Build Own Operate Transfer (BOOT) funding model of project financing involves a single organization, or consortium (BOOT provider) who designs, builds, funds, owns and operates the project for a defined period of time and then transfers this projects ownership across to a agreed party. BOOT projects are a way for governments to bundle together the design and construction, finance, operations and maintenance and potentially marketing and customer interface aspects of a project and let these as a package to a single private sector service provider. The asset is transferred back to the government after the concession period at little or no cost.
The Components of Build Own Operate Transfer (BOOT) Model:
- Build: The concession grants the promoter the right to design, construct, and finance the project. A construction contract will be required between the promoter and a contractor. The contract is often among the most difficult to negotiate in a BOOT project because of the conflict that increasingly arises between the promoter, the contractor responsible for building the facility and those financing its construction. Banks and other providers of funds want to be sure that the commercial terms of the construction contract are reasonable and that the construction risk is placed as far as possible on the contractors. The contractor undertakes responsibility for constructing the asset and is expected to build the project on time, within budget and according to a clear specification and to warrant that the asset will perform its design function. Typically this is done by way of a lump-sum turnkey contract.
- Own: The concession from the state provides concessionaire to own, or at least possess, the assets that are to be built and to operate them for a period of time: the life of the concession. The concession agreement between the state and the concessionaire will define the extent to which ownership, and its associated attributes of possession and control, of the assets lies with the concessionaire.
- Operate: An operator assumes the responsibility for maintaining the facility’s assets and the operating them on the basis that maximizes the profit or minimizes the cost on behalf of the concessionaire and, like the contractor undertaking construction and be a shareholder in the project company. The operator is s often an independent through the promoter company.
- Transfer: This relates to a change in ownership of the assets that occurs at the end of the concession period, when the concession assets revert to the government grantor. The transfer may be at book value or no value and may occur earlier in the event of failure of concessionaire.
Advantages of BOOT Model
- The majority of construction and long term risk can be transferred onto the BOOT provider.
- The BOOT operator can claim depreciation on the facility constructed and depreciation being a tax-deductible expense shareholder returns are maximized.
- Using an output based purchasing model, the tender process will encourage maximum innovations allowing the most efficient designs to be explored for the scheme. This process may also be built into more traditional tendering processes.
- Accountability for the asset design, construction and service delivery is very high given that if the performance targets are not met, the operator stands to lose a portion of capital expenditure, capital profit, operating expenditure and operating profit.
- Boot operators are experienced with management and operation of infrastructure assets and bring these skills to scheme.
- Corporate structuring issues and costs are minimal within a BOOT model, as project funding, ownership and operation are the responsibility of the BOOT operator. These costs will however be built into the BOOT project pricing.
Disadvantages of BOOT Model
- Boot is likely to result in higher cost of the product/ service for the end user. This is a result of the BOOT provider incurring the risks associated with 100 percent financing of the scheme and the acceptance of the ongoing maintenance liabilities.
- Users may have a negative reaction to private sector involvement in the scheme, particularly if the private sector is an overseas owned company.
- Management and monitoring of the service level agreement with the BOOT operators can be time consuming and resource hungry. Procedures need to be in place to allow users to assess service performance and penalize the BOOT operator where necessary.
- A rigorous selection process is required when selecting a boot partner. Users need to be confident that the BOOT operator is financially secure and sufficiently committed to the market prior to considering their bid.