BOT

In a BOT project, the public sector grantor grants to a private company the right to develop
and operate a facility or system for a certain period (the "Project Period"), in what would
otherwise be a public sector project.

Usually a discrete, greenfield new build project.

Operator finances, owns and constructs the facility or system and operates it commercially for
the project period, after which the facility is transferred to the authority.

BOT is the typical structure for project finance. As it relates to new build, there is no revenue
stream from the outset. Lenders are therefore anxious to ensure that project assets are ringfenced within the operating project company and that all risks associated with the project are
assumed and passed on to the appropriate actor. The operator is also prohibited from
carrying out other activities. The operator is therefore usually a special purpose vehicle.

The revenues are often obtained from a single "offtake purchaser" such as a utility or
government, who purchases project output from the project company (this is different from a
pure concession where output is sold directly to consumers and end users). In the power
sector, this will take the form of a Power Purchase Agreement. For more, see Power
Purchase Agreements. There is likely to be a minimum payment that is required to be paid
by the offtaker, provided that the operator can demonstrate that the facility can deliver the
service (availability payment) as well as a volumetric payment for quantities delivered above
that level.

Project company obtains financing for the project, and procures the design and construction
of the works and operates the facility during the concession period.

Project company is a special purpose vehicle, its shareholders will often include companies
with construction and/or operation experience, and with input supply and offtake purchase
capabilities. It is also essential to include shareholders with experience in the management of
the appropriate type of projects, such as working with diverse and multicultural partners, given
the particular risks specific to these aspects of a BOT project. The offtake purchaser/ utility
will be anxious to ensure that the key shareholders remain in the project company for a period
of time as the project is likely to have been awarded to it on the basis of their expertise and
financial stability.

Project company will co-ordinate the construction and operation of the project in accordance
with the requirements of the concession agreement. The off-taker will want to know the
identity of the construction sub-contractor and the operator.

The project company (and the lenders) in a power project will be anxious to ensure it has a
secure affordable source of fuel. It will often enter into a bulk supply agreement for fuel, and
the supplier may be the same entity as the power purchaser under the Power Purchase
Agreement, namely the state power company. For examples, click on Fuel Supply/Bulk
Supply Agreements. Power is also the main operating cost for a water or wastewater
treatment plant and so operators will need certainty as to cost and source of power.

The revenues generated from the operation phase are intended to cover operating costs,
maintenance, repayment of debt principal (which represents a significant portion of
development and construction costs), financing costs (including interest and fees), and a
return for the shareholders of the special purpose company.

Lenders provide non-recourse or limited recourse financing and will, therefore, bear any
residual risk along with the project company and its shareholders.

The project company is assuming a lot of risk. It is anxious to ensure that those risks that stay
with the grantor are protected. It is common for a project company to require some form of
guarantee from the government and/ or, particularly in the case of power projects,
commitments from the government which are incorporated into an Implementation
Agreements.

In order to minimize such residual risk (as the lenders will only want, as far as possible, to
bear a limited portion of the commercial risk of the project) the lenders will insist on passing
the project company risk to the other project participants through contracts, such as a
construction contract, an operation and maintenance contract

PPP
A Publicprivate partnership (PPP or 3P) is a commercial legal relationship defined by
the Government of India in 2011[1] as "an arrangement between a government / statutory entity /
government owned entity on one side and a private sector entity on the other, for the provision of
public assets and/or public services, through investments being made and/or management being
undertaken by the private sector entity, for a specified period of time, where there is well defined
allocation of risk between the private sector and the public entity and the private entity receives
performance linked payments that conform (or are benchmarked) to specified and predetermined performance standards, measurable by the public entity or its representative".
The Government of India recognizes several types of PPPs, including: User-fee based BOT
models, User-fee based BOT model, Performance based management/maintenance contracts
and Modified design-build (turnkey) contracts. Today, there are hundreds of PPP projects in
various stages of implementation throughout the country.
As outlined in its XII Five Year Plan (2012-2017), India has an ambitious target of infrastructure
investment (estimated at US$1 trillion). In the face of such an enormous investment requirement,
the Government of India is actively promoting PPPs in many sectors of the economy. According

PPP policies
The Ministry of Finance centralizes the coordination of PPPs, through its Department of
Economic Affairs' (DEA) PPP Cell. In 2011, the DEA published guidelines for the formulation and
approval of PPP projects. This was part of an endeavor to streamline PPP procedures and
strengthen the regulatory framework at the national level to expedite PPP projects approval,
reassure private parties and encourage them to enter into PPPs in India. This was one of the
main roles of the Public Private Partnership Appraisal Committee (PPPAC) which is responsible
for PPP project appraisal at the central level.
The Government also created a Viability Gap Funding Scheme for PPP projects to help promote
the sustainability of the infrastructure projects. This scheme provides financial support (grants) to
infrastructure projects, normally in the form of a capital grant at the stage of project construction
(up to 20 percent of the total project).

The Government has also set up India Infrastructure Finance Company Limited (IIFCL) which
provides long-term debt for financing infrastructure projects. Set up in 2006, IIFCL provides
financial assistance in the following sectors: transportation, energy, water, sanitation,
communication, social and commercial infrastructure.
To help finance the cost incurred towards development of PPP projects (which can be significant,
and particularly the costs of transaction advisors), the Government of India has launched in 2007
the 'India Infrastructure Project Development Fund' (IIPDF) which supports up to 75 % of the
project development expenses.
Finally, the PPP Cell has produced a series of guidance papers and a 'PPP Toolkit' to support
project preparation and decision-making processes. The objective is to help improve decisionmaking for infrastructure PPPs in India and to improve the quality of the PPPs that are
developed. The tookit has been designed with a focus on helping decision-making at the Central,
State and Municipal levels.

Infrastructure
Infrastructure in India is poor when compared to similarly developed nations. [2] The Government
of India identified public-private partnerships (PPP) as a way of developing the country's
infrastructure. In the 1990s, during India's first liberalization wave, there were various attempts to
promote PPPs. However, in some sectors - such as water and sanitation - it failed. India was
perceived as too risky and there was significant opposition to private sector involvement. It is
only in the first half of the 2000s that the first PPPs were signed and implemented. Construction
of infrastructure in India requires large capital outlays and there is a deficit in supply. Over fifty
percent of major infrastructure development projects in Maharashtra state are based on 3P.
Projects using the 3P model have also proceeded in Karnataka, Madhya Pradesh, Gujarat,
and Tamil Nadu state.
In August 2012, the Prime Minister of India, Manmohan Singh, lifted the ban on the transfer of
government-owned land, relaxed land transfer policy and did away with the need for Cabinet
approval for 3P projects in order to accelerate the building of infrastructure. [3]

Roads
Sixty percent of 3P projects are for road building and they represent forty-five percent of 3P
monetary value. They are a part of the National Highways Development Project(NHDP).
[4]
Examples of 3P road building projects are the Golden Quadrilateral and the NorthSouth and
EastWest Corridor. About 14,000 km (8,700 mi) of India's national highways are being
converted to four-lane highways.[5]

Ports
Port building projects account for ten percent of projects and thirty percent of the value of 3P.[2] As
of 2011, India had twelve major seaports and 185 minor seaports along its coast line of 7,517 km
(4,671 mi). Seaports constructed via the 3P model increased the handling of cargo in India by ten
percent between 2008 and 2011.[6] Examples of port building projects include the Jawaharlal
Nehru Port Trust (JNPT) in Mumbai and Chennai port in association with P&O. The Indian

government expects the National Maritime Development Programme (NMDP) to be a 3P

stakeholder.

Water
In India, no city yet offers continuous (24/7) water supply. The quality of the water supply service
is low, with non-revenue water being as high as 40 percent in most cities. The poor are
particularly affected by this situation and end up paying more for a liter of water than their
wealthier counterparts. With the objective of widening access to water services and making water
services more sustainable, the Government of India promoted PPPs in the water sector in the
1990s. However, this attempt failed as the Government did not manage to create a good
enabling environment for private investment[7] and poor project preparation. Furthermore, there
was important opposition to private sector involvement in water delivery.
However, after this failed first attempt, a decade later some cities tried different types of PPP
arrangements, such as management contracts. The allocation of risks between the public and
the private sectors was more balanced. The public sector provided part of the initial funding and
focused on efficiency gains. The mindsets of policymakers and politicians also started to evolve,
with a better understanding of the role of private sector companies and less opposition to their
involvement in the water space. Both the 2002 and 2012 National Water Policy [8] recognized the
importance of PPPs to solve water issues in urban areas. Between 2005 and 2011, 15 water
public-private partnerships were signed.

Risks
There have been a number of critics associated with Public Private Partnerships in India, in
particular related to the risks that come with such partnerships.
It has been argued that PPP involve greater costs that traditional government procurement
processes (because of the development, bidding and ongoing costs in PPP projects). Some have
questioned the value-for-money relevance of PPP projects in India.
The private sector does not provide a service that is not specifically outlined in the PPP contract.
It is thus critical that key performance indicators are precisely laid out in the contract and that the
government monitors closely the work of its private partner.
Furthermore, there is a cost attached to debt and while private sector can help access to finance,
it the customers or the government may end up bearing much of this cost.
Another critic of PPP projects is related to their social and political consequences, which can be
significant. For example, a PPP project may result in the transfer of civil servants to the private
sector, important tariff increases or resettlement issues to name a few.
Finally, PPPs often end up being renegotiated. This is due to the long-term nature of the PPP
projects (some run for up to 30 years) and their complexity. It is difficult to identify all possible
contingencies during project development and events and issues may arise that were not
anticipated in the documents or by the parties at the time of the contract.

Other major drawbacks encountered in 3P projects in India include poorly drafted contracts and
lack of understanding of contracts, inadequate resources, lack of managerial experience,
breaches of contract, failures in team building, lack of performance measures, corruption and
political interference