Valuing guarantees in a BOT infrastructure project

Andreas Wibowo (F.G. Bauwirtschaft und Baubetrieb, Institut für Bauingenieurwesen‐TU Berlin, Sekr. TIB 1‐B6 Geb. 13b, Gustav‐Meyer‐Allee 25, Berlin, Germany)

Engineering, Construction and Architectural Management

ISSN: 0969-9988

Publication date: 1 December 2004

Abstract

Host governments often provide guarantees in build‐operate‐transfer (BOT) infrastructure projects to attract private sector investors. Problems arise because the governments often do not know the full extent of contingent liabilities when issuing guarantees, and because they account and record guarantee costs only when guarantees come due. This paper discusses the guarantees' financial impact from the perspectives of the government and the project sponsor. A typical Indonesian BOT toll road project is taken as the case study. Stochastic simulation using Latin Hypercube technique is applied on the cash flow model with and without guarantees. Several types of guarantees including minimum revenue guarantee, maximum interest rate guarantee, debt guarantee, tariff guarantee and minimum traffic guarantee are discussed. Simulation results reveal that guarantees can reduce risk but are not free of cost. If compared with equivalent subsidies, however, some guarantees can be more effective in lessening the extent of project risk.

Keywords

Citation

Wibowo, A. (2004), "Valuing guarantees in a BOT infrastructure project", Engineering, Construction and Architectural Management, Vol. 11 No. 6, pp. 395-403. https://doi.org/10.1108/09699980410571543

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Publisher

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Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited

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