~Pergamon International Journal of Project Management Vol. 15, No. 2, pp. 73-78, 1997 Copyright © 1997 Elsevier Science Ltd and IPMA Printed in Great Britain. All rights reserved 0263-7863/97 $17.00 + 0.00 S0263-7863 (96)00033-6 Financial commitments for BOT projects Robert L K Tiong School of Civil and Structural Engineering, Nanyang Technological University, Nanyang Avenue, Singapore 639798 Jahidul Alum School of Civil and Structural Engineering, Nanyang Technological University, Singapore This paper investigates the extent of importance of a high level of financial commitments in a BOT tender. In cases where the competition is keen and where financing is uncertain, proposals with a high level of financial commitment are more attractive to governments. This paper also presents the strategies for developing a competitive financial proposal for BOT projects. Copyright © 1997 Elsevier Science Ltd and IPMA Keywords: BOT, financial commitments, risks, tender proposal Every promoter competing in a Build, Operate and Transfer (BOT) tender for a privatized infrastructure project has a competitive strategy, whether explicit or implicit. This strategy may have been developed explicitly through a planning process or it may have evolved implicitly through the past activities and experiences of the various partners in the bidding consortium. Successful packaging of a BOT proposal means getting all of the political, technical, commercial and financial elements of a project put together in a proposal so that adequate funds can be committed and advanced to the project company and construction can begin. Packaging therefore deals with the evaluation, promotion, development and financing aspects of proposal preparation before implementation of the project. This paper presents an analysis of the issues related to financial commitments of funds required from the lenders and promoters in a BOT tender. The issues to be investigated are: • the extent of importance of a high level of financial commitments during evaluation; and • whether the level of financial commitments provides the competitive advantage and increases the chances of success in a competitive BOT tender. Finally, the paper recommends the strategies required for developing a successful and competitive financial proposal for a BOT project. Requirements for financial commitments This paper is concerned with the financial commitment of funds required of private promoters in a privatized infra- structure project that is let under the Build, Operate and Transfer (BOT) concept. The commitments are partly for funds and partly for equity to supplement the promoter's equity which is normally the 'seed' capital for the develop- ment phase. These are inter-dependent in that the loan money will not be forthcoming unless a minimum level of equity is assured, and the equity will not be forthcoming unless those who are able to provide it are confident of sufficient loan monies being raised to finance the completion of the project. The financial commitments would take the form of irrevocable commitment letters such as letters of credit and are an agreement that equity and debt finance have been committed or will be available in the amounts required to assure the completion of the project. While this agreement may not necessarily be legally enforceable, most lenders will honour their commitments in the absence of any unforeseen event that may adversely affect the project's financial projections. To the lenders, this willingness to underwrite the financing of the project means an early opportunity to participate in the project, but it is also expensive for them as far as opportunity costs are concerned. The research is based on documented experiences and lessons as presented by the project promoters, government officials and their financial advisors in expert seminars and conferences on BOT projects. Information was also col- lected from multiple sources to improve the quality and reliability of analyses. These sources are: • Request For Proposals (RFPs)issued by governments • interviews with professionals involved in BOT projects including bankers, developers, contractors and govern- ment officials • annual reports, company and project profiles, and internal data made available by the government departments and companies 73