Comparative Analysis on BOT, PPP and ABS Project Financing Models

Abstract

As a new financing model, project financing has been widely used large-scale infrastructure projects in the world. As project financing, BOT, PPP and ABS are three specific financing models, which has a good development in the infrastructure sector and great potential for development. Introduction In recent years, the government has made great efforts on borrowing money for the purpose of fully construction of infrastructure, which has resulted in a huge amount of local debt. In order to solve the problem of government funds, the project financing model represented by BOT, PPP and ABS came into being. Compared with the traditional financing method, project financing has been popularized and applied in the world. Understanding the connotation of various project financing models and how to choose the appropriate project financing mode is the most important problem that must be solved in the construction of infrastructure projects. The Concept and Essence of the Three Financing Models In the BOT (Build - Operate - Transfer) 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 cost. In essence, BOT is the project financing in a narrow sense, that is, the form of limited recourse. PPP (Public - Private - Partnership) is a service contract between a public authority and a private sector concessionaire, where the public authority pays the concessionaire to deliver infrastructure and related services. Typically, the concessionaire, who builds the infrastructure asset, is financially responsible for its condition and performance throughout the asset lifetime, or the duration of the agreement, or it describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies.

ABS (Asset - Backed - Securitization) is based on the asset of project and guaranteed by the future earnings of the project assets. It’s a project financing way by raising funds in the international capital market. ABS financing originated in the United States in 1970s, which is applied to housing mortgage securitization at first, then followed by rapid development in Europe and Asia and became an important way of financing for infrastructure construction. The essence of ABS is to improve credit rating by special means, so the low credit rating of the project can still enter the high-grade market, with the characteristics of high credit rating, high security and good liquidity and low interest rate, the cost of raising funds is greatly reduced.

A Comparison of the Advantages and Disadvantages of the Three Financing Models

The advantages of BOT are as follows:

1. The organization is simple and the negotiation between the government and the private sector is easy.

2. The ROI of project is accurate, and the conflicts of interests between government and private sectors reduce.

3. BOT can broaden the sources of funding in order to lower government’s financial burden.

The disadvantages are:

1. Public and private sectors tend to deal with a long-term investigation and negotiation, so the tender fee is extremely high.

2. During the concession period, the government may lose the control of projects.

The advantages of PPP are as follows:

1. Public and private sectors take part in the preliminary study in early stage in order to shorten the cycle of work and lower the project fee.

2. Make up a strategical alliance to negotiate with people which hold different concept about the goal of interest.

3. The private sectors can introduce advanced technology and management experience in the initial stage.

4. The government holds control of the project.

Disadvantages:

1. How to ensure the difficulties that cooperation and the government takes responsibilities in cooperation, so the burden of risk will increase.

2. The form of organization is relatively complicated, and the degree of difficulty in management increases.

3. How to set up the return rate of project may become a controversial problem.

The ABS’s advantages are follows:

1. ABS has less involvement in program, lowering the cost of financing in certain degree.

2. The sources of funding are versatile, especially suitable for the need of large-scale funding. The issue of bonds in the international market is purchased by many investors, so the investment risk can be distributed.

3. It is beneficial to cultivate the experts in international financial aspects in host country.

Disadvantages:

1. Due to the issue of bonds in foreign financial securities market, the foreign advanced techniques and management cannot be fully introduced.

Source:

1. Comparative Analysis on BOT, PPP and ABS Project Financing Models Wenqian Huang -

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