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PROFESSIONAL PRACTICE AND ETHICS II

UNIT -III

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UNIT -III
NEW TRENDS IN PROJECT FORMULATION AND EXECUTION
Turnkey offer (Expression of interest, Request for Proposal Document)
A turnkey or a turnkey project (also spelled turn-key) is a type of project that is constructed so that
it could be sold to any buyer as a completed product. This is contrasted with build to order, where
the constructor builds an item to the buyer's exact specifications, or when an incomplete product
is sold with the assumption that the buyer would complete it.
Turnkey refers to something that is ready for immediate use, generally used in the sale or supply of
goods or services. Turnkey is often used to describe a home built on the developer's land with the
developer's financing ready for the customer to move in. If a contractor builds a "turnkey home" they
frame the structure and finish the interior. Everything is completed down to the cabinets and carpet.
"Turnkey" is commonly used in the construction industry, for instance, in which it refers to the
bundling of materials and labor by sub-contractors. 'Turnkey' is also commonly used in
motorsports to describe a car being sold with drive train (engine, transmission, etc.) to contrast with
a vehicle sold without one so that other components may be re-used.
Similarly, this term may be used to advertise the sale of an established business, including all the
equipment necessary to run it, or by a business-to-business supplier providing complete packages
for business start-up. An example would be the creation of a "turnkey hospital" which would be
building a complete medical center with installed medical equipment.
(Expression of interest, Request for Proposal Document, Conditions for inviting
turnkey offer, finalization of the bidder). Same processes as followed in tender.

Current practices in Project execution:

1. BOT (build-operate-transfer)
2. BOOT (build-own-operate-transfer)
3. BOO (build-own-operate)
4. BLT (build-lease-transfer)
5. DBFO (design-build-finance-operate)
6. DBOT (design-build-operate-transfer)
7. DCMF (design-construct-manage-finance)

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1. Build operate and Transfer (BOT)

Build-operate-transfer (BOT) or build-own-operate-transfer (BOOT) is a form of project
financing, wherein a private entity receives a concession from the private or public sector to
finance, design, construct, and operate a facility stated in the concession contract. This enables
the project proponent to recover its investment, operating and maintenance expenses in the
project.
Due to the long-term nature of the arrangement, the fees are usually raised during the
concession period. The rate of increase is often tied to a combination of internal and external
variables, allowing the proponent to reach a satisfactory internal rate of return for its
investment.
Introduction
In recent years, a growing trend emerged among governments in many countries to solicit
investments for public projects from the private sector. The main reasons for this trend are a
shortage of public funds and hands off approach of government agencies. The Build Operate
Transfer approach (BOT) is an option for the government to outsource public projects to the private
sector. With BOT, the private sector designs, finances, constructs and operates the facility and
eventually, after a specified concession period, the ownership is transferred to the government.
Therefore, BOT can be seen as a developing technique for infrastructure projects by using private
initiative and funding. Such infrastructure projects include a wide array of public facilities with the
primary function to serve public needs, to provide social services and promote economic activity in
the private sector. The most common examples are roads, bridges, water and sewer systems,
airports, ports and public buildings (Vaughan and Pollard, 1984).
In addition to government, the private sector may initiate BOT projects when there are limited
funds available and there are no enough resources to execute successfully a required building
project. Examples can be seen in non-profit hospitals and educational institutions as well as
manufacturing facilities. However, none of those cases are included in this book, which focuses on
government related projects. Several project delivery schemes have developed in recent years
(Diaz, 1994). The traditional design-bid-award was enhanced by the introduction of the project
manager as a consultant to the owner, where project manager advises the owner in formulating a
building strategy and supervises the construction on the owners behalf. As a consulting service,
the project manager works in parallel with the architect for a flat rate fee, with no fiduciary or
construction risk. Design- build is a one-stop shop for design and construction. Architects and
contractors work under one contract, where total responsibility for all stages of the project is
placed with both parties. Design-build projects are often of limited sophistication, but hold
considerable promise for the future as a partnership process of project delivery. Bridging allows the
separation of schematic design from design development, with the latter grouped together with
the general contractor. Such a project delivery scheme allows THE BUILD OPERATE TRANSFER
APPROACH 5 for more sophistication and for transfer of design across geographical and economic
boundaries.
With turnkey contracts, the owner buys a package of site, design and finished building, while the
developer secures financing, manages the project flow and coordinates the architect and the
contractor. Such contracts are usually limited in complexity1. BOT is closer to total product
delivery where in addition to financing and development, the supplier is also responsible for the
operation of the facility.

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BOT in construction
Build Operate Transfer is a major startup business venture where private organizations undertake
development and operation of a facility normally done by the government. The termination of the
private sector involvement occurs at the return of the ownership of the facility to the government
after a fixed concession period, usually 25 to 40 years (Tiong, 1990). Among the various definitions
of BOT, the following definition is adopted in this book that constitutes the premise for conducting
this research. In the BOT approach, a private party or concessionaire retains a concession for a
fixed period from a public party, called principal (client), for the development and operation of a
public facility. The development consists of the financing, design and construction of the facility,
managing and maintaining the facility adequately, and making it sufficiently profitable. The
concessionaire secures return of investment by operating the facility and, during the concession
period, the concessionaire acts as owner. At the end of the concession period, the concessionaire
transfers the ownership of the facility free of liens to the principal at no cost3. A key characteristic
of BOT is private financing. In BOT, the government subcontracts the entire development process,
including the associated risks, to the private entity. One of these risks is financing, which must be
obtained by the concessionaire, who is ultimately responsible for all aspects of the project.
A prerequisite for private financing is a need for the facility to be developed; for example, a
highway extension due to increasing traffic jams, more bed space in detention and correctional
facilities due to an increase in crime and the number of incarcerated individuals, a tunnel or bridge to
solve traffic problems and facilitate accessibility, or a sewage system or power generation to support
the growth in population and industry. If there is no obvious requirement for the facility, private
parties will refuse to participate and provide financial support. Only after market analysis justifies
a need will private parties be willing to financially participate as well as become involved in
developing the facility. BOT is just one of the many different project delivery schemes within the
context of privatization or public-private-partnerships. The two other schemes that appear most
similar to BOT are Build Own Operate (BOO) and Build Transfer Operate (BTO). In all three cases,
the private party retains revenues from operating the facility.
In BTO, the private party transfers the ownership of the facility directly after the delivery and
operates the facility on behalf of the principal. In BOO, the private party retains ownership of the
facility, makes returns on investment by operating it for its useful life, and may sell it at any point
at market value. Besides the three most common approaches, BOT, BOO and BTO, other variations
can also occur (Fig. 0.3). All differ from each other in the way the level of risk is divided between
the private and public parties. Each form is a kind of a public-private-partnership but all are
unique in allocating risks to the individual parties.
MAJOR PARTICIPANTS IN BOT PROJECTS
Five major participants are identified in every BOT project and Fig.
0.4 shows the typical
structure. Very simply, the principal grants the concession to the concessionaire. The
concessionaire, usually a consortium of companies, undertakes the financing and development of
the project. Financing is obtained from sponsors and lenders. The contractor builds the facility and
the operator runs the facility.

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Principal
In a BOT project, the principal is usually a government agency, a local or federal government body
that recognizes the need for a public facility but is unable to financially support the project. The
government agency is thus forced to look for alternative options.
Concessionaire
After the identification of the need for the facility, the government, following a due process, will
grant a concession to the concessionaire. The concessionaire is usually a consortium and takes the
responsibility of developing (designing, financing and constructing), maintaining and operating the
facility, on behalf of the principal. The concessionaire is the owner of the facility during the
concession period and realizes profits on the initial investment through the usage of the facility
Investors
Financing is supplied by the private sector and the investors include both shareholders and lenders.
The shareholders invest money in exchange for equity, and lenders support the concessionaire
during negotiations with the principal with promises for loans to be available during the
development of the project. Lenders may include banks, insurance companies and bond holders.
Contractor
The concessionaire commissions a contractor with the construction of the facility. In most cases,
the contractor is part of the concessionaires consortium and involvement is favored by all
concerned parties. During the early stages of the process the contractors involvement assures the
consortium of the most effective and efficient design and execution of the project. Ultimately, the
5contractor is responsible for the construction of the project and for hiring subcontractors, suppliers
and consultants.

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Operator
The operator is also in the concessionaires service and manages the operational stage of the
facility. Similar to the contractor, the operator is usually part of the concessionaires consortium,
because of the critical role in the revenue stream. In addition, the importance of operating
knowledge for programming, financing, design and construction is required. Often the operator is
supported by a government agency or in some cases, is the agency. In the Wijker tunnel case, the
facility is entirely operated by the government maintenance department for bridges, dikes and
roads, and in
STAGES OF BOT PROJECTS
Preliminary study
The preliminary study usually takes place prior to the involvement of the concessionaire. This stage is
executed by, or on behalf of, the principal. Feasibility studies are necessary to prove the
forecasted success of the project, in order to attract private funding. Alternatively, a private party
may identify a need and initiate the BOT project and in such a case, the preliminary study is
conducted by the private entity with limited government involvement.
Selection process
The selection process depends on who initiates the project. In a public selection process where the
initiative is coming from the public sector (government), a request for qualification is distributed.
After receiving applications, the government selects a few consortia to submit proposals (request
for proposals) and from these a concessionaire is chosen. During this process, the consortia will
group interested parties as required for the efficient and adequate execution of the project.
Alternatively, in a speculative selection process, the private sector initiates the project and
contacts the appropriate government agency for approval. The project is granted after proper
negotiations.
Project implementation
After the selection stage and the foundation of the concessionaire, the proposal is finalized.
Together with all the involved parties, the concessionaire develops a detailed program and
preliminary design, and applies for permits. This process can be shortened if a government agency
is actively participating. Once permits are issued, the final concession agreement is signed. During
the project implementation stage, in addition to the interests of the involved parties, the interests
of the external parties also require attention. The influential power of politics, the opposition, and
environmental agencies are significant factors and, if not taken into account, may hinder or even
dissolve the project.
Construction
Once the necessary permits are obtained, construction begins. Often BOT projects are fast track
projects where the design is not complete when construction starts. This is feasible because of
congruent financial interests within the members of the consortium and the pressing need to
complete construction and start collecting revenues. Less controversial designs allow a quicker
construction period with fewer uncertainties.
Operation
During the operation stage, the facility is operated and maintained by the operator who is paid by
the concessionaire. The concessionaire, as the owner of the facility during the operation period, is
obligated to operate the facility in a manner that adequately services the public user. The
concessionaire is also responsible for maintaining the facility in working condition. Both the
concession and operation agreements specify the condition of the facility at the time of transfer to
the principal.
Transfer
The facility is transferred to the principal, usually at no cost
(Fig. 0.10). Transfer time is
determined in the concession agreement. Should the principal choose to take over the facility
6earlier than the agreed concession period; the concessionaire will be financially compensated for

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the investment. After transfer, the principal is the sole owner of the facility and can choose to
operate and maintain the facility directly or hire an independent operator. Although a transfer has
not taken place in any of the cases in this book, it can be expected that the principal will continue
with the same operator, as in the concession period, due to history of involvement and experience
with the facility. If the principal is the government, it may choose after transfer not to charge the
final users anymore.
In essence, the facility at that time will have become public, and its maintenance and operation
can be funded by indirect taxation. Another issue to be considered is to what extend the principal
wants to receive the facility. After a typical concession period of 30 years, the facility may have
become obsolete and could need major rehabilitation or require more resources to operate than a
new facility. In prisons for example, the facility may be inadequate, or in a power plant the
method of generating energy may be inefficient. Active participation of the principal during the
concession period may keep a facility up to standards or, at transfer, a BOT project could in fact
lead to a new BOT project.
Due to the external and internal particularities of every BOT project, the actual organization and
process may be different to the presentation in the previous paragraphs. The starting and
completion period of each stage in a BOT project can change due to a variety of factors, both
external and internal to the project. Among them are the complexity of the development process,
government regulations, political influences, concerns of environmental groups, and neighborhood
pressures. Such effects have an m a j o r influence on the progress of a project, likely to stall or
change theoretical models. Thus, the development of a precise and detailed framework
applicable for every BOT project is not possible and this must be taken into consideration for each
case study in this book that presents the framework of a particular project and its external and
internal conditions.
2. Build Lease operate and Transfer (BLOT)
BLOT (build, lease, operate, transfer) is a public-private partnership (PPP) project model in which
a private organization designs, finances and builds a facility on leased public land. The private
organization operates the facility for the duration of the lease and then transfers ownership to the
public organization.
The BLOT model is one of several related PPP project types including BOOT (build, own, operate
and transfer) and BOO projects (build, own, operate).
BUILD, designed and tailor-made as per building faade.
OPERATE, install, commission and operate.
LEASE, on monthly rentals for minimum five years contract.
TRANSFER, thereafter transferred to you at an agreed value.
3. BOO
BOO (build, own, operate) is a public-private partnership (PPP) project model in which a private
organization builds, owns and operates some facility or structure with some degree of
encouragement from the government. Although the government doesn't provide direct funding in
this model, it may offer other financial incentives such as tax-exempt status. The developer owns
and operates the facility independently.
The BOO model is one of several related PPP project types including BOOT (build, own, operate
and transfer), BLT (build, lease, transfer) and BLOT (build, lease, operate, transfer).
4.BOOT (build-own-operate-transfer)
A BOOT structure differs from BOT in that the private entity owns the works. During the concession
7
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 higher margin on project. The

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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 but are not attractive for other types of private investments. BOOT & BOT
are methods which find very extensive application in countries which desire ownership transfer and
operations including. 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
5.BLT (build-lease-transfer)
Under BLT a private entity builds a complete project and leases it to the government. On this way
the control over the project is transferred from the project owner to a lessee. In other words the
ownership remains by the shareholders but operation purposes are leased. After the expiry of the
leasing the ownership of the asset and the operational responsibility are transferred to the
government at a previously agreed price. For foreign investors taking into account the country risk
BLT provides good conditions because the project company maintains the property rights while
avoiding operational risk.
6.DBFO (design-build-finance-operate)
Design-build-finance-operate are a project delivery method very similar to BOOT except that there
is no actual ownership transfer. Moreover, the contractor assumes the risk of financing till the end
of the contract period. The owner then assumes the responsibility for maintenance and operation.
Some disadvantages of DCMF are the difficulty with long term relationships and the threat of
possible future political changes which may not agree with prior commitments. This model is
extensively used in specific infrastructure projects such as toll roads. The private construction
company is responsible for the design and construction of a piece of infrastructure for the
government, which is the true owner. Moreover the private entity has the responsibility to raise
finance during the construction and the exploitation period. The cash flows serve to repay the
investment and reward its shareholders. They end up in form of periodical payment to the
government for the use of the infrastructure. The government has the advantage that it remains
the owner of the facility and at the same time avoids direct payment from the users. Additionally,
the government succeeds to avoid getting into debt and to spread out the cost for the road over
the years of exploitation.
7.DCMF (design-construct-manage-finance)
Some examples for the DCMF model are the prisons or the public hospitals. A private entity is
built to design, construct, manage, and finance a facility, based on the specifications of the
government. Project cash flows result from the governments payment for the rent of the facility.
In the case of the hospitals, the government has the ownership over the facility and has the price
and quality control. The same financial model could be applied on other projects such as prisons.
Therefore this model could be interpreted as a mean to avoid new indebtedness of public
finance.

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QUESTIONS
Two Marks:
1. What are the advantages of a turnkey contract?
2. What are the various current practices in Project execution?
Sixteen Marks:
1. Explain BOLT form of project financing with a suitable case study.
2. Explain the conditions for inviting turnkey offer and the process involved in the finalization of
the bidder.

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