There are many models to finance a project. Build-Operate-Transfer (BOT) Contract is one of such financing models used to finance big infrastructure projects. Let us know more about Build-Operate-Transfer (BOT) Contract in this article.
What is Build-Operate-Transfer (BOT) Contract?
Build-Operate-Transfer (BOT) Contract is a financing model which is used to finance the large infrastructure projects through public-private-partnerships.
In such projects, a public entity such as a local government provides initial concession to a private firm so that the private firm can build and operate a project. During the stipulated period (such as 20 or 30 years) in the contract the private firm operates the project after building it and after that time period, the private firm transfers that project to the public entity. Since then, the control of the project is transferred to the public entity.
Mechanism of Build-Operate-Transfer (BOT) Contracts
Under this type of contract, a public entity, generally a government grants concession to a private company to build and operate a project. The private company build that project and operate it for a fixed period, as stipulated in the contract, such as 20 or 30 years with the aim of recouping its investment made in the project. After the stipulated period, the private company transfers the project to the public entity.
Build-operate-transfer (BOT) contracts are used for the large infrastructure projects that would otherwise be financed by the government.
Examples of Build-operate-transfer (BOT) projects of India are as follows:
(1) Four laning with PSS of Solapur to Yedshi section on NH 211 from km 0 to km 100 inMaharashtra on DBFOT pattern.
(2) Four-laning a section between Khed-Sinnar section of NH 50 from km
42 to km 177 in Maharashtra on BOT (Toll) basis.
(3) Four/Six laning of Panvel Indapur section of NH 17 in the State of
(4) Sport Complex-cum-Commercial Complex (Mouje-Navsari).
(5) Waste Water Recycling Plant (Nagpur).
(6) Construction of Offshore Container Berths & Development of Container
Terminal in Mumbai Harbour.
Limitations of Build-operate-transfer (BOT) Contracts
Some of the limitations of build-operate-transfer contracts are as follows:
- The BOT projects involve many entities and requires a complicated legal and institutional framework. It may require a long time and significant upfront costs to prepare and close such projects.
- It is only suitable for large infrastructure projects and may not be suitable for small projects.
- It requires to build institutional capacity to take the full benefit of this model as conducting a fair and transparent bidding process as well as entering into a dispute resolution procedure effectively involves professional expertise and trainings, etc.
- There is a risk that the contractor might extract revenue beyond the profit margin by collecting fee over a longer period of time.
Benefits of Build-operate-transfer (BOT) Contracts
Out of numerous benefits of build-operate-transfer contracts, some are listed below:
- The most important benefit of this type of contracts for government is that it transfers risks of the project to the contractor. As the contractor is responsible for construction and operation, government becomes free and all risks are born by the contractor.
- In build-operate-transfer contracts, contractor also called concessionaire, invests his/ her money and hence the government budget for development and capital infrastructure reduces. The government can use that money in other welfare works.
- The expertise and better management of private company i.e. the contractor is utilized in this type of contracts and hence the government is benefitted with that.
- These are performance based and output oriented contracts which provide a mechanism and incentives for the contractor to improve efficiency.
- As this is a fully competitive bidding process, these projects are completed with minimum cost.
Alternatives of Build-operate-transfer (BOT) Contracts
There are some alternatives of BOT contract which are also used by many clients. Some of these alternatives are as follows:
DBO (Design-Build-Operate) Contract
In this type of contract, the contractor designs, builds the project and also operates it for a longer period of time.
DBFO (Design-Build-Finance-Operate) Contract
The private company designs, builds, finance and operate the project for a longer period of time. It is used for the projects where there is a high demand of the service since investors are willing to invest money for that such as opening a new airport in a busy metropolis.
BLT (Built-Lease-Transfer) Contract
In this type of contract, the public sector partner leases the project from the contractor and takes responsibility for its operation.
ROT (Renovate-Operate-Transfer) Contract
If there is some existing infrastructure which is performing substandard, then this type of contract is used in which the private partner renovates and operates the project and then finally transfers it to the client.
Build-operate-transfer (BOT) contracts are based on the format that provides benefits for the government as well as incentives for the contractor also. These are performance based contracts and transfer most of the risks to the contractor. BOT contract is widely used in greenfield infrastructure projects and reduces development budget of the government which can be utilized for some other purposes. The BOT contracts are being used in many countries like India, Iran, Croatia, Japan, China, Vietnam, Philippines, Egypt, Myanmar, Pakistan, Croatia, Japan, China, Vietnam, Malaysia, Philippines, etc.