Decoding BOT, EPC and HAM - The Weekly Manifest
All views are personal and for educational purposes only, please do your own research before investing and trading
Hi,
This week I was looking into the infrastructure space, specifically public infrastructure, roads
Now, one of the things about public infrastructure is to understand how the revenue is earned by the companies
So today we cover the 3 primary ways the payments for infrastructure are structured; namely BOT, EPC and HAM
Let's Begin!
BOT - Build, Operate & Transfer
Build, Operate and Transfer so what does this mean?
Well in BOT, the company arranges the financing for the project, and would collect either tolls or receive an annuity from the government
In case of annuity payments, the term used would be BOT-Annuity
Now what this means is:
If the company gets a BOT project all it is getting is the "permission" if one thinks abouts it
The company would arrange the financing (using a mix of equity and debt), build the highway, and operate it for a time period, taking care of the maintenance and earning through tolls and eventually transfer it to the client (in this case the govt.) at the end.
As you can imagine, this puts all the risks to the firm, they not only have to arrange financing and manage paying it back but also spend on maintenance while their revenue is based on the revenue from the project (Tolls) which is uncertain
Now yes, if it's BOT-Annuity, at least the revenue aspect is certain from the government and the company isn't exposed to the risk of whether the project will earn enough revenue or not
EPC - engineering, procurement & construction
Under EPC, the idea is the company is only contracted for construction and doesn't have to do anything beyond constructing the project
In other words, the financing of the project and the future maintenance is taken care by the govt, and they'd manage it through the toll collection, all the company has to do is build and deliver the project for the fixed fee
This as you can imagine would put excess burden on the govt to manage everything while the company only has to take care of building the project quickly and under the budgeted cost
HAM - Hybrid Annuity Model
This is as the name suggests a hybrid of the BOT-Annuity and EPC model
The blend is 40% EPC and 60% BOT-Annuity
The EPC part of capital is delivered by the Govt. over 5 installments based on pre-decided milestones (Progress)
The BOT-Annuity part of capital is arranged by the company, with a part of it being equity and the rest being debt
The model splits the responsibility between the govt. and the company.
The govt. takes the risk of revenue collection as it collects the toll and is paying the company a fixed annuity, in return the company takes the duty and the risk of maintenance
The company and govt. both take the risk of financing the project
This as you can imagine as a new initiative and being a more balanced approach towards the risks would be more popular and preferred in the upcoming projects
Well, that's it for this week, hope this helps you in analysing infrastructure companies!
See you in the next one, until then keep manifesting wealth!
Best,
Aryan
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