[Year]

SHAILESH AGGARWAL

NMP27, ROLL no-77

ASSIGNMENT - 1

Critically describe the difference between BOOT and BOT project structure in terms of

financial viability and risks profile.

In the BOT approach, a private party or concessionaire retains a concession for a fixed

period from a public party, called principal (client), for the development and operation of a

public facility. The development consists of the financing, design and construction of the

facility, managing and maintaining the facility adequately, and making it sufficiently

profitable. The concessionaire secures return of investment by operating the facility and,

during the concession period, the concessionaire acts as owner. At the end of the

concession period, the concessionaire transfers the project ownership free of liens to the

principal at no cost. BOT projects include a wide array of public facilities with the primary

function to serve public needs, to provide social services and promote economic activity in

the private sector. The most common examples are roads, bridges, water and sewer

systems, airports, ports and public buildings. In recent years, a growing trend emerged

among governments in many countries to solicit investments for public projects from the

private sector. The main reasons for this trend are a shortage of public funds and a hands-

off approach of government agencies. The Build Operate Transfer (BOT) approach is an

option for the government to outsource public projects to the private sector

Stages

Preliminary Study

Selection Process

Project Implementation

Construction

Operation

Transfer

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. The contractor is responsible for the construction of the project and for hiring

subcontractors, suppliers and consultants. The operator is in the concessionaire s service

and manages the operational stage of the facility 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

In general, a project is financially viable for the private entity if the revenues generated by

the project cover its cost and provide sufficient return 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.

Advantages,

The most important advantages of BOT are: utilization of private sector's investment

instead of public sector's, transferring all the risk to private sector, transferring technical

knowledge is one of the most important benefits of this method for developing countries,

political resistance in using private sector is less than other methods because project will

owned by the government finally.

Disadvantages,

These kinds of projects are very complicated from the viewpoint of technical and financial

issues and need high level experts and consultants, increasing expenditures of users in

operation time, contrast between benefits of private sector with public sector

BOOT (build–own–operate–transfer)

Build-Own-Operate-Transfer is a founding model and a form of concession in which a public

authority makes an agreement with a private company (concessionaire) to Design Build,

Own and Operate a specific piece of an infrastructure such as power, transport, water, and

telecom industries, within receiving the right to achieve income from the facility under a

period of time (concession period approximately 15-25 years), and later transferring it back

into public ownership through a single organization or consortium (BOOT provider)

The earned income can be based on a variety of arrangements, ranging from a fixed annual

fee (flat rate) to the measured quantity supplied (unit rate) and "Take-or-pay" arrangements

are effectively two part tariffs expressed in a different manner.

The objectives of BOOT s participants including Government, Special Purpose Company

(SPC), the Contractor, the Lenders, the Operator, and the Sponsors are reducing the capital

expenses and government s role in build, operation and maintenance of infrastructures,

making new jobs for unemployed citizens and accountable atmosphere for a reliable and

appropriate quality, providing opportunities for a comparative or competitive climate and a

sympathetic cost benefit for both parties, introducing innovative and alternative

technology. There are many factors that make BOOT attractive and suitable for

governments as a project delivery method includes stable political system, predictable and

proven legal system, government support for a project that is also clearly in the public

interest, Long term demand, limited competition, reasonable profits, good cash flows etc.

A BOOT structure differs from BOT in that the private entity owns the works. During the

concession period the private company owns and operates the facility with the prime goal

to recover the costs of investment and maintenance while trying to achieve higher margin

on project. The specific characteristics of BOOT make it suitable for infrastructure projects

like highways, roads mass transit, railway transport and power generation and as such they

have political importance for the social welfare but are not attractive for other types of

private investments. BOOT & BOT are methods which find very extensive application in

countries which desire ownership transfer and operations including.

Advantages of BOOT projects are:

• Encourage private investment

• Inject new foreign capital to the country

• Transfer of technology and know-how

• Completing project within time frame and planned budget

• Providing additional financial source for other priority projects

• Releasing the burden on public budget for infrastructure development[8]

Disadvantages:-

Moreover the defects of this model are described as: higher cost for the end user due to the

BOOT provider accountability of 100 percent financing and on-going maintenance, negative

reaction of community to private sector involvement, not realizable full benefits of

economic development a sole sourced BOOT provider, time consuming and resource hungry

management and monitoring of the operating contract with the BOOT operators,

requirement of a rigorous selection process in selecting a BOOT partner

Practical Implications,

As the infrastructure projects need large investment and long time period, the risks for

investor is also comparatively more. Thus investor always requires government support

including perfect law and regulations system, guarantees, develop strong domestic capital,

ensure easy and speedy processing of the project, fair sharing of risks between both parties,

and provide realistic incentives, adequate returns and protection of the investment

BOOT v/s BOT

The definition of BOOT and BOT is very close together and the only difference is the

ownership of facilities in BOOT and because of this, quality of the work is vital to private.

BOOT is more efficient because the ownership of facilities prepare a better environment for

management. The BOOT contracts have the tendency to work well when the purpose of the

project is to offer a service, but if the aim is to improve a service or make more efficient a

system, this modality is not recommended. These methodologies increment the complexity

of the financial study