Build–operate–transfer

From Wikipedia, the free encyclopedia

Build–operate–transfer (BOT) or build–own–operate–transfer (BOOT) is a form of project financing,

wherein a private entity receives a concession from the private or public sector to finance, design, construct,
own, and operate a facility stated in the concession contract. This enables the project proponent to recover its
investment, operating and maintenance expenses in the project.

Due to the long-term nature of the arrangement, the fees are usually raised during the concession period. The
rate of increase is often tied to a combination of internal and external variables, allowing the proponent to reach
a satisfactory internal rate of return for its investment.

Examples of countries using BOT are Pakistan,[1] Thailand, Turkey, Taiwan, Bahrain, Saudi Arabia,[2] Israel,
India, Iran, Croatia, Japan, China, Vietnam, Malaysia, Philippines, Egypt, Myanmar and a few US states
(California, Florida, Indiana, Texas, and Virginia). However, in some countries, such as Canada, Australia, New
Zealand and Nepal,[3] the term used is build–own–operate–transfer (BOOT). Traditionally, such projects
provide for the infrastructure to be transferred to the government at the end of the concession period. In
Australia, primarily for reasons related to the borrowing powers of states, the transfer obligation may be
omitted. For the Alice Springs – Darwin section of the Adelaide–Darwin railway the lease period is 50 years,
see AustralAsia Rail Corporation. The first BOT was for the China Hotel, built in 1979 by the Hong Kong listed
conglomerate Hopewell Holdings Ltd (controlled by Sir Gordon Wu).

Forms of project finance are listed in the sections below.

Contents

1 BOT (build–operate–transfer)

2 BOOT (build–own–operate–transfer)

3 BOO (build–own–operate)

4 BLT (build–lease–transfer)

5 DBFO (design–build–finance–operate)

6 DBOT (design–build–operate–transfer)

7 DCMF (design–construct–manage–finance)

8 See also

9 References

BOT (build–operate–transfer)
BOT finds extensive application in infrastructure projects and in public–private partnership. In the BOT
framework a third party, for example the public administration, delegates to a private sector entity to design and
build infrastructure and to operate and maintain these facilities for a certain period. During this period the
private party has the responsibility to raise the finance for the project and is entitled to retain all revenues
generated by the project and is the owner of the regarded facility. The facility will be then transferred to the
public administration at the end of the concession agreement,[4] without any remuneration of the private entity
involved. Some or even all of the following different parties could be involved in any BOT project:

The host government: Normally, the government is the initiator of the infrastructure project and decides if
the BOT model is appropriate to meet its needs. In addition, the political and economic circumstances are
main factors for this decision. The government provides normally support for the project in some form.
(provision of the land/ changed laws)
The concessionaire: The project sponsors who act as concessionaire create a special purpose entity which
is capitalised through their financial contributions.
Lending banks: Most BOT project are funded to a big extent by commercial debt. The bank will be
expected to finance the project on "non-recourse" basis meaning that it has recourse to the special purpose
entity and all its assets for the repayment of the debt.
Other lenders: The special purpose entity might have other lenders such as national or regional
development banks
Parties to the project contracts: Because the special purpose entity has only limited workforce, it will
subcontract a third party to perform its obligations under the concession agreement. Additionally, it has to
assure that it has adequate supply contracts in place for the supply of raw materials and other resources
necessary for the project

A BOT Project (build operate transfer project) is typically used to

develop a discrete asset rather than a whole network and is generally
entirely new or greenfield in nature (although refurbishment may be
involved). In a BOT Project the project company or operator generally
obtains its revenues through a fee charged to the utility/ government
rather than tariffs charged to consumers. A number of projects are called
concessions, such as toll road projects, which are new build and have a
number of similarities to BOTs.[5]
In general, a project is financially viable for the private entity if the BOT model
revenues generated by the project cover its cost and provide sufficient
return on investment. On the other hand, the viability of the project for the host government depends on its
efficiency in comparison with the economics of financing the project with public funds. Even if the host
government could borrow money on better conditions than a private company could, other factors could offset
this particular advantage. For example, the expertise and efficiency that the private entity is expected to bring as
well as the risk transfer. Therefore, the private entity bears a substantial part of the risk. These are some types of
the most common risks involved:

Political risk: especially in the developing countries because of the possibility of dramatic overnight
political change.
Technical risk: construction difficulties, for example unforeseen soil conditions, breakdown of equipment
Financing risk: foreign exchange rate risk and interest rate fluctuation, market risk (change in the price of
raw materials), income risk (over-optimistic cash-flow forecasts), cost overrun risk[6][7][8]

BOOT (build–own–operate–transfer)
A BOOT structure differs from BOT in that the private entity owns the works. During the concession period the
private company owns and operates the facility with the prime goal to recover the costs of investment and
maintenance while trying to achieve higher margin on project. The specific characteristics of BOOT make it
suitable for infrastructure projects like highways, roads mass transit, railway transport and power generation and
as such they have political importance for the social welfare but are not attractive for other types of private
investments. BOOT & BOT are methods which find very extensive application in countries which desire
ownership transfer and operations including. Some advantages of BOOT projects are:

Encourage private investment

Inject new foreign capital to the country
 Transfer of technology and know-how
Completing project within time frame and planned budget
Providing additional financial source for other priority projects
Releasing the burden on public budget for infrastructure development[9]

BOO (build–own–operate)
In a BOO project ownership of the project remains usually with the project company for example a mobile
phone network. Therefore, the private company gets the benefits of any residual value of the project. This
framework is used when the physical life of the project coincides with the concession period. A BOO scheme
involves large amounts of finance and long payback period. Some examples of BOO projects come from the
water treatment plants. This facilities run by private companies process raw water, provided by the public sector
entity, into filtered water, which is after returned to the public sector utility to deliver to the customers.[10]

BLT (build–lease–transfer)
Under BLT a private entity builds a complete project and leases it to the government. On this way the control
over the project is transferred from the project owner to a lessee. In other words, the ownership remains by the
shareholders but operation purposes are leased. After the expiry of the leasing the ownership of the asset and the
operational responsibility are transferred to the government at a previously agreed price. For foreign investors
taking into account the country risk BLT provides good conditions because the project company maintains the
property rights while avoiding operational risk.

DBFO (design–build–finance–operate)
Design–build–finance–operate is a project delivery method very similar to BOOT except that there is no actual
ownership transfer. Moreover, the contractor assumes the risk of financing till the end of the contract period.
The owner then assumes the responsibility for maintenance and operation. Some disadvantages of DBFO are the
difficulty with long term relationships and the threat of possible future political changes which may not agree
with prior commitments.This model is extensively used in specific infrastructure projects such as toll roads. The
private construction company is responsible for the design and construction of a piece of infrastructure for the
government, which is the true owner. Moreover, the private entity has the responsibility to raise finance during
the construction and the exploitation period. The cash flows serve to repay the investment and reward its
shareholders. They end up in form of periodical payment to the government for the use of the infrastructure. The
government has the advantage that it remains the owner of the facility and at the same time avoids direct
payment from the users. Additionally, the government succeeds to avoid getting into debt and to spread out the
cost for the road over the years of exploitation.[11]

DBOT (design–build–operate–transfer)
This funding option is common when the client has no knowledge of what the project entails. Hence he
contracts the project to a company to design, build, operate and then transfer it. Examples of such projects are
refinery constructions. [12]

DCMF (design–construct–manage–finance)
Some examples for the DCMF model are the prisons or the public hospitals. A private entity is built to design,
construct, manage, and finance a facility, based on the specifications of the government. Project cash flows
result from the government's payment for the rent of the facility. In the case of the hospitals, the government has
the ownership over the facility and has the price and quality control. The same financial model could be applied
on other projects such as prisons. Therefore, this model could be interpreted as a mean to avoid new
indebtedness of public finance.

See also
Adelaide–Darwin railway
Central Texas Turnpike System
Pay on production
Public-private partnership
Privatization
Project finance
Private Finance Initiative
Shadow toll

References

1. Sehrish Wasif (July 28, 2016). "Hyderabad-Sukkur section: China, S Korea lobbying for M-6 motorway"
(http://tribune.com.pk/story/1150871/hyderabad-sukkur-section-china-s-korea-lobbying-m-9-motorway/).
The Express Tribune. Retrieved July 28, 2016.
2. P.K. Abdul Ghafour (6 April 2009). "North-South Railway to be ready for freight movement by 2010" (htt
p://archive.arabnews.com/?page=1&section=0&article=121242&d=6&m=4&y=2009). Arab News.
Retrieved 7 June 2011.
3. ASHISH GAJUREL (2013-07-07). "Promotion of public-private partnership" (http://www.thehimalayanti
mes.com/fullNews.php?headline=Promotion+of+public-private+partnership++&NewsID=382881). The
Himalayan Times. Retrieved 15 September 2013.
4. "BOT - PPP in Infrastructure Resource Center" (http://pppirc.worldbank.org/public-private-partnership/ag
reements/concessions-bots-dbos). World Bank. March 13, 2012.
5. "BOT - PPP in Infrastructure Resource Center" (http://pppirc.worldbank.org/public-private-partnership/ag
reements/concessions-bots-dbos). World Bank. March 13, 2012.
6. Walker, Smith, Adrian Charles (1995). Privatized infrastructure: the build operate transfer approach.
Thomas Telford. p. 258. ISBN 978-0-7277-2053-5.
7. Wilde Sapte LLP, Denton (2006). Public Private Partnerships: Bot Techniques and Project Finance.
London: Euromoney Books. p. 224. ISBN 978-1-84374-275-3.
8. Mishra, R.C. (2006). Modern Project Management. New Age International. p. 234. ISBN 978-81-224-
1616-9.
9. Gatti, Stafano (2007). Project Finance in theory and practice. Academic Press. p. 414. ISBN 978-0-12-
373699-4.
10. Lewis/ Grimsey, Mervyn/Darrin. Public Private Partnerships: the worldwide revolution in infrastructure
provision and project finance. Edward Elgar Publishing. p. 268. ISBN 978-1-84720-226-0.
11. Pekka, Pakkala (2002). Innovative Project Delivery Methods for Infrastructure. Finnish Road Enterprise.
p. 120. ISBN 978-952-5408-05-8.
12. Design-Build-Approacheshttp://www.dnaindia.com/mumbai/report_worli-haji-ali-sea-link-will-be-ready-
in-4-years_1402669
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Categories: Build–operate–transfer Infrastructure investment Public administration Public finance

Public–private partnership

This page was last edited on 16 July 2017, at 10:10.

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