Competitive Advantage of Equity in BOT Tender

Abstract

This paper is concerned with the role of equity and level of equity investment required in a build-operate-transfer (BOT) tender. In times of decreasing ability to raise public funds for infrastructure projects, the BOT concept has been used increasingly by governments to implement privately financed projects such as toll roads and private power plants. This paper shows that high level of equity is necessary in BOT tender if it is specified in the request for proposal, the competition is keen, and financing for the project is uncertain. Governments are often concerned about the high financial charges that may overburden the cash flows of the project and which may subsequently affect the efficient running of the project. It may also be concerned about the availability of debt financing. Governments therefore view high equity as important and necessary. The threshold equity level proposed by the promoters must therefore be high—typically between 20% and 30%—for them to be short-listed and to proceed to the final round of negotiation when the selection will be made. Otherwise they will be dropped from further consideration.