Build Operate Transfer (BOT) is a project financing and operating approach that has found an application in recent years primarily in the area of infrastructure privatization in the developing countries. It enables direct private sector investment in large scale infrastructure projects.
In BOT the private contractor constructs and operates the facility for a specified period. The public agency pays the contractor a fee, which may be a fixed sum, linked to output or, more likely, a combination of the two. The fee will cover the operators fixed and variable costs, including recovery of the capital invested by the contractor. In this case, ownership of the facility rests with the public agency.
The theory of Build Operate Transfer (BOT) is as follows:
- BUILD – A private company (or consortium) agrees with a government to invest in a public infrastructure project. The company then secures their own financing to construct the project.
- OPERATE — The private developer then operates, maintains, and manages the facility for an agreed concession period and recoups their investment through charges or tolls.
- TRANSFER– After the concessionary period the company transfers ownership and operation of the facility to the government or relevant state authority.
In a BOT arrangement, the private sector designs and builds the infrastructure, finances its construction and operates and maintains it over a period, often as long as 20 or 30 years. This period is referred to as the “concession” period. In short, under a BOT structure, a government typically grants a concession to a project company under which the project company has the right to build and operate a facility. The project company borrows from the lending institutions in order to finance the construction of the facility. The loans are repaid from “tariffs” paid by the government under the off take agreement during the life of the concession. At the end of the concession period the facility is usually transferred back to the government.
Advantages of BOT Model
- The Government gets the benefit of the private sector to mobilize finance and to use the best management skills in the construction, operation and maintenance of the project.
- The private participation also ensures efficiency and quality by using the best equipment.
- BOT provides a mechanism and incentives for enterprises to improve efficiency through performance-based contracts and output-oriented targets.
- The projects are conducted in a fully competitive bidding situation and are thus completed at the lowest possible cost.
- The risks of the project are shared by the private sector.
Disadvantages of BOT Model
- There is a profit element in the equity portion of the financing, which is higher than the debt cost. This is the price paid for passing of the risk to the private sector
- It may take a long time and considerable up front expenses to prepare and close a BOT financing deal as it involves multiple entities and requires a relatively complicated legal and institutional framework. There the BOT may not be suitable for small projects
- It may take time to develop the necessary institutional capacity to ensure that the full benefits of BOT are realized, such as development and enforcement of transparent and fair bidding and evaluation procedures and the resolution of potential disputes during implementation.