BOT & BOOT Projects for Highways
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, 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 Thailand, Turkey, Taiwan, Saudi Arabia, Israel, India, Iran, Croatia, Japan, China, Vietnam, Malaysia, Philippines, Egypt, and a few US states (California, Florida, Indiana, Texas, and Virginia). However, in some countries, such as Canada, Australia and New Zealand, 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.
Forms of project finance are listed in the sections below.
BOT finds extensive application in the 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, 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.
In general, a project is financially viable for the private entity if the 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 compared to that of the public sector, 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
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.