Build Operate Transfer

Article byNanditha Saravanakumar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Build Operate Transfer (BOT)?

The Build Operate Transfer (BOT) model is an arrangement between private companies and the government. Under this model, the private company is granted concessions to finance, design, construct, and operate large infrastructure projects for a specific period, typically several decades. Eventually, the ownership of the project is transferred to the government.

BUILD OPERATE TRANSFER

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BOT contracts are a common form of Public-Private Partnership (PPP), aiming to benefit both parties. The private company gains revenue during the concession period, while the government benefits from infrastructure development without upfront investment. Build operate transfer companies can vary in expertise and are not restricted to large industrial firms.

Key Takeaways

  • The Build Operate Transfer model in economics is a contract between state departments (government) and private entities (companies), commonly used in public-private partnerships.
  • BOT is particularly well-suited for greenfield projects (new projects without prior work) and large-scale, capital-intensive projects. However, it can also apply to refurbishing and renovation of existing infrastructure.
  • The government benefits from not having to provide the initial capital for the project, and the private firm receives concessions and incentives from the government to facilitate project completion. However, the specifics of the financial arrangements and incentives vary depending on the individual BOT contract.

Build Operate Transfer Explained

Build Operate Transfer (BOT) companies are private or publicly traded entities in various sectors, including manufacturing, infrastructure, transportation, and more. BOT is commonly used for greenfield projects, starting from scratch, but it can also be applied to some brownfield projects involving refurbishment and renovation.

BOT is one of the project delivery models in Public-Private Partnerships (PPP). Variations of BOT include Build Own Operate Transfer (BOOT), where the private firm owns the asset during the contract period, and Build Lease Transfer (BLT), where the public enterprise leases the project from the private firm for a specified time.

The step-wise framework of BOT involves three stages:

  1. Build: The private firm agrees to construct an infrastructure project with the government. The firm finances the construction, with some government support in the form of incentives.
  2. Operate: After completion, the private firm operates the project for a predetermined period to recover its operating costs and investments.
  3. Transfer: At the end of the contract period, the private firm transfers the project to the government entity, often involving a predetermined process and possible compensation.

Build Operate Transfer laws can vary in complexity across different countries, and they are usually designed to ensure mutual benefits for all parties involved. Companies, especially multinational corporations, should thoroughly study the laws and contract terms before engaging in BOT agreements.

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Examples

Consider the following hypothetical and real-world scenarios to understand BOT.

Example #1

Suppose, Seaworth, a logistics company, recently assumed management of seaport Y and sought to improve its operations by introducing two gantry cranes. Seaworth entered into a BOT contract with the state to facilitate this infrastructure upgrade. The total cost of installing the gantry cranes amounted to $20,000,000. The government offered incentives worth approximately $1,000,000 to support the project. The BOT contract spans 25 years.

Example #2

Let us understand the concept through the news from the Philippines. The country’s Department of Transportation (DOTr) is pursuing PPP, especially BOT contracts citing financial hurdles. Some undertakings announced include 10 provincial airports, seaport, and bus networks. The DOTr has introduced some build-operate transfer law amendments for smooth operations and balance between the government and the private sector.

Advantages And Disadvantages

The merits and demerits can be listed based on their respective effects on the companies and the government.

Advantages

  • The main reason why companies opt for BOT is the concessions they receive. Governments financially incentivize private companies to build large infrastructure projects that would otherwise be capital-intensive.
  • Apart from the financial advantage, a partnership with the government can help the firms legally too. Procurement and procedures often become easy with government support.
  • Companies that must design projects for a specific period and not maintain them forever can benefit immensely from BOT.
  • The government’s main advantage in BOT is that it does not have to invest money upfront, only offering support to the project.
  • The state wouldn’t have to make an effort to coordinate with different departments to accomplish project completion.
  • Finally, the risk associated with such large-investment projects is shared between the parties.

Disadvantages

  • The most significant disadvantage for companies is that they do not receive any payment for the asset transfer. Large projects consume millions of dollars. Companies should thus make maximum utilization of the project before they transfer.
  • Large assets are subject to depreciation, wear, and tear over time, considering the more extended transfer period spanning twenty to thirty years.
  • The company should comply with many rules associated with the particular government department. It can be tedious and time-consuming.
  • Sometimes, governments have to deal with the exceeding expectations of companies to circumvent the law. The concerned department should keep regular checks to ensure nothing occurs.
  • BOT only works for large projects.

BOT vs PPP

Build Operate Transfer (BOT) and Public-Private Partnerships (PPPs) are contractual arrangements and how private entities collaborate with government institutions to undertake projects and manage public assets. Let us understand the differences.

BOT vs PPP

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  • In a PPP, the government and private entities collaborate to jointly finance and operate a public project, including infrastructure, social services, or other initiatives. In contrast, BOT contracts are a specific type of PPP explicitly designed for large capital-intensive infrastructure projects.
  • In BOT contracts, the private company usually finances, builds, and exclusively operates the infrastructure for a specific period before eventually transferring it to the government. In contrast, PPPs involve private entities operating public property or services without necessarily transferring ownership to the government.

Frequently Asked Questions (FAQs)

1. What is BOT and EPC?

BOT is a project delivery model in public-private partnerships. In BOT, private companies build, finance, and operate an infrastructure project for a specific period before transferring it to the government. Engineering, Procurement, and Construction (EPC) is a contract model commonly used in construction projects. In EPC, a single contractor is responsible for the entire project, including design, procurement of materials, and construction.

2. What is also called build operate transfer?

The BOT is present in certain Asian countries, a few European countries, and some U.S. states. In other countries, including Australia, Canada, etc., build own operate transfer (BOOT) is prevalent. Both concepts are used under the same context.

3. What is difference between BOT and boot?

BOT is a contractual relationship between the government and private firms in which the latter builds and operates the project before transferring it to the former. However, in BOOT, the private firms own the infrastructure until the end of the contract period, unlike BOT.

This article has been a guide to What Is Build Operate Transfer. We explain the concept along with its examples, advantages, disadvantages, and comparison with PPP. You may also find some useful articles here –

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