Build-own-operate-transfer (
BOOT) or
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, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
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 the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
for its investment.
Examples of countries using BOT are
ThailandThailand , officially the Kingdom of Thailand , formerly known as Siam , is a country located at the centre of the Indochina peninsula and Southeast Asia. It is bordered to the north by Burma and Laos, to the east by Laos and Cambodia, to the south by the Gulf of Thailand and Malaysia, and to the...
,
TurkeyTurkey , known officially as the Republic of Turkey , is a Eurasian country located in Western Asia and in East Thrace in Southeastern Europe...
,
TaiwanTaiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...
,
Saudi ArabiaThe Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
,
IsraelThe State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...
,
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 with over 1.2 billion people, and the most populous democracy in the world...
,
IranIran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
,
CroatiaCroatia , officially the Republic of Croatia , is a unitary democratic parliamentary republic in Europe at the crossroads of the Mitteleuropa, the Balkans, and the Mediterranean. Its capital and largest city is Zagreb. The country is divided into 20 counties and the city of Zagreb. Croatia covers ...
,
JapanJapan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, 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...
,
ChinaChinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
,
VietnamVietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...
,
Malaysia,
PhilippinesThe Philippines , officially known as the Republic of the Philippines , is a country in Southeast Asia in the western Pacific Ocean. To its north across the Luzon Strait lies Taiwan. West across the South China Sea sits Vietnam...
,
EgyptEgypt , officially the Arab Republic of Egypt, Arabic: , is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia. Egypt is thus a transcontinental country, and a major power in Africa, the Mediterranean Basin, the Middle East and the Muslim world...
, and a few U.S. states (
CaliforniaCalifornia is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
,
FloridaFlorida is a state in the southeastern United States, located on the nation's Atlantic and Gulf coasts. It is bordered to the west by the Gulf of Mexico, to the north by Alabama and Georgia and to the east by the Atlantic Ocean. With a population of 18,801,310 as measured by the 2010 census, it...
,
IndianaIndiana is a US state, admitted to the United States as the 19th on December 11, 1816. It is located in the Midwestern United States and Great Lakes Region. With 6,483,802 residents, the state is ranked 15th in population and 16th in population density. Indiana is ranked 38th in land area and is...
,
TexasTexas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
, and
VirginiaThe Commonwealth of Virginia , is a U.S. state on the Atlantic Coast of the Southern United States. Virginia is nicknamed the "Old Dominion" and sometimes the "Mother of Presidents" after the eight U.S. presidents born there...
). However, in some countries, such as
CanadaCanada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends 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 mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
and
New ZealandNew Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, the term used is build-own-operate-transfer (BOOT).
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 may be omitted. For the Alice Springs - Darwin section of the
Adelaide-Darwin RailwayThe Adelaide–Darwin railway is a north-south transcontinental railway in Australia, between the cities of Adelaide, South Australia and Darwin, Northern Territory...
the lease period is 50 years, see
AustralAsia Rail CorporationThe AustralAsia Railway Corporation was established in 1997 by the Government of the Northern Territory to build the Darwin - Alice Springs section of the Adelaide-Darwin Railway. 50% of its board positions and voting right are assigned to the South Australian Government...
.
Forms of
project financeProject finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors...
are:
BOT (Build Operate Transfer)
BOT finds extensively application in the
infrastructureInfrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
projects and in public private partnership. In the BOT framework a third party, for example the
public administrationPublic Administration houses the implementation of government policy and an academic discipline that studies this implementation and that prepares civil servants for this work. As a "field of inquiry with a diverse scope" its "fundamental goal.....
, delegates to a
private sectorIn economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...
entity to design and build infrastructure and to operate and maintain these facilities for a certain period. During this period the private party has the responsibly to raise the
finance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
for the
projectA project in business and science is typically defined as a collaborative enterprise, frequently involving research or design, that is carefully planned to achieve a particular aim. Projects can be further defined as temporary rather than permanent social systems that are constituted by teams...
and is entitled to retain all revenues generated by the project but is not the owner of the regarded facility. The facility will be then transferred to the public administration at the end of the
concession agreementConcession may refer to:* Concession : failure to challenge or cessation of challenging, as in "conceding an election" or "conceding a game".* Concession : a contracted-out service, as in concession stand....
, without any remuneration of the private entity involved.
Some or even all of the following different parties could be involved in any BOT project:
- The host government: Normally, the government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
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.
- 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
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
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
In general, a project is financially viable for the private entity if the revenues generated by the project cover its
costIn production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
and provide sufficient
return on investmentReturn on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
. 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. .Even the host government could borrow money on better conditions compared to that of the public sector other factors could offset this particular advantage. For example, the expertise and
efficiencyEfficiency in general describes the extent to which time or effort is well used for the intended task or purpose. It is often used with the specific purpose of relaying the capability of a specific application of effort to produce a specific outcome effectively with a minimum amount or quantity of...
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. These are some types of the most common risks involved:
- Political risk
Political risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with reasoned foresight and investment....
: 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
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
fluctuation, market riskMarket risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices...
(change in the price of raw materials) , income risk (Cash flow forecasts are overoptimistically) , cost overrun risk
BOOT (Build Own Operate Transfer)
A BOOT structure differs from BOT in that the private entity owns the works. During the concession period the private company owns and operates the facility with the prime goal to recover the costs of investment and maintenance while trying to achieve higher margin on project. The specific characteristics of BOOT make it suitable for infrastructure projects like highways, roads mass transit, railway transport and power generation and as such they have political importance for the social welfare but are not attractive for other types of private investments. BOOT & BOT are methods which find very extensive application in countries which desire ownership transfer and operations including. Some advantages of BOOT projects are:
- Encourage private investment
- Inject new foreign capital
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
to the country
- Transfer of technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
and know how
- Completing project within time frame and budget
A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods...
planned
- Providing additional financial source for other priority projects
- Releasing the burden on public budget for infrastructure development
BOO (Build Own Operate)
In a BOO project ownership of the project remains usually with the Project Company for example a mobile phone network. Therefore the private company gets the benefits of any
residual valueResidual value is one of the constituents of a leasing calculus or operation. It describes the future value of a good in terms of percentage of depreciation of its initial value....
of the project. This framework is used when the physical life of the project coincides with the concession period. A BOO scheme involves large amounts of finance and long
paybackPayback may refer to:*Payback period, the period of time required for the return on an investment*Revenge*Operation Payback, an ongoing hacker operation*Payback , a 1999 film, starring Mel Gibson; remake of the 1967 film Point Blank...
period. Some examples of BOO projects come from the water treatment plants. This facilities run by private companies process raw water, provided by the public sector entity, into filtered water, which is after returned to the public sector utility to deliver to the customers.
BLT (Build Lease Transfer)
Under BLT a private entity builds a complete project and leases it to the government. On this way the control over the project is transferred from the project owner to a lessee. In other words the ownership remains by the shareholders but operation purposes are leased. After the expiry of the
leasingLeasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments....
the ownership of the asset and the operational responsibility are transferred to the government at a previously agreed price. For foreign investors taking into account the
country riskCountry risk refers to the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country...
BLT provides good conditions because the project company maintains the property rights while avoiding
operational riskAn operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates...
.
DBFO (Design Build Finance Operate)
Design- Build- Finance- Operate is a project delivery method very similar to BOOT except that there is no actual ownership transfer. Moreover, the contractor assumes the risk of financing till the end of the contract period. The owner then assumes the responsibility for maintenance and operation. Some disadvantages of DCMF are the difficulty with long term relationships and the threat of possible future political changes which may not agree with prior commitments.This model is extensively used in specific infrastructure projects such as toll roads. The construction company build a private entity which is in charge to design and construct an infrastructure for the government which is the true owner. Moreover the private entity has the responsibility to raise finance during the construction and the exploitation period. The cash flows serve to repay the investment and reward its shareholders. They end up in form of periodical payment to the government for the use of the infrastructure. The government has the advantage that it remains the owner of the facility and at the same time avoids direct payment from the users. Additionally, the government succeeds to avoid getting into
debtA debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
and to spread out the cost for the road over the years of exploitation.
DCMF (Design Construct Manage Finance)
Some examples for the DCMF model are the prisons or the public hospitals. A private entity is build to
designDesign as a noun informally refers to a plan or convention for the construction of an object or a system while “to design” refers to making this plan...
, construct,
manageManage is a Walloon municipality located in the Belgian province of Hainaut. On January 1, 2006 Manage had a total population of 22,341. The total area is 19.60 km² which gives a population density of 1,140 inhabitants per km²....
, and finance a facility, based on the specifications of the government. Project cash flows result from the government’s payment for the
rentRenting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
of the facility. In the case of the hospitals, the government has the ownership over the facility and has the price and
quality controlQuality control, or QC for short, is a process by which entities review the quality of all factors involved in production. This approach places an emphasis on three aspects:...
. The same financial model could be applied on other projects such as prisons. Therefore this model could be interpreted as a mean to avoid new indebtedness of
public financePublic finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...
.
See also
- Adelaide–Darwin railway
- Central Texas Turnpike System
- Pay on production
Pay on production is a special build-operate-transfer model, where payment is made to a supplier by the original equipment manufacturer per piece produced on the supplier’s own equipment by the OEM’s employees.- Description :...
- 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 or to private non-profit organizations...
- Project finance
Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors...
- Private Finance Initiative
The private finance initiative is a way of creating "public–private partnerships" by funding public infrastructure projects with private capital...
- Shadow toll
Shadow tolls are payments made by government to the private sector operator of a road based, at least in part, on the number of vehicles using the road. First proposed by the UK Government in 1993, they are currently in operation on some roads in the UK...
- South Bay Expressway