Build-Operate-Transfer (BOT) is a form of project financing, wherein a private entity receives a
concessionA concession is a business operated under a contract or license associated with a degree of exclusivity in business within a certain geographical area. For example, sports arenas or public parks may have concession stands. Many department stores contain numerous concessions operated by other...
from the private or
public sectorThe public sector is a part of the state that deals with the delivery of goods and services by and for the government, whether national, regional or local/municipal....
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.
Due to the long-term nature of the arrangement, the fees are usually raised during the concession period.
Build-Operate-Transfer (BOT) is a form of project financing, wherein a private entity receives a
concessionA concession is a business operated under a contract or license associated with a degree of exclusivity in business within a certain geographical area. For example, sports arenas or public parks may have concession stands. Many department stores contain numerous concessions operated by other...
from the private or
public sectorThe public sector is a part of the state that deals with the delivery of goods and services by and for the government, whether national, regional or local/municipal....
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.
Due to the long-term nature of the arrangement, the fees are usually raised during the concession period. The rate of increase is often tied to a combination of internal and external variables, allowing the proponent to reach a satisfactory
internal rate of returnThe internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or simply the rate of return . In the context of savings and loans the IRR is also called the effective...
for its investment.
Examples of countries using BOT are
IndiaIndia, officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the south, the Arabian Sea on the west, and the Bay of Bengal...
,
CroatiaCroatia , officially the Republic of Croatia , is a country in southeast Europe, at the crossroads of the Pannonian Plain, the Balkans, and the Mediterranean Sea. Its capital is Zagreb...
,
Japanis an island country in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, People's Republic of China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
,
ChinaChina is a cultural region, an ancient civilization, and, depending on perspective, a national or multinational entity extending over a large area in East Asia....
,
MalaysiaMalaysia is a country in Southeast Asia that consists of thirteen states and three Federal Territories, with a total landmass of . The capital city is Kuala Lumpur, while Putrajaya is the seat of the federal government. The population stands at over 28 million inhabitants...
and
PhilippinesThe Philippines officially known as the Republic of the Philippines, is a country in Southeast Asia with Manila as its capital city. It comprises 7,107 islands in the western Pacific Ocean....
. However, in some countries, such as
CanadaCanada is a country occupying most of northern North America, extending from the Atlantic Ocean in the east to the Pacific Ocean in the west and northward into the Arctic Ocean...
,
AustraliaAustralia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the continental mainland , the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans...
and
New ZealandNew Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses , and numerous smaller islands, most notably Stewart Island/Rakiura and the Chatham Islands. The indigenous Māori named New Zealand Aotearoa, commonly translated as The Land of the Long White Cloud...
, the term used is
Build-Own-Operate-Transfer (BOOT). Recently, in the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
, BOT strategies are being considered for construction of portions of
Interstate 69Interstate 69 is an Interstate Highway in the United States. It exists in two parts: a completed highway from Indianapolis, Indiana, northeast to the Canadian border in Port Huron, Michigan, and a mostly-proposed extension southwest to the Mexican border in Texas...
, with groundbreaking on the
Southern Indiana Toll RoadThe Southern Indiana Toll Road was a proposed toll expressway through southern Indiana expected to be included as part of the 142-mile Interstate 69 extension from Indianapolis to Evansville...
segment expected to begin in 2008.
Traditionally, such projects provide for the infrastructure to be transferred to the government at the end of the concession period. (In Australia, primarily for reasons related to the borrowing powers of states, the transfer obligation is omitted).
BOT is a type of project financing. The hallmarks of project financing are:
(i) The lenders to the project look primarily at the earnings of the project as the source from which loan repayments will be made. Their credit assessment is based on the project, not on the creditworthiness of the borrowing entity.
(ii) The security taken by the lenders is largely confined to the project assets. As such, project financing is often referred to as "limited recourse" financing because lenders are given only a limited recourse against the borrower.
Most project finance structures are complex. The risks in the project are spread between the various parties; each risk is usually assumed by the party which can most efficiently and cost-effectively control or handle it.
Once the project's risks are identified, the likelihood of their occurrence assessed and their impact on the project determined, the sponsor must allocate those risks. Briefly, its options are to absorb the risk, lay off the risk with third parties, such as insurers, or allocate the risk among contractors and lenders. The sponsor will be acting, more often than not, on behalf of a sponsor at a time when the equity participants are unknown. Nevertheless, each of the participants in the project must be satisfied with the risk allocation, the creditworthiness of the risk taker and the reward that flows to the party taking the risk. In this respect, each party takes a quasi equity risk in the project.
See also
- Public-private partnership
Public-private partnership describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies...
- Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector...
- Private Finance Initiative
The Private Finance Initiative , developed initially by the Australian and United Kingdom governments, is a method to provide financial support for "public-private partnerships" between the public and private sectors...
- Adelaide-Darwin Railway
The Adelaide - Darwin railway is north-south transcontinental railway in Australia, between the cities of Adelaide, South Australia and Darwin, Northern Territory...