BOT (Build, Operate and Transfer)
Basic Method of Establishment and Operation
BOT transactions are a partnership between a State and the Private Sector in order
that an essential or desirable piece of national infrastructure can be put in place
without creating an unnecessarily high financial burden on the State.The essential first steps in implementing BOT Schemes is a function of the State rather than the Private sector, although the private sector are usually contracted by the State to undertake some of these steps. In summary, the steps are:
1. Legislative changes
2. Project Feasibility Study and Technical Analysis
3. Compulsory purchase of necessary real-estate (where applicable)
The legislative changes must obviously be made in order to legally allow the state
through its appropriate ministries to enter into contracts with the private sector forthe provision of services and the on-going operation of the project.The feasibility and technical analysis is usually the function of a purpose project management company which comprises of specialists related to the project itself as well as representatives chosen by the state (usually to examine the budgetary
aspects of the initial feasibility study). This company is usually financed by the appropriate government ministry up to the point of feasibility completion.Thereafter, the project management company oversees the project to completion and is paid for its services from the investment inflows.
The last step is a pure government function. There has to be an allocation of real estate (whether owned by the State or private individuals). In the case of private individuals, the State must purchase all land required for the underlying project.
The Second Stage involves the establishment of a BOT contract. This will be with another purpose company (usually a consortium of interested corporations who will Finance and operate the underlying project). This contract is an extremely important document as it sets out the concession in detail, without which the consortium would be unable to raise the required finance for the project.
Terms for BOT contracts vary depending upon the type of project and the conclusions of the feasibility study. As a general guide, BOT contracts run between15 and 30 years and usually contain a provision for the sharing of profits over and above those required to service the financing. At the end of the operating period, the State takes back control of the project (sometimes with a pre-agreed exit cost being payable to the operating company). At that point, the State may either tender for a new operator, re-enter a new agreement with the existing operator, or keep the project under full state control through a relevant ministry. In some instances, the
State and the operating company jointly form a public corporation to take over operations, thus leaving either or both parties to sell their respective shareholdings in whole or in part through an initial public offering of shares.