[Year]

ASSIGNMENT - 1

SHAILESH AGGARWAL
NMP27, ROLL no-77

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 handsoff 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 (buildownoperatetransfer)
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