PUBLIC PRIVATE PARTNERSHIP

Build Operate and Transfer

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Public Private Partnership

A public-private partnership is a contractual
agreement formed between public and

private sector partners, which allows more

private sector participation than is

traditional.

DesignBuild

DesignBuildMaintain

DesignBuildOperate

DesignBuildOperateMaintain

Build-OwnOperateMaintain

BuildOwnOperate

Public Responsibility
Service Contracts Management contracts Lease Concession

Private Responsibility
Divestiture

BUILD OPERATE TRANSFER

Build-operate-transfer (BOT) is a form of project

financing, wherein a private entity receives a concession from the private or public sector to finance, design,

construct, and operate a facility stated in the concession

contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project.
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 It is a major startup business venture where private

organizations undertake development and operation of a facility normally done by the government. The termination of the private sector involvement occurs at the return of the ownership of the facility to the

government after a fixed concession period, usually 25 to

40 years

In the BOT approach, a private party or concessionaire retains a concession for a fixed period from a public party, called principal (client), for the development and operation of a public facility. The development consists of the financing, design and construction of the facility, managing and maintaining the facility adequately, and making it sufficiently profitable. The

concessionaire secures return of investment by operating the

facility and, during the concession period, the concessionaire acts as owner. At the end of the concession period, the

concessionaire transfers the ownership of the facility free of

liens to the principal at no cost
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The following different parties could be involved in any BOT project: The host government: The government is the initiator of the infrastructure project and decides if the BOT model is appropriate to meet its needs. In addition, the political and economic circumstances are main factors for this decision. The government provides normally support for the project in some form. (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.
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Lending banks:

Most BOT project are funded to a big extent by commercial debt. The bank
will be expected to finance the project on non-recourse basis meaning that it has recourse to the special purpose entity and all its assets for the repayment of the debt. 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, it will subcontract a third party to perform its obligations under the concession

agreement. Additionally, 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
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 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. On the other hand, 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. For example, the expertise and efficiency that that the private entity is expected to bring as well as the risk transfer. Therefore the private entity bears a substantial part of the risk.

Concession contract
The concession contract is signed between the principal and the concessionaire. This contract runs from the initial design stage through the final transfer, and includes the allocation of risks.

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The main issues addressed within the concession contract are: The length of the concession period; the starting date and the transfer date. The structure of the project company (concessionaire). The financial scheme. The financial guarantees (principal and concessionaire). The material guarantees (if the concessionaire is not able to deliver the facility, the principal has the right to step in and take over). The financial ceiling of development costs. The financial ceiling of usage costs.

The construction process.

The completion time of the construction.

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Financial agreements The most significant guarantee is provided by the government to step-in in case of lower than expected revenue levels. One of the extreme guarantees for a lender is the right to take over the facility

in case the concessionaire is unable to meet financial obligations.

Construction contract The contract between the concessionaire and the contractor is usually a fixed price contract or a design-build contract. Operation contract The operation contract is signed between concessionaire and operator. The rates for usage of the facility are included in the contract, as agreed by the principal and concessionaire

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STAGES OF BOT PROJECTS

Preliminary study
Feasibility studies are necessary to prove the forecasted success of the project, in order to attract private funding. Alternatively, a private party may identify a need and initiate the BOT project and in such a case, the preliminary study is conducted by the private entity with limited government involvement. Selection process The selection process depends on who initiates the project. In a public selection process where the initiative is coming from the public sector (government), a request for qualification is distributed. Project implementation After the selection stage and the foundation of the concessionaire, the proposal is

finalized.
Together with all the involved parties, the concessionaire develops a detailed program and preliminary design, and applies for permits.
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Construction

Once the necessary permits are obtained, construction begins. Often BOT projects are
fast track projects where the design is not complete when construction starts. This is feasible because of congruent financial interests within the members of the consortium and the pressing need to complete construction and start collecting revenues. Less

controversial designs allow a quicker construction period with fewer uncertainties.

Operation During the operation stage, the facility is operated and maintained by the operator who is paid by the concessionaire. The concessionaire, as the owner of the facility during the

operation period, is obligated to operate the facility in a manner that adequately services
the public user. The concessionaire is also responsible for maintaining the facility in working condition. Both the concession and operation agreements specify the condition of the facility at the time of transfer to the principal

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Transfer
The facility is transferred to the principal, usually at no cost. Transfer time is determined in the concession agreement. Should the principal chooses to take over the facility earlier than the agreed concession period, the concessionaire will be financially compensated for the investment. After transfer, the principal is the sole owner of the facility and can choose to operate and maintain the facility directly or hire an independent operator. Although a transfer has not taken place in any of the cases in this book, it can be expected that the principal will continue with the same

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WHEN IS BOT APPROPRIATE

The greatest advantage of BOT for the government is the subcontracting of the

majority of the risks to the private sector, with the latter willing to finance and assume
risks in the development of a public facility. At the end of the concession period, the government will inherit a well-operated project without investing public funds and with little risks.

A consequence of not investing its own money is that the project can take place even
if the governments budget is limited.

BOT is a complex process. Because of the numerous and very different contracts, organizations and stages, the process management is more complex, especially at its early stages. Furthermore, the concessionaire accepts to take over the risks from the principal expecting a high return on investment.

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For every risk the concessionaire concedes to, the final customer has to pay. Nevertheless, BOT projects need not necessarily be more expensive than traditional projects because of the savings in a privately owned process and because of efficient design, construction and operation.

Another issue is the uncertainty of predicting the revenues during the concession period which is the most crucial piece of information for the concessionaire. The length of the concession period will depend on those expected revenues and can be up to 30 years, already a considerable prediction period. Often, the business plan of the concessionaire is based on inaccurate assumptions that can be devastating for the operation of the project.

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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.

Technical risk: Construction difficulties, for example unforeseen soil conditions, breakdown of equipment

Financing risk: Foreign exchange rate risk and interest rate fluctuation, market risk (change in the price of raw materials), cost overrun risk

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BuildOperateTransfer Contracts

Responsibility for construction (typically greenfield) and operations with the private partner while ownership is retained by the public sector.

Design-buildoperate (DBO)

ShortGreenfield medium (e.g. 3-5 yrs)

MediumHigh Tariff revenue

Design, construct, manage, maintain

Not very common in India.

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Build-operatetransfer (BOT)/ Design-BuildFinanceOperateTransfer (DBFOT)

Long (e.g. 2030 yrs)

Greenfield Private

High Tariff revenue

Design, finance, construct, manage, maintain

Most common form of BOT concession in India. e.g. Nhava Sheva International Container Terminal, Hyder abad Metro,

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Build-operate- Long transfer (BOT) (e.g. 20-30 Annuity yrs)

Greenfield Private

Low Annuity revenue / unitary charge

Design, finance, construct, manage, maintain

E.g. Tuni Anakapalli Project,Alan dur Undergroun d Sewerage Project

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It is not the governments obligation to provide services but to see that theyre provided. -Mario Cuomo, 52nd Governor of New York State

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Presented by Roll no 1-20, PGDM 2011-2013

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