BOT finds extensive application in infrastructure projects and in public–private partnership. In the BOT framework a third party, for example the public administration, delegates to a private sector 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 responsibility to raise the finance for the project and is entitled to retain all revenues generated by the project and is the owner of the regarded facility. The facility will be then transferred to the public administration at the end of the concession agreement,[3] 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 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 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
BOT model
A BOT Project (build operate transfer project) is typically used to develop a discrete asset rather than a whole network and is generally entirely new or greenfield in nature (although refurbishment may be involved). In a BOT Project the project company or operator generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers. A number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to BOTs.[4]
In general, a project is financially viable for the private entity if the revenues generated by the project cover its cost and provide sufficientreturn on investment. 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 if the host government could borrow money on better conditions than a private company could, other factors could offset this particular advantage. For example, the expertise and efficiency 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: 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 fluctuation, market risk (change in the price of raw materials), income risk (over-optimistic cash-flow forecasts), cost overrun risk[5][6][7]
EWC Price at posting:
22.5¢ Sentiment: Buy Disclosure: Held
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