NMP27, ROLL no-77

In recent years. the political and economic circumstances are main factors for this decision. called principal (client). The development consists of the financing. At the end of the concession period. The main reasons for this trend are a shortage of public funds and a handsoff approach of government agencies. the concessionaire acts as owner. to provide social services and promote economic activity in the private sector. and making it sufficiently profitable. a growing trend emerged among governments in many countries to solicit investments for public projects from the private sector. The Build Operate Transfer (BOT) approach is an option for the government to outsource public projects to the private sector Stages Preliminary Study Selection Process Project Implementation Construction Operation Transfer Some or even all of the following different parties could be involved in any BOT project: • • • The host government: Normally. a private party or concessionaire retains a concession for a fixed period from a public party. The most common examples are roads. (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. ports and public buildings. In the BOT approach. for the development and operation of a public facility. airports. bridges. The concessionaire secures return of investment by operating the facility and. Lending banks: Most BOT project are funded to a big extent by commercial debt.Critically describe the difference between BOOT and BOT project structure in terms of financial viability and risks profile. during the concession period. managing and maintaining the facility adequately. BOT projects include a wide array of public facilities with the primary function to serve public needs. In addition. the concessionaire transfers the project ownership free of liens to the principal at no cost. water and sewer systems. the government is the initiator of the infrastructure project and decides if the BOT model is appropriate to meet its needs. design and construction of the facility. The bank will be expected to finance the project on “non-recourse” basis meaning that . The government provides normally support for the project in some form.

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. Even if the host government could borrow money on better conditions than a private company could. 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. For example. income risk (over-optimistic cash-flow forecasts). 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. The contractor is responsible for the construction of the project and for hiring subcontractors. for example unforeseen soil conditions. other factors could offset this particular advantage. breakdown of equipment • Financing risk: foreign exchange rate risk and interest rate fluctuation. . cost overrun risk. suppliers and consultants. The operator is in the concessionaire s service and manages the operational stage of the facility Additionally. it will subcontract a third party to perform its obligations under the concession agreement. Therefore the private entity bears a substantial part of the risk. On the other hand. • Technical risk: construction difficulties. • 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. the expertise and efficiency that the private entity is expected to bring as well as the risk transfer.it has recourse to the special purpose entity and all its assets for the repayment of the debt. 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 In general. market risk (change in the price of raw materials).

ranging from a fixed annual fee (flat rate) to the measured quantity supplied (unit rate) and "Take-or-pay" arrangements are effectively two part tariffs expressed in a different manner. transport. water. government support for a project that is also clearly in the public interest. operation and maintenance of infrastructures. Long term demand. transferring all the risk to private sector. and the Sponsors are reducing the capital expenses and government s role in build. . The objectives of BOOT s participants including Government. making new jobs for unemployed citizens and accountable atmosphere for a reliable and appropriate quality. Disadvantages. the Operator. reasonable profits. There are many factors that make BOOT attractive and suitable for governments as a project delivery method includes stable political system. the Contractor. providing opportunities for a comparative or competitive climate and a sympathetic cost benefit for both parties. Special Purpose Company (SPC). increasing expenditures of users in operation time. and telecom industries. and later transferring it back into public ownership through a single organization or consortium (BOOT provider) The earned income can be based on a variety of arrangements. The most important advantages of BOT are: utilization of private sector's investment instead of public sector's. limited competition. good cash flows etc. within receiving the right to achieve income from the facility under a period of time (concession period approximately 15-25 years). introducing innovative and alternative technology. These kinds of projects are very complicated from the viewpoint of technical and financial issues and need high level experts and consultants. predictable and proven legal system. the Lenders.Advantages. contrast between benefits of private sector with public sector BOOT (build–own–operate–transfer) Build-Own-Operate-Transfer is a founding model and a form of concession in which a public authority makes an agreement with a private company (concessionaire) to Design Build. transferring technical knowledge is one of the most important benefits of this method for developing countries. political resistance in using private sector is less than other methods because project will owned by the government finally. Own and Operate a specific piece of an infrastructure such as power.

not realizable full benefits of .A BOOT structure differs from BOT in that the private entity owns the works. BOOT & BOT are methods which find very extensive application in countries which desire ownership transfer and operations including. The specific characteristics of BOOT make it suitable for infrastructure projects like highways. negative reaction of community to private sector involvement. 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. 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. roads mass transit. 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[8] Disadvantages:• Moreover the defects of this model are described as: higher cost for the end user due to the BOOT provider accountability of 100 percent financing and on-going maintenance.

develop strong domestic capital. The BOOT contracts have the tendency to work well when the purpose of the project is to offer a service. but if the aim is to improve a service or make more efficient a system. and provide realistic incentives. guarantees. These methodologies increment the complexity of the financial study . time consuming and resource hungry management and monitoring of the operating contract with the BOOT operators. the risks for investor is also comparatively more. quality of the work is vital to private.economic development a sole sourced BOOT provider. ensure easy and speedy processing of the project. As the infrastructure projects need large investment and long time period. this modality is not recommended. Thus investor always requires government support including perfect law and regulations system. BOOT is more efficient because the ownership of facilities prepare a better environment for management. fair sharing of risks between both parties. requirement of a rigorous selection process in selecting a BOOT partner Practical Implications. adequate returns and protection of the investment BOOT v/s BOT The definition of BOOT and BOT is very close together and the only difference is the ownership of facilities in BOOT and because of this.