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BOT (build-operate-transfer)
BOT (build-operate-transfer)
Private Partnership Policy
“A partnership between the public and private sectors with clear agreement on shared
objectives for the delivery of public infrastructure and/or public services.”
“There is no single PPP engagement model that can satisfy all conditions concerning a
project’s location setting and its technical and financial features. The most suitable model
should be selected taking into account the country’s political, legal and socio-cultural
circumstances, maturity of the country’s PPP market and the financial and technical
features of the projects and sectors concerned.”
The below are the top ten prevalent PPP Engagement Models in India:
What is BOT?
The BOT scheme is essentially a form of leasing, where the government (project sponsor)
allows a private entrepreneur (project promoter) to design, finance, and build an
infrastructure facility. In return, the project promoter is permitted to collect tolls (user
fee) and operate the facility for a specified period (called the concession period), during
which he is expected to recover all of his costs and earn a reasonable profit. At the end of
the concession period, the ownership of the facility is transferred to the government. This
arrangement facilitates the implementation of capital intensive infrastructure projects by
the government with funds from outside the budget allocation, while transferring the risks
involved to the private sector.
The concession period is determined primarily by the length of time needed for the
facility’s revenue stream to pay off the company’s debt and provide a reasonable rate of
return for its effort and risk.
The service provider is responsible for design and construction, finance, operations,
maintenance and commercial risks associated with the project.
The service provider owns the project throughout the concession period. The asset is
transferred back to the government at the end of the term, often at no cost.
Similar to BOOT projects, but the service provider retains ownership of the asset in
perpetuity. The government only agrees to purchase the services produced for a fixed
length of time
A design and construction contract linked to an operation and maintenance contract. The
service provider is usually responsible for financing the project during construction.
The government purchases the asset from the developer for a pre-agreed price prior to (or
immediately after) commissioning and takes all ownership risks from that time.
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Similar to a BOO project but an existing asset is leased from the government for a
specified time. The asset may require refurbishment or expansion.
Flow chart shows the typical contractual structure for a BOT project
ownership during the concessionary period, which is normally 10-50 years, after which
1. Concession agreement.
2. Loan agreement.
3. Shareholders agreement.
4. Construction contract.
5. Supply contract (Equipment/Material/Fuel supply contract).
6. Off-take agreement.
7. O & M agreement.
Concession Agreement
The concession agreement is between the government and the concessionaire. The
concession agreement is regarded as the "heart" of a BOT project as it determines the
commercial viability and profitability.
Loan Agreement
The loan agreement is between the lenders (i.e. Banks) and the concessionaire. The
Banks provide the much necessary debt to the concessionaire. Bank debt is the primary
source of financing for a BOT infrastructure project.
Shareholder Agreement
The shareholder agreement is between the equity investors and the concessionaire.
Construction Contract
The construction contract is between the contractor and the concessionaire. The contract
is usually let under fixed price turnkey contract.
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An agreement between the supplier and the concessionaire. The supplier in a supply
contract is often government agency that supplies raw material such as coal to power
plant and oil.
Off-take Agreement
An agreement between the concession company and the operator. The operation phase
Plays a very important role in the success of BOT project as is success is tied to its
revenue generating ability. The operation phase of build-operate-transfer projects
presents the great management challenge and demands the highest level of attention.
The typical evaluation and selection process in a competitive tender is shown in Figure
below. Pre-qualification: The main aim of the request for qualification (RFQ) is to
shortlist a of competitive proposals by consortia that consists of reputable and
experienced operators and bankers. Nonetheless pre-qualification would eliminate and
discourage the non-serious promoters.
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BOT projects are characterized by high risk and cost overruns. Tiong et al (1992)
identified six Critical Success Factors (CSF) that are vital for project promoters in
winning a BOT contract. These factors are:
BOT projects have unique characteristics that distinguish them from other project
delivery methods. The following are some of the their unique characteristics:
1. BOT projects are financed on a project finance basis with limited recourse.
Typically in limited recourse financing, the lenders provide debt to the concession
company solely based upon expected cash flow/revenue generating capacity of the
project. Financing is provided on the merit of the revenue generating capacity of
the project rather than the assets of the concessionaire company.
7. BOT formula can be applied to any sector of the economy. But it has been used
widely in power plant sector, transportation and telecommunications.
The economic costs associated with BOT projects include the following:
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A BOT transport infrastructure project may be considered as financially viable, when the
following three conditions are simultaneously satisfied:
1. The NPV(net present value) for the project should be positive. The discount rate
for financial analysis may include a risk premium over the current commercial
lending rate.
2. The financial IRR should have a value greater than the discount rate.
3. The cash flow (liquidity) situation in each year of the concession period should be
satisfactory. In other words, the cash balance at the end of every year should be
positive.
For conditions prevailing in India, the discount rate for financial analysis may be
assumed at 20%, corresponding to an interest rate of 18% for long-term debt.
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Risk Sharing/Management
Risk Allocation:
Risk management plays an important role in the BOT projects. Given the multiple
complex agreements between the various members of the consortium, in which each
member is interested in different stages of project, proper allocation of risk is a
prerequisite for the success of BOT project.
Types of Risk:
1. Political risk.
2. Currency and foreign exchange risk.
3. Cost overrun risk.
4. Delay risk.
5. Tariff adjustment risk.
6. Market risk.
7. Operation risk.
8. Force majure risk.
project, which is transferred to the public at the end of the contract period.
Disadvantages of BOT
1. Transaction costs are high, they amount to 5-10% of total project cost.
2. Not suitable for smaller projects. Victorian Government of Australia has suggested
that projects with a value of less than Australian dollar $15m are unlikely to gain
benefits from BOT delivery method.
3. The success of BOT project depends upon successful raising of necessary finance.
Various costs such as cost of construction, equipment, maintenance should be
committed during the life of the project.
4. BOT projects are successful only when substantial revenues are generated during
the operation phase.
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REFERENCES:-
1. en.wikipedia.org/wiki/Build–operate–transfer
2. www.investopedia.com/terms/b/botcontract.asp
3. www.e-bizsolve.com/CMS/images/stories/cbs_incubation.pdf
4. www.indiankanoon.org/search/?formInput=build%20operate%20transfer
5. http://www.gsd.harvard.edu/images/content/5/.../fac-pub-pollalis-bot-part-1.pd...%E2%80%8E
6. web.shgm.gov.tr/hadyayin/a02.pdf
7. http://www.yildiz.edu.tr/~zyumur/Economical%20analyses%20of%20build-operate-
transfer%20model%20in%20establishing%20alternative%20power%20plants.pdf
8. www.ecronacunova.com/pdf/whitepapers/BOT_Report_Final.pdf
9. www.uq.edu.au/economics/johnquiggin/Conference/BOOT.html
10. http://www.businessdictionary.com/definition/build-own-operate-transfer-BOO..
11. http://www.forumsec.org.fj/resources/uploads/attachments/documents/FEMM%202006%20Pr
ivate%20Public%20Partnerships%20and%20BOT%20Schemes.pdf
12. www.mcmullan.net/eclj/BOT.html
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