Consideration of investment risk in build operate transfer infrastructure projects in Africa: Lenders' perspective

Commercial debt constitutes the largest component of the capital structure of most Build Operate Transfer (BOT) infrastructure projects. This suggests that commercial lenders' willingness to invest largely determines the go/no go decisions for such projects. BOT projects are by their nature high risk projects, so commercial lenders face significant risks when investing in such projects. Risk management is therefore a major factor in lenders' decisions to invest or not invest in BOT infrastructure projects. Empirical evidence suggests that lenders' current approaches to risk management are inadequate, given the US$1.6 billion worth of BOT infrastructure projects cancelled or renegotiated annually, since 1990. The costs of cancellation/renegotiation to lenders are enormous, and include loss of income, loss of investment and the potentially adverse impact of such losses on the commercial banks' loan portfolio. The risks that lenders face when investing in BOT infrastructure projects become aggravated when the projects are based in foreign locations, such as Africa, which has seen an average of US$1 billion invested in BOT projects annually since 1990. This research considers the risks faced by commercial lenders in BOT infrastructure projects within the context of Sub-Saharan Africa and evaluates the options available for managing such risks. Effective management of the risks in foreign based projects requires that lenders understand, inter alia, the particular investment location. The research evaluates the different dimensions of Sub-Saharan Africa's investment climate, including the cultural, political and economic environments and identifies the factors, which affect the viability of BOT projects. In addition, the nature of the BOT model for procuring infrastructure projects is analysed to identify the risks peculiar to projects financed under that model. The research develops a cross-border integrated risk management model to overcome the flaws in lenders' current approaches to the identification, analysis and management of BOT project risks, and to facilitate a more effective approach to risk management. The flaws include reliance on experience and intuition, the use of deterministic cash flow estimates to evaluate projects, and behavioural and cognitive limitations. The risk management model incorporates a Monte Carlo-based computer simulation model for the probabilistic analysis of risks and evaluation of the viability of projects. A case study of a BOT toll road project in Nigeria is developed to validate the integrated risk management model. The case study facilitates the understanding of peculiar characteristics of Africa as an investment destination, and permits the analysis of risks that lenders face in such locations. The case study also shows that projects in Africa are unlikely to be feasible without the support of host governments and the multilateral developments agencies. The results of the research suggest that project (construction) cost, toll revenue, and foreign exchange fluctuation and currency devaluation are the most significant risks faced by lenders to BOT infrastructure projects in Africa. Culture is a source of risk, which pervades the whole project process. However its impact is not fully understood and there are no known methods to measure its impact on project cash flows and project viability. Political risk, the focus of risk analysis in BOT projects, needs to be understood better because the link between risk sources, risk events and the effects of risk events is not inevitable. Dispute resolution procedures remain a source of concern for lenders because of the importance of enforcement of property rights to recovery of their investments. The options available for mitigating the risks of BOT projects, from the perspective of lenders, have many flaws, and perhaps explain why lenders lose money on many cross-border BOT projects. Reliance on host government guarantees, which is a popular option to secure project loans, may not be worth much unless supported by a reliable financial institution. The time and costs of obtaining financial institution guarantees are likely to be a considerable drain on project finances. Despite the vigorous attempts by lenders to transfer all the risks of a project to sponsors and other parties, the residual risk in such projects is considerable.