Build-Operate-Transfer A new schema in operations management

Build-Operate-Transfer A new schema in operations management

Build-Operate-Transfer (BOT) and its variants (BOO, BOOT etc.) are several private finance initiatives that form the basis for Public-Private partnerships created for funding capital intensive, long-gestation period infrastructure projects. BOT has gained much acceptance lately because many national governments now award critical infrastructure projects to private developers under this method.

Definition: The BOT scheme is a kind of leasing, where the government allows a private developer to design, finance, and build an infrastructure facility. The private developer collects tolls/revenues and operates the facility for a fixed period of time called the concession period. The concession period is long enough to allow the private developer to recover all his investments and realise a profit. The ownership of the infrastructure facility is passed on to the government at the end of this concession period.

Whats in it for the Government? BOTs are an effective way to attract private money into the construction/upgradation of infrastructure facilities. The private developer brings with him the necessary technical expertise, funding capacity & management capability which the government may lack. Also, the government has to handle only one contractor when it comes to contracting, scheduling, integration etc. The majority of construction and long-term operating risk can be transferred on to the BOT provider. The infrastructure projects pursued under such schemes are also crucial to the national development. The Indian Government, after passing the Electricity Act 2003, is relying heavily on private sector to bridge the electricity demand-supply gap. It was only because of its reliance on the private sector that the government could set an ambitious target of addition of 78000 MW of generation capacity in the 11th five year plan. Whats in it for the Private Developer? Government agrees to purchase a minimum level of output to ensure that the private developer recovers his costs during operation. For ex: A state electricity board may sign a power purchase agreement with the power project developer. Also, the BOT agreements tend to reduce market and credit risks for the private developer because of the fact that government is the customer

Where does BOT find application? Transport Infrastructure Projects such as airports, roads, highways & bridges Power Projects such as Coal & Gas fired Plants, Wind Farms, Solar farms etc. Turnkey Projects such as Steel Plants, Cement Plants, Oil Refineries etc.

Instances of BOT leasing in India The Bandra-Worli Sea Link was awarded to HCC Ltd. by MSRDC on BOT basis. HCC now collects tolls from the commuters to realize its costs & profits Many UMPPs (Ultra Mega Power Projects), Super Thermal Power Projects are being developed on BOOT basis (a variant of BOT) Many National & State Highways are awarded to private players on BOT basis . Many airports in Tier-II & Tier-III cities are being developed under the same scheme

The Case for BOT arrangement The BOT model of project finance is considered to be the key to infrastructure development in developing countries such as India. India has seen development of some world class infrastructure facilities which were developed under such schemes of Public-Private partnerships. For ex: Hyderabad International Airport, T3 Terminal of Delhi Airport, BandraWorli Sea Link & Tata Powers Mundra UMPP. The fact that Indian Nuclear Sector has now been opened up to private players only strengthens the case for BOT to be used in future developments.

BOT for sustainable development The need to use clean energy to fuel future growth is felt around the globe. The governments and businesses round the world are looking at ways to harness the potential in renewable energy sources and reduce the reliance on conventional non-renewable energy sources. The governments are providing incentives to the private sector to attract them to play a proactive role. For ex: Indian Government in its last budget had exempted imported solar lanterns from the customs duty. More such initiatives like subsidising solar panels & wind turbines, providing land & environmental clearances for green projects etc. will make the private sector participation healthier.

References: Website of Central Electricity Authority www.cea.nic.in Build Operate Transfer Municipal Bridge Projects in India, Esther Malini Journal of Management in Engineering, July-August 1999.