilemma which lead to cost overrun and

schedule delay.

• In addition, poor planning and controlling,

lack of top management, unrealistic project

scheduling and poor coordination ,

communication are poor project

management practices explored in EPC

contract

1.4ISSUES RELATED TO BOT CONTRACT

• Interdependancy

• Mismatching of risks

• Stakeholders equity

• Long term contracts

• Changes in circumstances

• increased demand

• liquidated damages

• performance standards

• options/takeouts

1.5ADVANTAGES OF BOT PROJECT

• Finance

• Use of construction cost

• Project risk

• Project possibilities

• Benefit to country

• Privatization

• Model to other contracts

• Time

• Quality

1.6BARRIERS OF BOT

• The main barriers that often arise in BOT

agreements are related to financial

uncertainties, technical problems and legal

and political disputes.

• One of the main barrier in establishing BOT

projects is the lack of legal certainty in some

States regarding the realisation of particular

aspects of a project.

• It might not be clear as to what extent

private entities may draw revenue from the

operations of public infrastructure projects.

• In other instances, there might be lack of

clarity as to the basis and effect of certain

construction and long-term contractual

assurances that the Government would need

to make to the private consortium.

• Enabling legislation to make the underlying

legal framework attractive for BOT projects

is therefore imperative.

II.LITERATURE REVIEW

2.1TYPES OF PPP

Build Operate Transfer (BOT):

BOT and similar arrangements are a

kind of specialized concession in which

a private firm or consortium finances

and develops a new infrastructure

project or a major component according

to performance standards set by the

government.

Under BOTs, the private partner

provides the capital required to Build

the new facility, Operate & Maintain

(O&M) for the contract period and then

return the facility to Government as per

agreed terms.

Importantly, the private operator now

owns the assets for a period set by

contract—sufficient to allow the

developer time to recover investment

costs through user charges.

BOTs generally require complicated

financing packages to achieve the large

financing amounts and long repayment

periods required. At the end of the

contract, the public sector assumes

ownership but can opt to assume

operating responsibility, contract the

operation responsibility to the

developer, or award a new contract to a

new partner. The main characteristic of

BOT and similar arrangements are

given below:

Design Build (DB):

Where Private sector designs and

constructs at a fixed price and transfers

the facility.

Build Transfer Operate (BTO):

Where Private sector designs and builds

the facility. The transfer to the public owner takes

place at the conclusion of construction.

Concessionaire is given the right to operate and get

the return on investment.

Build Own Operate (BOO):

A contractual arrangement whereby

a Developer is authorized to finance, construct, own,

operate and maintain an Infrastructure or

Development facility from which the Developer is

allowed to recover his total investment by collecting

user levies from facility users. Under this Project, the

Developer owns the assets of the facility and may

choose to assign its operation and maintenance to a

facility operator. The Transfer of the facility to the

Government, Government Agency or the Local

Authority is not envisaged in this structure; however,

the Government, may terminate its obligations after

specified time period.

Design Build Operate (DBO):

Where the ownership is involved in

private hands and a single contract is let out for

design construction and operation of the

infrastructure project.

Design built finance–operate (DBFO)

approach the responsibilities for designing, building,

financing, and operating & maintaining, are bundled

together and transferred to private sector partners.

DBFO arrangements vary greatly in Terms of the

degree of financial responsibility that is transferred to

the private partner.

Build Operate Transfer (BOT):

Annuity/Shadow User Charge: In this BOT

Arrangement, private partner does not collect any

charges from the users. His return on total investment

is paid to him by public authority through annual

payments (annuity) for which he bids. Other option is

that the private developer gets paid based on the

usage of the created facility.

2.2STAGES OF BOT PROJECTS

Six stages are identified during the concession

period. After the preliminary study, usually

conducted by the government, a consortium is chosen

following a specific selection procedure. After the

selection, the concessionaire starts the

implementation of the project by forming the team,

executing studies, obtaining permits, and proceeding

with design development. Once the design is

approved, construction begins.

Upon Completion of construction, the

facility opens for use and the repayment of the

facility is covered by the incoming revenues. After a

predetermined concession period, the facility

transfers to the client (government) and then state

Agencies will own and operate the facility

2.3‘Value for Money’ (VFM) in PPP projects

These type of projects were subjected to a

factor analysis, which grouped them into four

categories: ―project efficiency‖, ―project

sustainability‖, ―multi-benefit objective‖ and ―public

effective procurement‖.The second analysis

discussed in this paper, concerns qualitative risk

allocation.The suggestion is that project participants

should adopt any measures associated with ―project

efficiency‖, ―sustainability‖, ―multi-benefit

consideration‖ and ―effective procurement

arrangement‖ in order to fully achieve VFM in

construction PPP projects.

2.3 A CASE STUDY APPROACH TO EPCM

EPCM contract is the ideal procurement

method for warehouse projects with respect to the

time, cost, and quality that a customer will demand.

The limitation and future research directions related

to the EPCM contract are also discussed in this

paper.EPCM is more flexible and facilitates the

construction of new facilities without affecting the

existing operation. This research has demonstrated

how EPCM can be considered an ideal option for

procuring warehouse projects based on the evaluation

of three case studies validation with respect to time,

cost, and quality. The outcome of this research

provides valuable insights into EPCM because it

involves real case studies in the discussion of

applying the associated success criteria.

2.5 CONCEPTUAL ISSUES IN DEFINING PPP

The several gaps that have been identified

related to issues of governance, management and

policy design of PPPs. This article offers some

suggestions relating to different conceptual issues

which emerge in defining PPPs. The common

features such as nature of cooperation, inter-

organisational arrangements, financial relationships

and commitment should be very precise. Roles of

different policy communities and policy networks

should be evident. Governance aspects such as

decision making process, and roles and responsibility

of different organisations/actors should be

specific.PPP is viewed in different approaches, hence

this article offers some suggestions as mentioned

above which might be helpful in defining different

conceptual issues of PPP.

III. SCOPE OF THE PROJECT

The project taken for study is based on

Engineering procurement and construction for a

water treat plant 300 MLD in Coimbatore city, Tamil

Nadu for Coimbatore city Municipal Corporation.

Our objective is to study this project under BOT

model and to analysis the advantages, risk and

financial feasibility for this project.

An analysis of the advantages of BOT over

EPC contract shall be studied. Based on the

Construction cost, Interest, depreciation and

operative expenses the payback period of the initial

investment of the project shall be calculated.

Risk related with the BOT projects shall be

identified and listed with details.

IV. OBJECTIVE

To study the EPC contract and

BOT contract and various

characteristics of each

To analyse the EPC O&M contract

of proposed water treatment plant

based on the specifications &cost

of construction.

To check whether the same EPC

can be executed as BOT model.

V. METHODOLOGY

The viability of any project mainly depends

on the technical analysis, financial analysis,

economic analysis and ecological analysis.

Hence it can be very well understood that

feasibility study is the base for the success of a

project and major part of the success lies in

proper financial analysis.

Financial analysis is useful for every business

entity to enhance their performance, competitive

strength and access their financial stability and

profitability of the firm. This paper investigates

the financial analysis of the BOT model Water

treatment plan.

Based on the scope of project, operation cost,

construction cost, cash inflow and cash outflow.

The investment strategy shall be calculated based

in Internal Rate of Return method.

VI. PROPOSAL FOR WATER TREAMENT

PLANT

• The water supply to the city of Coimbatore

is looked after by two agencies.

• The Siruvani and Pillur Water Treatment

Plants are under the O&M of the Tamil

Nadu Water Supply and Drainage (TWAD)

Board.

• The distribution of water is under the

Coimbatore Municipal Corporation

• Pillur dam on river Bhavani and Siruvani

dam on river Siruvani are the two major

water sources for drinking water supply to

Coimbatore city.

• O&M agency for both the schemes Siruvani

and Pillur is Tamil Nadu Water Supply and

Drainage (TWAD) Board.

• At present the city is getting 36 MLD water

from Siruvani dam and 65 MLD water from

Pillur dam.

• At present, the supply of drinking water is

maintained at 110 lpcd. The entire water

supply from Siruvani water supply scheme

is by gravity whereas pumping is involved

in the Pillur scheme.

• There are two water treatment plants, one at

Siruvani Adivaram and another at

Velliangadu. Siruvani Scheme is supplying

water to the city through 20 OHSRs and

Pillur through 27 OHSRs.

Analysis and Results

Non-Discounted Cash Flow Criteria: -

(a) Pay Back Period (PBP)

(b) Accounting Rate Of Return (ARR)

Discounted Cash Flow Criteria: -

(a) Net Present Value (NPV)

(b) Internal Rate of Return (IRR)

(c) Profitability Index (PI)

COST ESTIMATE

OPERATIONAL EXPENSES PER YEAR

FINANCIAL FEASIBILITY OF THE PROJECT

EPC:

The cost of the EPC type of the contract is 81.5Cr

and the cost breakup of the Electrical & Mechanical,

Civil and also the profit of 10% is assumed. The cost

breakup for the operational and Maintenance is

calculated which is 18.83Cr.

COST OF THE PROJECT IN EPC

BOT:

Discounting factor – 14.1%

Debt-Equity Ratio – 4:1

Construction period – 15 years

Interest on debt – 13.5% per annum

Cost of equity – 16.5%

Cost of water sold in urban areas: 3.5 INR per Cubic

meter as per TWAD board, Tamil nadu.

through metering system.

Total revenue per year: 383250000= 38.32 crore

rupees

FINANCIAL DATA AS BOT MODEL

COST ESTIMATE

AMOUNT OF E&M

WORKS

RS 388,706,894

INCLUDING ALL

WITHOUT PROFIT 10%

AMOUNT OF CIVIL

WORKS

RS 427,022,920

INCLUDING ALL

WITHOUT PROFIT 10%

OPERATIONAL EXPENSES PER YEAR

POWER 6,424,000

MAINTENANCE 1,000,000

MANPOWER INCL SERVICE

CHARGE / ST 7,800,000

CHLORINE 18,067,500

SLUDGE DISPOSAL 300,000

TOTAL COST WITHOUT PROFIT 33,591,500

COST ACCORDING TO EPC

TYPE

OF

WORK

COST PROFIT TOTAL

E&M 388,706,894 38,870,689 427,577,583

CIVIL 427,022,920 42,702,292 469,725,212

TOTAL 815,729,814 81,572,981 897,302,795

PRESENT CASH INFLOW 81.57

PRESENT CASH OUTFLOW 118.03

NPV 36.45

IRR 23

NET PROJECT COST 81.57

PAY BACK PERIOD 8.53 YEARS

Client

Consortium

Organization

Financier

Sub -

Contractor

s

Designers

Facility

Managers

Buil

ders

BOT FORMATION STRUCTURE

INFERENCE:

The following results have been inferred

NPV is positive.

Debt Ratio is 4:1.

So the project could service scheduled repayments

during its life cycle. So the project is acceptable from

investment criteria and also acceptable by lenders.

Thus now that the project falls under the financially

acceptable. Municipal administrations in India, as in

many other developing countries, can advantageously

apply the BOT scheme to implement public

infrastructure projects, such as the construction of

bridges, without increasing the sovereign debt.

Government may contribute financial assistance to

the project by way of an outright grant. The financial

model described in this paper facilitates the study of

the financial viability of a BOT project as affected by

various options relating to the toll structure, toll

revision schedule, extent of government grant, and

the duration of the concession period, as

demonstrated by the case study. By careful

consideration of the results of the financial study, the

project sponsor and the project promoter can arrive at

a reasonable agreement on the sharing of risks and

the terms of the concession.

VII. CONCLUSION

A BOT project is a public project utilizing

private-sector benefits. Therefore, to become a BOT

project, the project must, first of all, have value from

a socioeconomic perspective. In addition, we must

demonstrate that the project will be commercially

profitable under the BOT model.

BOT projects have the goals of introducing advanced

technologies owned by private parties, as well as

cutting public expenditures.

The private participant will recover his investment by

levying charges through Rupees per cubic meter of

water supplied. The cost of land acquisition,

environmental clearance, distribution network,

shifting of utilities and other legal issues will be

borne by the government so as to make the project

more attractive to private participants. All other cot

apart from construction of project shall be levied by

govt. directly. All other risks like the risks involved

with toll collection, interest rate fluctuation, foreign

exchange fluctuation etc. will be borne by the private

participant.

Thus now that the above project falls under the

financially acceptable and is more feasible compared

to EPC model. Municipal administrations, can

advantageously apply the BOT scheme to implement

in water treatment projects and supply. By careful

consideration of the results of the financial study, the

client and the project contractor shall arrive at a

reasonable agreement on the sharing of risks and the

terms of the concession.

REFERENCE

1. A Guidebook on Public-Private Partnership in

Infrastructure, BY ECONOMIC AND SOCIAL

COMMISSION FOR ASIA AND THE

PACIFIC.

2. ARTICLE: Types of Public Private Partnership

Models in India

http://swapsushias.blogspot.in/2013/09/typesofpu

blicprivatepartnership.

3. CASE STUDIES ON BUILD OPERATE

TRANSFER by Prof. Drs. Ir. Sebastiaan

C.M. Menheere, Prof. Spiro N. Pollalis, Dipl.

Eng., SM., MBA, Ph.D.

4. http://www.mbaskool.com/business-

articles/operations/867-how-to-improve-ppp-

projects-in-india-a-learning-from-the-past.html

5. http://toolkit.pppinindia.com/pdf/case_studies.pdf

6. United Nations Industrial Development

Organisation, ―Guidelines for Infrastructure

Development through Build-Operate-Transfer

(BOT) Projects‖. Vienna: UNIDO Publications,

1996.

7. THE ROLE OF BUILD OPERATE TRANSFER

IN PROMOTING RES PROJECTS.

8. Compendium on Public Private Partnership in

Urban infrastructure, Case Studies, CII

9. International Review of Business Research

Papers,Vol.6, No.1 February 2010, Pp. 367-381.

10. Urban - JNNURM presentation by Ashok

Natarajan, Former MD, Latur Water

Management Company

11. The ABC of EPC and EPCM Contractin Cullen,

David Senior Associate

david.cullen@blakedawson.com

12. ―Projects Planning, Financing, Implementation

and Review‖, Chandra Prasanna, Tata McGraw-

Hill, New Delhi, 2002.\