Risk Analysis of Infrastructure Projects:

A Case Study on Build-Operate-Transfer Projects

in India
Hiren Maniar*

The growth of the infrastructure sector in India has been relatively slow compared to that of the
industrial and manufacturing sectors. Energy shortage, inadequate transportation network, and
insufficient water supply system have caused a bottleneck in the country’s economic growth. The
Build-Operate-Transfer (BOT) scheme is now becoming one of the prevailing ways for
infrastructure development in India to meet the needs of India’s future economic growth and
development. There are tremendous opportunities for foreign investors in this field. However,
undertaking infrastructure business in India involves many risks and problems that are mainly due
to differences in legal systems, market conditions and culture. It is crucial for foreign investors to
identify and manage the critical risks associated with investments in India’s BOT infrastructure
projects. The main purpose of this paper is to investigate the critical risks associated with BOT
projects in India. Based on a survey, the following critical risks, in descending order of criticality, are
identified: delay in approval, change in law, cost overrun, dispatch constraint, land acquisition and
compensation, enforceability of contracts, construction schedule, financial closing, tariff adjustment
and environmental risk. The measures for mitigating each of these risks are also discussed. Finally,
a risk management framework for India’s BOT infrastructure projects is developed.

Introduction
India’s economy has shown remarkable growth over the past several years and many
foreign economists predict a healthy growth in the near future. A private international
forecasting firm predicts that India’s GDP will grow at an average annual rate of about 8%
between 2010 and 2015.
India’s investment reforms, rapid economic growth and social development have led
to a surge in Foreign Direct Investment (FDI). Annual utilized FDI in India grew from
$636 mn in 1991 to $26 bn in 2009, making India, in recent years, the third largest
destination of FDI in the world.
A number of reasons explain India’s attractiveness to foreign investment:
• Relatively cheaper human resources, especially the labor.
• Governments at all levels and in all states are eager for funding local economic
growth and have become increasingly friendly to foreign investors.

* Assistant General Manager, L&T Institute of Project Management, L&T Knowledge City, Vadodara 390019,
Gujarat, India. E-mail: hiren.maniar@lntipm.org

©
34 2010 IUP. All Rights Reserved. The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 • A number of major international events have shown that India is a safer oasis
for investment.
• The economic and social infrastructure that was considered as bottleneck has
been significantly improved in recent years. Governments at various levels have
been making investment in infrastructure development to keep pace with the
local and the national economic growth.
• India’s economy has shown remarkable economic growth over the past two
decades at an average annual rate of about 7.5%, and it is expected that India’s
GDP will grow at an average annual rate of about 9% in year 2010.
• India became a member of the World Trade Organization (WTO), which enables
India to play a major role in the development of new international rules on trade
in the WTO, and provides India access to the dispute resolution process in the
WTO, making it easier for reformers in India to push liberalization policies.
The tremendous economic growth in India has resulted in an immense demand for
basic infrastructure like roads, tunnels, power plants, water treatment plants and so on.
In 1991, India began to investigate financing ways, specifically through the Build-Operate-
Transfer (BOT) scheme to meet the needs of the country’s infrastructure and to be
attractive to foreign investors. BOT has the potential to be one of the most effective ways
for India to raise funds for infrastructure projects in the near future. It also provides
opportunities to foreign investors to penetrate into new markets in India. Despite this
there may be a reluctance to engage in BOT because the application of BOT projects has
a relatively short history across the world and especially in India. This means that the
BOT scheme may not be well-understood and received by foreign investors in terms of
its policy hurdles and its effectiveness in India, or by the Indian government
representatives handling it.
Furthermore, despite the tremendous opportunities to invest in infrastructure projects
in India, it is inevitable that such projects involve risks and obstacles. Unfortunately, the
traditional mechanisms for project risk allocation that are available in other countries,
may not be suitable in India due to differences in legal systems, market conditions and
culture. In order to successfully implement BOT schemes in India, foreign investors will
need to identify and find ways to mitigate the critical risks considering diversity in terms
of various issues pertaining to political front, policy matters and demography along with
geographical challenges. The purpose of the research is to identify and evaluate the critical
risks associated with India’s BOT infrastructure projects, and develop a framework for
managing these risks that all parties to BOT infrastructure projects can refer to.

1.1 Challenges for Infrastructure Development in India

The government officials as well as economists are however, aware of the fact that growth
can be sustained only if further reforms are made to the economy. India’s banking system
is regulated and controlled by the central government, which sets interest rates and

Risk Analysis of Infrastructure Projects: 35

A Case Study on Build-Operate-Transfer Projects in India
attempts to allocate credit to certain Indian firms. The current financial state of the
banking system prevents the Indian government from opening the sector to foreign
competition (due to worsening of non-performing asset situation of banks in India).
Corruption is another problem of the Indian banking system. Loans are often sanctioned
on the basis of political connections. In many cases, bank branches extend loans to firms
controlled by local officials, even during periods when the central government is
attempting to limit credit. Such a system promotes widespread inefficiency in the economy
because savings are generally not allocated on the basis of obtaining the highest possible
returns. In addition, inability to control the credit policies of local and provincial banks
has made it very difficult for the central government to use monetary policy to fight
inflation without causing major disruptions in the economy.
Infrastructure bottlenecks, such as inadequate transportation and pollution remedial
stems, pose serious challenges to India’s ability to sustain rapid economic growth. India’s
investment in infrastructure development has failed to keep pace with its economic
growth.
The unfledged rule of law in India has led to widespread government corruption,
financial speculation, and misallocation of investment funds. In many cases, government
‘connections’, not market forces, are the main determinant of successful firms in India
(in the form of public sector units in infrastructure sectors). Many foreign firms find it
difficult to do business in India because rules and regulations are generally not consistent
or transparent, contracts are not easily enforced, and intellectual property rights are not
protected (due to the lack of an independent judicial system). The lack of effective rule
of law, current ownership of land, and widespread local protectionism in India limit
competition and undermine the efficient allocation of goods and services in the economy.
A wide variety of social problems have arisen from India’s rapid economic growth and
extensive reforms, including pollution, widening of income disparities between the coastal
and inner regions of India, increasing number of bankruptcies, and worker layoffs. This
poses several challenges to the government, such as enacting regulations to control
pollution, focusing resources on infrastructure development in the hinterland, and
developing modern fiscal and tax systems to address various social concerns (such as
poverty alleviation, healthcare, education, worker retraining, pensions and social security).
All these unfavorable aspects produce numerous uncertainties for infrastructure
development in India.
In 1991, the then Finance Minister of India, Manmohan Singh, outlined a number of
major economic initiatives and goals for reforming India’s economy and maintaining
healthy economic growth, such as:
1. Expand domestic demand, especially by increasing spending on infrastructure in
response to the Asian Financial Crisis, and maintain the pace of previously
planned economic reforms;

36 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 2. Reorganize the banking system to increase the regulatory and supervisory power
of the central bank and make commercial banks operate independently; and
3. Substantially reduce the size of the government and reorganize the remaining
government institutions.
All the three goals were to be obtained within three years.
The Government of India implemented the above measures by relaxing FDI and sound
banking and regulatory system, which further helped to lure foreign funds in the form of
FDI and FII toward infrastructure sector.
The Indian government anticipates that banking and other financial reforms will lead
to widespread layoffs. Stimulating domestic demand, especially through infrastructure
development, is viewed as a key mechanism to re-employ workers displaced by reforms.
Issuance of government bonds has become a major source of finance for infrastructure.
However, such policies will likely increase the size of the central government’s budget
deficit. It is also likely that India hopes to attract foreign investment for much of its
infrastructure needs.

2. Literature Review
The following summarizes the main findings of the related literature:
• The BOT scheme of financing infrastructure projects has many potential
advantages and is a viable alternative to the traditional approach using
sovereign borrowings or budgetary resources.
• BOT projects involve a number of elements, such as host government, the
project company, lenders, contractors, suppliers, purchasers, etc., and all of them
must work in coordination for a successful project.
• The application of the BOT scheme in Indian infrastructure development is
being carried out stage by stage.
• There are two broad categories of risk of BOT projects—country risks and
specific project risks. The former is associated with the political, economic and
legal environment over which the project sponsors have little or no control.
The latter to some extent can be controlled by the project sponsors.
• Different researchers appear to have different points of view on risk
identification because they have approached the topic from different angles.
A few researches of risk management associated with India’s BOT projects
focused on a particular sector.
• Risk management is a critical success factor of BOT projects. A particular risk
should be borne by the party most suited to deal with it, in terms of control or
influence and costs, but it has never been easy to obtain an optimal allocation
of risks.

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A Case Study on Build-Operate-Transfer Projects in India
 The above points are as per KPMG report on India Infrastructure sector dated
July 22, 2010.

3. Risks Analysis of Infrastructure Projects

3.1 Risks Associated with Infrastructure Projects
The risks of infrastructure projects have a wide range of sources and can be classified into
the following broad categories (This is based on the speech of Montek S Ahluwalia,
Deputy Planning Commission, www.planningcommission.gov.in/aboutus/speech/spemsa/
msa009.doc):
• Technical, quality or performance risk such as employment of inexperienced
designers, changes in the technology used, or in the industry standards during
the project.
• Organizational risks such as cost, time and scope objectives that are internally
inconsistent, lack of prioritization of projects, inadequacy or interruption in
funding, and resource conflicts with other projects in the organization.
• External risks such as shifting legal or regulatory environment (including
institutional changes), poor geological conditions, and weather-related force
majeure risks such as earthquakes and floods.
• Project management risks such as poor allocation of time and resources,
inadequate quality of the project plan, and poor use of project management
disciplines.
The experience of private investment in infrastructure in India over past years
indicates that risks and pitfalls go together with opportunities. Proper identification,
therefore, of the risks associated with investment in infrastructure in India, and planning
for effective responses thereto are essential for the private investors to be successful.
In general, in order to be successful all capital projects should meet the following criteria
or have the characteristics as listed below:
• A credit risk rather than an equity risk is involved.
• A satisfactory feasibility study and financial plan have been prepared.
• The cost of product or raw material to be used by the project is assured.
• The supply of energy at reasonable cost has been assured.
• A market exists for the product, commodity or service to be produced.
• The best way to appreciate the concerns of investors in infrastructure in India
is to review and consider some of the common causes of their failures, as stated
below:
– Delay in completion, with consequential increase in the interest expense on
construction financing and delay in the contemplated revenue flow;

38 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 – Capital cost overrun;
– Technical failure;
– Financial failure of the contractor;
– Government interference or inaction;
– Uninsured casualty losses;
– Increased price or shortages of raw materials;
– Technical obsolescence of the plant;
– Loss of competitive position in the market;
– Expropriation;
– Poor management;
– Overly optimistic appraisals of the value of pledged security, such as oil and
gas reserves; and
– Financial insolvency of the host government.
In particular, for private investors to be successful in their infrastructure projects, these
risks must be properly considered, monitored and avoided throughout the life of the projects.

3.2 Risks Associated with Financing of Infrastructure Projects

According to Nevitt and Fabozzi (2000), the risks that the lenders may take during project
financing include:
• Country risk: This includes risk of a politically-motivated embargo or boycott
of a project, debt repayments or shipment of product, which involves the foreign
policy of the country. Country risk also includes circumstances where the host
country cannot permit transfer of funds for debt service because of its own
economic problems.
• Political risk: Political and regulatory risks are inherent in every business. They
affect all aspects of a project, from site selection and construction to completion,
operations and marketing. They are difficult to evaluate. Where possible, they
are assumed by the sponsors, and where it is not possible, the lenders sometimes
assume such risks. The ultimate political risk is of expatriation. It is often
difficult to distinguish this risk from the country risk.
• Sovereign risk: Lenders used to making credit judgments for loans to countries
are in a position to make lending decisions where the project is owned entirely
or in part by an agency of a country. This in terms of collateral or security and
guarantee from Government of India. Being a BOT Project it is highly essential

Risk Analysis of Infrastructure Projects: 39

A Case Study on Build-Operate-Transfer Projects in India
 to mitigate the risk from lender’s perspective, hence this risk is very essential
from the lender’s point of view.
• Foreign exchange risk: In case capital expenditures, operating expenses,
revenues and borrowings are not in the same currency, the lender may be asked
to assume some of the risk through multicurrency loans which give the borrower
an option, based upon a fixed exchange rate, to repay in different currencies.
The lenders sometimes hedge this risk.
• Inflation risk: The lender must ultimately rely on projections of the cost of
construction of the project and the cost of operations. Use of correct inflation
factors in figuring out these future costs is an area in which the lender usually
has more expertise than the project company or its promoters.
• Interest rate: Loans with floating interest rates may be used for construction
purpose and long-term financing, as well as for working capital and short-term
needs. Forecasts of future interest rates used to or project capitalized
construction costs and future debt service requirements are dependent upon
realistic interest rate assumptions. Due to global economic slowdown and
stimulus packages by various countries, it is advisable to have interest rate in
floating condition till we get clear picture about complete recovery of economy
from economic slowdown. However, considering the uncertain economic
environment it is very much essential to predict interest rate in perfection to
reduce interest outgo and for speedy payment of loans for the projects.

3.3 Risk Appraisal of Infrastructure Projects

This can be done based on the following:
• Availability of permits and licenses: Where permits and licenses must be
obtained and renewed before the plant operates, the lenders, in effect, assume
the risk that such permits and licenses will be obtained in a reasonable time in
the absence of any provision by the sponsors to pay these costs.
• Operating performance risk: Once the project is complete and operate according
to specifications, the project begins to assume the characteristics of an
established operating company. As the completion guarantee drops away, the
lenders in many project financing become dependent on the uninterrupted
operation of the project and sale of its products or services to obtain the
revenues necessary to repay the project loans.
• Price of the product: The lender must appraise the future market for the
commodity and make judgments as to whether such price projections are
realistic.
• Enforceability of contracts for product: Even if a project is supported by
take-or-pay contracts with adequate escalation clauses, a question still arises as
to whether the contract is enforceable, and whether the contracting party is a

40 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 reliable party who will live up to its contractual obligations. Possible force
majeure defenses to performance must be considered. Should a loan be made, e.g.,
on the basis of a long-term contract to sell coal to a public utility? Is it possible
that the responsible public utility commission might declare the contract
unenforceable at a later date? A credit judgment also has to be made on the
financial ability and integrity of the contracting party to live up to its
contractual obligation.
• Price of raw materials and energy: This can be assessed based on the prevailing
prices of raw materials and other commodities required for infrastructure
projects.
• Enforceability of contracts for raw materials: If a project has long-term contracts
for raw materials at attractive prices, which are used in the underlying financial
projections, a question still arises as to their enforceability and as to whether
the contracting party is reliable and will live up to the commitments. If the raw
material is imported, the risk of import restriction or force majeure events in
the exporting country must be considered. Lenders sometimes assume these
risks by advancing additional loans.
• Refinancing risk: If the project is arranged on a basis whereby the construction
financing is to be provided by one group of lenders, and the long-term financing
after completion of construction is to be provided by another set of lenders, the
construction lenders run the risk of not being taken out by the long-term
lenders. This is due to various problems faced by BOT projects during its
construction stage, hence construction lenders are more vulnerable to risk
compared to long-term lenders who generally prefer to lend after construction
stage. Construction lenders prefer long-term financing to be arranged at the
time of the construction loan. However, this is not always possible because of
long lead time. Construction lenders can protect themselves by providing
incentives to sponsors to arrange the long-term debt. This may be achieved, for
example, by gradually escalating interest rates, by triggering additional sponsor
guarantees, or by requiring a take-out by the sponsor. Project financing tend to
have the same group of lenders for both construction lending and long-term
lending.
• Force majeure risk: Force majeure risks are those risks which result from events
beyond the control of the parties to the project financing. The objective of
lenders is to shift the various force majeure risks to the sponsor, or to the
sponsor’s suppliers and purchasers through contractual obligations or insurance
protection. To the extent that these risks are not shifted, the lenders have to
assume the force majeure risk.
• Completion: The completion risk sometimes assumed by a lender arises in
circumstances where for all practical purposes it is impossible to complete the

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A Case Study on Build-Operate-Transfer Projects in India
 project or facility so that it operates to the full capacity and/or specifications
originally envisaged. Sponsors do not want to be in a position of having to
provide funds to attempt to complete a facility to specifications that require
expenditures out of proportion to the benefit to be realized, or which seem
impossible to achieve. Usually this risk can be handled with little exposure to
the lender, but the loan may have to be extended for a longer-term due to lower
production than anticipated in the financial projections.
The risks associated with a project may arise in three major periods during the project
life cycle:
1. Engineering and construction phase;
2. Start-up phase; and
3. Operations according to specification.

3.4 Risk-Sharing: The Lessons Learned

At the heart of project financing is a contract that allocates risks associated with a project
and defines the claims on rewards. While often the cause of delay and heavy legal costs,
efficient risk allocation has been central to making it possible to finance projects and has
been critical in maintaining incentives to perform. Risks are divided not only between
public and private entities but also among various private parties. Four kinds of risks can
be distinguished—currency, commercial, policy-induced, and country—although the
distinctions among them are not always clear-cut.

3.4.1 Currency Risk

More recently, privately financed infrastructure has drawn on foreign capital and therefore
faces the risk of local currency devaluation. International lenders rarely assume such risk,
preferring instead to denominate their repayments in foreign currency terms. In the past,
public enterprises or governments have borne the currency risk, but with the growing
demand for private finance, the risk of currency depreciation falls on the project sponsor
and ultimately on the consumers of the service. In many recent private projects, service
prices have been linked to an international currency.

3.4.2 Market (Commercial) Risk

Two types of commercial risk may be distinguished, those relating to costs of production
and those arising from uncertainties in demand for services. Substantial progress has been
made in shifting cost-related risks onto private sponsors and other private parties.
Typically, contracts include bonuses for early commissioning of the project and penalties
for late completion. A contract may also specify operational obligations, such as
maintenance or the availability of capacity. In the case of utilities, a power or water
supplier is sometimes penalized for capacity availability below pre-specified level. Or the
contract may require that a plant be available in effective working order for a specified
period of time.

42 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 Project sponsors are able to transfer some of these risks to other private parties. It is
common, for example, to transfer construction risk to specialized construction companies
through turnkey contracts. Also, sponsors may enter into long-term contracts with input
suppliers.
Where sector policy concerns are unimportant, investors also accept market risk, but
progress in this regard has been slower. Tariffs in line with costs, sector unbundling to
permit new entry, and access to transmission networks are required in order to enable
private sponsors to assume all market risks. In telecommunications project, the market risk
is typically borne by the sponsor. In the electric power and water sector, on the other hand,
limitations on assumption of market risk arise because payments to cover costs are not
assured. Also, governments need to decisively eliminate the prospect that investors will
be bailed out if circumstances are unfavorable.
Assumption by private parties of even cost-related risks creates incentives for good
performance. Not only do sponsors have equity holdings in the project, but also lenders
are central to the monitoring process. As part of the contract, several financial covenants
are made. In such situations, commercial banks have a much greater incentive for
supervising projects than do lenders backed by sovereign guarantees.
The evidence, although limited, shows that the assumption of cost-related risks by
private sponsors and the monitoring of performance by banks are effective. Evidence, for
example, on private construction is very favorable and reflects the tight contractual
conditions and severe penalties for cost and time overruns (As per the report of Planning
Commission, June 2010). A preliminary review of the International Finance Corporation’s
infrastructure projects shows that time overruns in construction have been only seven
months on average, and cost performance has been almost on target. Such performance,
however, is possible only when commercial risks are truly transferred to private sponsors.
Private investors may wish to insure themselves against commercial risks. The
provision of such insurance is best left to the private sector, although governments have
a role in stimulating domestic guaranty facilities, possibly by taking an initial stake in
guaranty funds. The private market for risk insurance for international transactions is
small. While short-term insurance for trade credit is available, private insurance for
infrastructure projects is uncommon.

3.4.3 Sector Policy Induced Risk

Important issues arise, especially in the power sector because project sponsors focus on the
credibility and solvency of their buyer, typically a government utility that transmits and
distributes power. The instrument that projects the power supplier is the ‘take-or-pay’
contract, or power purchase agreement. Under such a contract, the buyer agrees to pay a
specified amount regardless of whether the service is used. The government thus provides
a contract compliance guarantee—a useful transitional measure—while the long-term
goal of sector reform is being addressed.
Similar concerns arise with water and other environmental infrastructure projects
(such as water supply, wastewater treatment, and solid waste disposal operations that are

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A Case Study on Build-Operate-Transfer Projects in India
typically carried out at the municipal level by a local monopoly). Here government
agencies (or municipal authorities) are not the direct purchasers of the service. But they
can and do influence the ability of the service provider to meter, bill, and collect. Where
the municipal authorities cannot deliver, collection guarantees from the central
government are required.
Thus, in such projects, the ‘market’ risk, or the risk arising from fluctuations in
demand, is effectively transferred to the government through the take-or-pay formula.
This becomes necessary because market risk is intermingled with the danger that
financially troubled power purchasers (transmission utilities) or water users may not
honor their commitments. Overall sector reform is required to eliminate policy-induced
risks and thus reveal the market risk.

3.4.4 Country Risk

Where governments do provide guarantees against policy or even commercial risks, these
may not always be acceptable to private international lenders, who may look instead for
guarantees from creditor countries or from multilateral banks to insure against ‘country’
risks. The role of the borrower government does not disappear in such situations, since
counter-guarantees are typically required.

4. Project Risk Management

Project risk management had been implemented for many years in India prior to the term
‘Project Risk Management’ becoming known to most of the Indian project managers and
government officials in the early 1990s.

4.1 Risk Identification and Analysis

The long-lasting implementation of project risk management in India can best be
evidenced from the construction project procedure that has been in use for over four
decades in India. The procedure is shown in Figure 1. The feasibility study was formally
introduced into the procedure in 1992. A capital project (including infrastructure
projects) must follow this procedure.
When an organization has identified its need for a new facility, it must submit a project
proposal defining the purpose, requirements and general aspects of the project, such as
location, performance criteria, scope, layout, equipment, services and other requirements.
The definition and planning of the project should be carried out in coordination with
agencies in charge such as provincial, municipal, autonomous region governments, central
ministries or commissions. The project proposals of a medium or large-sized project must
be submitted to the agencies in charge for review and comments. The priority projects
should be subject to review and approval by the State Council.
The review and approval procedure must make sure that the project complies with the
national, economic and social development programs and there are sufficient resources
available to the project. Once the proposal is approved, site selection and feasibility study

44 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 Figure 1: Construction Project Procedure in India

Preparation of Proposals

Feasibility Study Long-Term Capital Investment Program

Employer’s Estimate Feasibility Study

Five-Year Capital Investment Program

Design’s Estimate Scheme/Concept Design

Design Development

Working Drawing
Program of Implementation
of Approved Projects

Detailed Estimate
Site Preparation

Annual Capital Investment

Commencement/Progress

Preparation for Start-Up

Final Settlement Test at Completion

Take Over for Start-Up

should follow. The feasibility study involves the process of risk identification and analysis.
Various matters should be considered when selecting the site for the proposed project and
feasibility study is made, such as climate, topographical and geological conditions,
resources, transportation, potential natural calamities, environment conservation,
available services, utilities and so on. Usually, several alternative sites and proposals should
be considered and compared with each other in terms of the various factors influencing
the project.
All the potential sites need to be investigated to determine their suitability for the
project and must meet the local planning requirements. A site choice report and a
feasibility study report are usually required and submitted to the appropriate planning
authority, or the State Council in the case of a priority project for review and approval.

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A Case Study on Build-Operate-Transfer Projects in India
4.2 Risk Response Strategies
India’s government officials and project managers use the risk response strategies that are
available to them.

4.2.1 Avoidance
Risk avoidance is changing the project plan to eliminate the risk or condition or to protect
the project objectives from its impact. Some risk events that arise early in the project can
be dealt with by clarifying requirements, obtaining information, improving communication,
or acquiring expertise. Reducing scope to avoid high-risk activities, adding resources or
time, adopting a familiar approach instead of an innovative one, or avoiding an unfamiliar
subcontractor may be examples of avoidance.

4.2.2 Transference
Risk transfer is seeking to shift the consequence of a risk to a third party along with ownership
of the response. Transferring the risk simply gives another party responsibility for its
management; it does not eliminate it. Transferring liability for risk is most effective in dealing
with financial risk exposure. Risk transfer nearly always involves payment of a risk premium
to the party taking on the risk. It includes the use of insurance, performance bonds, warranties
and guarantees. Contracts may be used to transfer liability for specified risks to another party.
Use of a fixed-price contract may transfer risk to the seller if the project’s design is stable.
Although a cost-reimbursable contract leaves more of the risk with the customer or sponsor,
it may help reduce cost if there are mid-project changes.

4.2.3 Mitigation
Mitigation seeks to reduce the probability and/or consequences of an adverse risk event to an
acceptable threshold. Taking early action to reduce the probability of a risk occurring or its
impact on the project is more effective than trying to repair the consequences after it has
occurred. Mitigation costs should be appropriate, given the likely probability of the risk and
its consequences. Risk mitigation may take the form of implementing a new course of action
that will reduce the problem, e.g., adopting less complex processes, conducting more seismic
or engineering tests, or choosing a more stable seller. It may involve changing conditions so
that the probability of the risk occurring is reduced, e.g., adding resources or time to the
schedule. It may require prototype development to reduce the risk of scaling up from a bench-
scale model. Where it is not possible to reduce probability, a mitigation response might address
the risk impact by targeting linkages that determine the severity. For example, designing
redundancy into a subsystem may reduce the impact that results from a failure of the original
component.

4.2.4 Acceptance
This technique indicates that the project team has decided not to change the project plan
to deal with a risk or is unable to identify any other suitable response strategy. Active
acceptance may include developing a contingency plan to execute, should a risk occur. Passive
acceptance requires no action, leaving the project team to deal with the risks as they occur.

46 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 A contingency plan is applied to identified risks that arise during the project.
Developing a contingency plan in advance can greatly reduce the cost of an action should
the risk occur. Risk triggers, such as missing intermediate milestones, should be defined
and tracked. A fallback plan is developed if the risk has a high impact, or if the selected
strategy may not be fully effective. This might include allocation of a contingency amount,
development of alternative options, or changing project scope.
The most usual risk acceptance response is to establish a contingency allowance, or
reserve, including amounts of time, money, or resources to account for known risks.
The allowance should be determined by the impacts, computed at an acceptable level of
risk exposure, for the risks that have been accepted.

5. Methodology of Study
5.1 Procedure
This research study employed a combination of methods for an integrated qualitative and
quantitative research methodology that included five stages. The first stage was a
comprehensive literature review together with lessons learned from the practice of BOT
projects in developing countries, especially in India, to develop an initial list of risks associated
with India’s BOT infrastructure projects. In the second stage of instrument development, only
the critical risks associated with India’s BOT infrastructure projects were chosen for the study.
This research on BOT projects in India mainly focuses on the following categories of
risk, which were not covered in various studies on risk analysis in BOT projects as well
as in the KPMG report on Indian infrastructure sector.
• Approval risk
• Cost overrun risk
• Law risk
• Dispatch constrain risk
• Contracts risk
The filtering of the initial list was based mainly on experiences in the practice of two
BOT infrastructure projects in India supported with information from literature reviews and
published case studies. In the third stage, a survey via questionnaires to related experts was
conducted to evaluate the criticality of the short-listed risks and the effectiveness of the
corresponding mitigation measures. The fourth stage was case studied; it provides detailed
information to supplement that obtained from a survey. Finally, a risk management
framework for investing in India’s future BOT infrastructure projects was developed.

5.2 Survey
5.2.1 Rating of Risk Criticality and Mitigation Measure Effectiveness
The evaluation of the criticality of risk is a complex subject concealed in uncertainty and
vagueness. The vague terms are unavoidable because it is easy for project managers to

Risk Analysis of Infrastructure Projects: 47

A Case Study on Build-Operate-Transfer Projects in India
access risks in qualitative linguistic terms. To improve the preciseness and reliability of
survey replies, a six-degree rating system for the criticality of risk and the effectiveness of
mitigation measures was adopted (Armstrong, 2004), as shown in Table 1.

Table 1: Rating System for Risk Criticality and Mitigation Measure Effectiveness

Ratings Risk Criticality Mitigation Measure Effectiveness

0 Not applicable Not applicable
1 Not at all critical Not at all effective
2 Only slightly critical Only slightly effective
3 Critical Effective
4 Very critical Very effective
5 Very much critical Very much effective

5.3 Data Collection

This survey is mainly focused on the infrastructure sector of India and it targeted the
following industries:
• Power Plants
• Toll Road Projects
• Aviation

• Telecommunication
• Social Infrastructure Projects like sewage, drinking water, etc.
There were 50 respondents, who were asked various questions pertaining to various
risks they faced during conceiving to commissioning stages of infrastructure projects.

5.4 Analysis of Data

Since the survey targets were mainly the experts in India, the survey had already been
tested on a small sample of relevant respondents to make sure that the survey was
unambiguous and that the respondents understood the terms and would interpret terms
in a similar manner.
Data analysis consists of examining, categorizing, and tabulating the evidence to
address the initial propositions of the study. In order to generate recommendations, this
research project analyzed data in following three stages:
1. Data Reduction: It edited and summarized the data collected from the survey
and case studies, and looked for patterns and themes to reduce the data without
significant loss of information. The main method used was coding or sorting the

48 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 data into categories according to some criteria which appear to be reasonable
based upon prior research.
2. Data Display: In this stage it used tables to display the results of the survey and
enhance the understanding of the data.
3. Drawing Valid Conclusions: It was initially tentative, but firmed up as the
analysis developed and was verified by constantly referring back to the data.

5.4.1 Critical Risks and Mitigating Measures

Criticality of Critical Risks: The survey results concerning the criticality of risks
associated with India’s BOT infrastructure projects are tabulated in Table 2. The risks
are ranked from 1 to 11 on the basis of their mean scores. The risk with the highest
mean score would be ranked 1 and so on.
Table 2: Criticality of Risks in India’s BOT Infrastructure Projects
Percentage of Respondents Who Answered

Mean Score

Ranking
Not At All

Very Much
Applicable

Critical Risk
Slightly
Critical

Critical

Critical

Critical
Critical
Only

Very
Not

Delay in Approval 0 4.8 4.8 33.3 28.6 28.6 3.71 1

Change in Law 0 9.5 9.5 19.0 28.6 33.3 3.67 2

Cost Overrun 0 0 19.0 42.9 23.8 14.3 3.33 3

Dispatch Constraint 0 4.8 33.3 19.0 23.8 19.0 3.19 4

Land Acquisition and Compensation 0 0 28.6 47.6 4.8 19.0 3.14 5

Enforceability of Contracts 0 4.8 38.1 19.0 23.8 14.3 3.05 6

Construction Schedule 0 4.8 28.6 42.9 9.5 14.3 3.00 7

Financial Closing 0 41.3 19.0 33.3 23.8 9.5 2.95 8

Tariff Adjustment 0 9.5 28.6 33.3 19.0 9.5 2.90 9

Environmental Risk 0 14.3 38.1 28.6 14.3 4.8 2.57 10

Exchange Rate and Convertibility 4.8 38.1 38.1 9.5 9.5 0 1.86 11

Effectiveness of Mitigating Measures: The survey also asked the respondents to evaluate
the effectiveness of the generally available mitigating measures for the critical risks
associated with India’s BOT infrastructure projects, which were developed from the
literature review, personal experience and informal discussion with colleagues.
Based on Table 3, maintaining a good relationship with government authorities,
especially officers at the state or provincial level, is regarded as the most effective

Risk Analysis of Infrastructure Projects: 49

A Case Study on Build-Operate-Transfer Projects in India
mitigating measure for delay in approval risk, because a foreign consortium will at least
know from where, who and how to get the approvals.
Table 3: Effectiveness of Mitigating Measures for Delay in Approval Risk
Effectiveness
Mitigating Measure
Mean Score Ranking
Establish joint venture with Indian government agencies or state-owned 3.43 2
enterprises or local private partners, or with foreign (international)
company either already or not yet operating in India
Obtain government’s guarantees to adjust tariff or extend concession 3.19 3
Maintain good relationship with central and state governments 3.86 1

As shown in Table 4, the respondents felt that the most effective mitigating measure
for change in law risk was to obtain guarantees from the government to either adjust the
tariff or extend the concession period.
Table 4: Effectiveness of Mitigating Measures for Change in Law Risk
Effectiveness
Mitigating Measure
Mean Score Ranking
Obtain government’s guarantees, e.g., adjust tariff or extend 3.86 1
concession period
Insurance for political risk 1.67 3
Maintain good relationship with central and state governments
authorities 3.62 2

As shown in Table 5, the respondents felt that the most effective mitigating measure
for cost overrun risk was to include penalty clauses in contracts with the project
participants, e.g., constructors, input suppliers and the operator, so that all share the
responsibility and the incentive to perform well as individuals, and also engage in solving
problems that affect the health of the overall project even if the cause of the problem does
not lie with them.

Table 5: Effectiveness of Mitigating Measures for Cost Overrun Risk

Effectiveness
Mitigating Measure
Mean Score Ranking
Enter into contracts with the project participants, e.g., constructors, 3.86 1
input suppliers, and the operator
Additional capital provided by shareholders in the form of a stand-by 3.10 2
subordinated loan or as a stand-by capital contribution
Ask the lenders to provide standby credit facilities for cost overruns 2.95 3

As shown in Table 6, the most effective measure for dispatch constraint risk, according
to the respondents, is to enter into take-or-pay contracts with other parties. A take-or-

50 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
pay contract is an agreement by the product purchaser to pay specified amounts
periodically for the product purchased, and to make specified minimum payments even if
it does not take delivery.

Table 6: Effectiveness of Mitigating Measures for Dispatch Constraint Risk

Effectiveness
Mitigating Measure
Mean Score Ranking
Enter into take-or-pay products (e.g., power or water) purchase 3.33 1
arrangements with purchaser
Enter into dispatch contracts with government authorities to dispatch 3.33 2
facilities at full capacity for a minimum number of hours each year
Ask government to guarantee that transmission system will be 3.10 3
ready for dispatch

As shown in Table 7, making a credit judgment on the financial ability and integrity
of the contracting party to live up to its contractual obligation is regarded as the most
effective measure for mitigating the enforceability of contracts risk.

Table 7: Effectiveness of Mitigating Measures for Enforceability of Contracts Risk

Effectiveness
Mitigating Measure
Mean Score Ranking
Make a credit judgment on the financial ability and integrity of the
contracting party to live up to its contractual obligation 3.57 1
Maintain good relationship with government authorities, and establish
a communication with local arbitrators 2.81 3
Appoint independent accountant to audit the contracting parties 3.10 2

The above-mentioned survey results show the effectiveness of the mitigating measures
for the short-listed critical risks associated with India’s BOT infrastructure projects. Each
measure may represent an additional cost to foreign investors. The different measures
should not be viewed as alternatives but as components in an integrated approach to risk
management. Many of the measures appear complementary and it seems logical to suppose
that they will be more powerful as mitigating measures when used together than when
used alone.

5.5 Risk Management Framework for BOT Infrastructure Project

Based on the survey results and analysis as well as case studies, a risk management
framework for investing in India’s future BOT infrastructure projects can be proposed as
follows:
Step 1: List all risks associated with the proposed BOT infrastructure project and then
analyze these risks in order of importance. The more critical the risk, the more attention
should be paid to it.

Risk Analysis of Infrastructure Projects: 51

A Case Study on Build-Operate-Transfer Projects in India
Step 2: For each risk, list corresponding mitigation measures as much as possible, and then
examine the availability of the mitigating measures in sequence based on their
effectiveness. The more effective the measure, the higher the priority for adoption.
Sometimes, a combination of several mitigating measures is needed to be adopted.
Step 3: For each risk and its mitigating measures, negotiate with Indian government and
related entities to incorporate the risk mitigation measures, and fine tune the concession
agreement and other agreements as much as possible to ensure that all these risks are
adequately covered.
Step 4: Allocate risks to related parties according to the principle that risk should be
borne by the party most capable of controlling it. An optimal allocation of risks depends
on the relative bargaining power of the parties and the potentiality of reward for taking
the risks.
Step 5: Adopt the risk allocation and security structure and enter into financing process
for the project.

Conclusion
In this research, the critical risks associated with India’s BOT projects were investigated.
The main conclusions are as follows:
• The identified critical risks in descending order of importance are: delay in
approval, change in law, cost overrun, dispatch constraint, land acquisition and
compensation, enforceability of contracts, construction schedule, financial
closing, tariff adjustment, and environmental risk.
• The measures for mitigating each of these risks have been evaluated by the
respondents. Most of the measures were regarded as effective to some degree,
however the most effective measures to mitigate each risk are as follows:
– For delay in approval, maintaining a good relationship with government
authorities, especially officers at the state or provincial level;
– For change in law, obtaining government’s guarantees via adjusting either
the tariff or extending the concession period;
– For cost overrun, entering into contracts with the project participants so
that all share the responsibility and the incentive;
– For dispatch constraint, entering into take-or-pay contracts with other
parties;
– For land acquisition and compensation, obtain government’s guarantees to
achieve timely acquisition of land;
– For enforceability of contracts, making a credit judgment on the financial
ability and integrity of the contracting party to live up to its contractual
obligation;

52 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
 – For construction schedule, choosing quality, trustworthy Indian partners
with knowledge of how to handle everyday construction issues;
– For financial closing, equity financing and cooperation with government
partners;
– For tariff adjustment, negotiating to separate and redefine the tariff burden
so that while some portions of the total tariff burden remain fixed other
portions are either adjusted, rescheduled or paid in foreign currency; and
– For environmental risk, creating appropriate lines of communication and
contacts with government authorities and agencies.
The risk management framework proposed by this research project is easier to apply
than others. It incorporates the findings from this research and provides step-by-step
guidelines for foreign companies who intend to invest in India’s infrastructure projects in
the future. It also has the potential to help national, provincial, and city government to
examine their approach to and services in support of BOT infrastructure projects. It
suggests that mechanisms be reviewed to improve the communication and coordination
links between different levels of government, a second thought be given to develop
mechanisms to coordinate actions of different government agencies, and the lessons
learned from individual BOT projects be shared among government servants so that
unintended barriers to BOT are dismantled. v

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A Case Study on Build-Operate-Transfer Projects in India
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54 The IUP Journal of Financial Risk Management, Vol. VII, No. 4, 2010
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