National 11 (Spotlight Weekly)

Significance Of BOT Concept To Infrastructure Projects

By GANDHI PANDIT

The role of the government as the predominant investor in infrastructure projects is slowly diminishing, as it seeks to encourage the participation of the private sector in such endeavors. The underlying factor behind this transformation is the fact that the government lacks adequate funds required for mega projects. Rather, governments across the developing world are more strongly focusing on the production of basic goods and services for their people. They are more concerned with producing greater benefit to their citizen by investing fewer resources.

The Build Operate Transfer (BOT) approach is the best option for the government to invite private- sector investments. The approach offers private entrepreneurs the opportunity to profit from financing, developing and managing major projects. The government, for its part, benefits by eventually acquiring ownership of projects in which it has not put money into.

The BOT approach is gradually becoming very popular in developing countries. Under this system, it is the private sector, instead of the government, that designs, finances, constructs and operates vital facilities. After a specified concession period, the ownership of such projects is transferred to the government. Among the recent example of BOT projects constructed around the world are power plants, airports, toll roads, bridges, tunnels, water treatment plant and cables.

Historical Development

The BOT model emerged as a result of a growing acknowledgement of the paucity of government funds required to build and operate projects vital to the nation's sustenance. It gradually gained acceptance as an alternative source of pooling private capital into huge public projects. The approach gained popularity throughout the world in mid-1960s, as the private sector increasingly came forward with supplementary resources and funds to build and develop vital installations and facilities.

Turkey was the first country that promoted private facility development under the name "Build Operate and Transfer" in 1984. However, the BOT method was used in 1834 in the Suez Canal. The canal, a 165-km revenue-producing waterway linking the Mediterranean and Red seas financed by European capital, was constructed on the BOT basis. Later on, the model became very popular in the United States and Europe. BOT-based infrastructure projects remained under governmental jurisdiction until fairly recently. In early 1980s, Britain and France allowed the private sector to participate in such projects, significantly widening the space for involvement.

BOT is primarily based on a public-private sector partnership. The government or its agency determines or recognizes the need for a public facility that it cannot finance and looks for someone who is ready to invest. After the identification of the project, the government, following due process, will grant concession through an agreement to the concessionaire. The concessionaire in turn looks for financiers in the domestic or international market.

In essence, the government or its designated agencies and private entrepreneurs are the major partners in BOT projects. As the private sector provides necessary capital and the government provides necessary concession, both parties stand to benefit. The private sector has the opportunity to make returns on its investment within a specified period of time, whereas the government obtains ownership after the completion of the BOT project.

The completion of the participation of the private sector in projects conventionally undertaken by the government occurs when the fixed concession period (the period during which private sector constructs, operates, manages and generates revenue to return its investment) is over.

The concession consists of financing, designing and construction of the facility, managing and maintaining the facility adequately, and making it sufficiently profitable. The private party (concessionaire) secures a return on investment by operating the facility. During the concession period, the concessionaire acts as owner. At the end of the concession period, the concessionaire transfers the ownership of the facility free of liens to the principal at no cost.

Why is the government redefining its role from being the main financier of infrastructure projects to one of providing basic goods and service to the people? Evidently, the government has many priority sectors competing for its limited resources. The BOT model has emerged as a useful method of attracting private initiative and funding in the wider context of a nation's economic and development activities.