552 Corporate Finance
- Build–Operate–Transfer (BOT) Model
- Build–Transfer–Operate (BTO) Model
- Buy–Build–Operate (BBO) Model
In a BOT model, a private entity gets the mandate to finance, build and operate the project (which is otherwise
a public sector project) for a specified period of time (say 25 years) at the end of which ownership reverts to
the local government. Typically, the sponsoring organisation makes an equity investment of 20 to 30 percent
of the project cost and the rest is raised from international banks, multilateral agencies and domestic financial
institutions. The host government generally gives a concession to carry out the construction and operation of
the project and credit support for project borrowings. The license agreement clearly spells out the commercial
and financial terms. The BOT concept has been used in transportation (e.g., roads), energy (e.g., power
projects), sewage and water treatment plants and hospitals.^2
In a BTO model, the private entity transfers the facility to the government soon after the project clears the
completion test and leases it back for a specified period of time. The project company runs the facility and
collects revenues during the lease term. At the end of the lease term the title passes on to the government (or
the public sector entity).
In a BBO model, a private entity buys an existing facility, modernizes it, and operates it as a for–profit,
public use facility. In many developing countries where existing facilities require modernization/expansion,
the BBO model is ideal. Roads and bridges are candidates for this model.
A typical project goes through the following phases:
- Planning,
- Implementation,
- Construction,
- Operation, and
- Transfer.
During the planning phase, the government identifies the need for a service, identifies the quality and quantity
of service required upon identification of the project, the government invites bids from qualified service
providers. The most cost efficient bid is awarded the contract. Once the contract is awarded, the contractor
begins detailed engineering, design and construction work, usually under a fixed price contract. Upon
completion, the project is tested for its suitability. If the project clears the hurdle, the private sector participant
gets to run the project for a specified period of time after which it reverts to the public sector entity (or
government). Exhibit 27.4 presents the different phases in a BOT scheme.
Funding Aspects
Although the financing package for a project is tailor-made, the basic form of funding remains the same,
namely, equity and debt. Project debt is either of the non-recourse or limited recourse type. Commercial
banks remain the most important source of project financing. Some banks have set up subsidiaries to serve
the growing need of infrastructure. Bank loans can be either secured or unsecured. They may involve a
single bank or a syndicate of banks. These loans are either fixed rate or floating rate and have tenors ranging
from 5–10 years.
(^2) See Appendix 1 at the end of the chapter for a brief description of different phases in a BOT scheme.