BUILD-OPERATE-TRANSFER

A new administration in the government traditionally in Philippine setting focus always their
attention on what would be their legacy for the country and to the Filipino people when they
leave their office.  The customary practice of most administration is the provision for
infrastructure and others that provide public services.  It could be road, bridges, hospitals,
airports, skyways, and the like.  But what is evident is these legacies involve a hefty amount of
capital expenditures before it could take place.   With these in mind, the government cannot do
it alone and so they resort to a way of attracting the private sector to participate in this worthy
endeavor.  This participation of the private sector in developing, financing, and maintaining the
infrastructure the government wanted for the benefit of the public that lead to an arrangement
between the two sectors is what we called now as “build-operate-transfer” (BOT)
arrangements.
The BOT arrangements work in various ways prior to the construction, development, or
maintenance of an existing infrastructure take place.  Let us look into these factors relevant to
the subject:
1. Funds are outsourced from private companies called the operators through competitive
bidding or direct negotiation.
 
2. The government who is called the grantor for purposes of the arrangement is in charged
to grant and allows the operator to finance the construction, development and
maintenance of the infrastructure
 
3. The grantor allows the operator to commercially operate the infrastructure for a fixed
period of time sufficient enough for the operator to earn and received back his capital
investment plus the realization of profit.
 
4. After satisfying numbers 1 to 3, the operator then shall transfer the infrastructure to the
government (grantor) without compensation.
 
BOT is also known as “public private partnership”, “rehabilitate-operate-transfer” and “service
concession arrangements”.
 
EXAMPLES OF BOT PROJECTS IN THE PHILIPPINES
A. Concession arrangement for the water and wastewater services in Manila between
Metropolitan Waterworks and Sewerage System (MWSS) and Maynilad Water Services,
Inc. (private company).
 
 B. Concession arrangement for the operation and maintenance of the North Luzon
Expressway (NLEX) between the government and Manila North Tollways Corporation
(private company).
 
C. Concession arrangement for the operation of Manila Metro Rail Transit System Line 3
(MRT 3) between the Department of Transportation and Communication (DOTC) and
Metro Rail Transit Corporation (private company).
 
D. Concession arrangement for the operation of public car parks between several local
government units and Jadewell Parking Systems Corporation (private company).
The BOT contracts and arrangements entered by the Philippine government with private
sectors are governed by the Phil. BOT Law or R. A. No. 7718 which amends certain sections of
the R.A. No. 6957 or the “act authorizing the financing, construction, operation and
maintenance of infrastructure projects by the private sector and for other purposes”.
 
FEATURES OF BOT ARRANGEMENT
The study of BOT entails important features the student must remember in order to fully
comprehend and analyze its implementation and the application of concepts attributable to it. 
The arrangements involving BOT involve among others the following:
1. The operator under the BOT arrangement shall provide public service in behalf of the
government.
 
2. The government is called the grantor of the contract to the private entity to which the
responsibility of the service has been passed.
 
3. Having passed the responsibility, the operator is not only responsible for the
management of the infrastructure and services accruing to it but also act as an agent of
the grantor.
 
4. The operator does not only manage the infrastructure but also sets the initial prices as
levied by the operator and in charge in regulating the same over the period embodied in
the service arrangement.
 
5. The operator is duty bound at the end of the period to pass to the grantor the
infrastructure after the period of arrangement has been fully satisfied by the operator in
accordance with the specified conditions of the arrangement without incremental
consideration notwithstanding which party initially financed it.
 
The very common characteristics of a service concession arrangement is the principle that the
Concession Operator receives the right but incurs an obligation to provide public services in
behalf of the Concession Provider (government).

INTERNATION FINANCIAL REPORTING INTERPRETATIONS

 COMMITTEE (IFRIC)
IFRIC is the interpretative body of the International Accounting Standards Board (IASB) that
reviews newly identified financial reporting issues not specifically addressed in IFRS or issues
where unsatisfactory or conflicting interpretations have developed, or seem likely to develop,
with a goal to reach a consensus.
The role of the Interpretations Committee is to interpret the application of IFRS Standards to
ensure consistent accounting practices throughout the world and to provide timely guidance on
financial reporting issues that are not specifically addressed in IFRS Standards.
 

                                       IFRIC 12 – SERVICE CONCESSION ARRANGEMENTssion arrangement is

an arrangement whereby a government or other public sector body contracts with a
private operator to develop (or upgrade), operate and maintain the grantor's
infrastructure assets such as roads, bridges, tunnels, airports, energy distribution
networks, prisons or hospitals. The grantor controls or regulates what services the
operator must provide using the assets, to whom, and at what price, and also controls
any significant residual interest in the assets at the end of the term of the arrangement.
 upgrade), operate and maintain the grantor's infrastructure assets such as roads,
bridges, tunnels, airports, energy distribution networks, prisons or hospitals. The grantor
controls or regulates what services the operator must provide using the assets, to
whom, and at what price, and also controls any significant residual interest in the assets
at the end of the term of the arrangement.
By having IFRIC 12, it provides interpretations how a service concession arrangement should be
handled in accounting.  But firstly, what is service concession arrangement?
A service concession arrangement is an arrangement whereby a government or other public
sector body contracts with a private operator to develop (or upgrade), operate and maintain
the grantor's infrastructure assets such as roads, bridges, tunnels, airports, energy distribution
networks, prisons or hospitals. The grantor (the government) controls or regulates what
services the operator must provide using the assets, to whom, and at what price, and also
controls any significant residual interest in the assets at the end of the term of the
arrangement.
 
TYPES OF SERVICE CONCESSION ARRANGEMENTS
According to IFRIC 12, it draws a distinction between two types of service concession
arrangement and these distinctions are enumerated as follows:
 
1. The operator receives a financial asset, referring to an unconditional contractual right to
receive a specified or determinable amount of cash or another financial asset from the
government in return for constructing or upgrading a public sector asset by operating
and maintaining the asset for a specified period of time. This category includes
guarantees by the government to pay for any shortfall between amounts received from
users of the public service and specified or determinable amounts.
 
2. The operator receives an intangible asset – a right to charge for use of a public sector
asset that it constructs or upgrades and then operate and maintain for a specified
period of time. A right to charge users is not an unconditional right to receive cash
because the amounts are contingent on the extent to which the public uses the service.
IFRIC 12 allows the possibility that both types of arrangement may exist within a single
contract:
1.  to the extent that the government has given an unconditional guarantee of
payment for the construction of the public sector asset, the operator has a
financial asset;
2. to the extent that the operator has to rely on the public using the service in
order to obtain payment, the operator has an intangible asset.
ACCOUNTING ISSUES ON SERVICE CONSESSION ARRANGEMENTS
Students of accountancy should bear in mind the following issues regarding concession
arrangement:
a. Treatment of operator’s rights over the infrastructure
The right to operate shall not be recognized as property, plant and
equipment of the operator because the arrangement does not include
the conveyance of the right to control the use of public infrastructure,
only, an access to operate the infrastructure.
 
b. Recognition and measurement of arrangement consideration
 The recognition of revenue by the operator is in accordance with the
services it performs which depends on the nature of the
consideration.       
 
 c. Construction or upgrade services
The consideration given by the grantor to the operator in the
construction of infrastructure or upgrade of services may be in the form
of rights to financial or intangible asset.   
 
d. Operation services
The operator in the fulfillment of its contractual obligation must maintain
specified level of serviceability in the infrastructure up to the period the
infrastructure is pass over to the grantor.
 
e. Borrowing costs
All borrowings costs attributable to the arrangement is recognized as
an      expense of the operator.  However, if the arrangement has a
contractual right for the operator to receive an intangible asset, (the right
to charge users of the public service), the borrowing costs attributable to
the arrangement shall be capitalized.
 
f. Recognition of Financial and Intangible asset
              A financial asset shall be recognized if the operator has an unconditional
contractual right to receive cash from the grantor such as the grantor
contractually guarantees to pay the operator.
 
An intangible asset shall be recognized if the operator receives a right to
charge users of the public service.