BOT Contracts

MCM611- Infrastructure Development

Projects
Prof. Rajiv Gupta
 Abstract of Shri Ajit Gulabchand’s (Chairman, Hindustan
Construction Company Limited) letter to the shareholders in
the company’s Annual Report 2006-07

 The company (HCC) needs to expand its business

space.
 Infrastructure is about three pillars. Develop, Build
and Operate.
 In most parts, HCC is located in the „Build‟ space as
a major contractor for projects. HCC has
considerable expertise in this domain across the
entire gamut of construction activities, and it has
served it well in terms of revenues, profits and
shareholder value.
 However, HCC needs to be in the other two spaces
as well
2 i.e. Developers and Operators.
MCM611-IDP Prof. Rajiv Gupta
 An obvious extension is to be in the
Build-Operate-Transfer (BOT)
space.

 Especially for stretches of dual

carriage, restricted access, toll
roads on national highways.

 Infrastructure projects are „lumpy‟ in

nature. Be it roads, ports, water
supply or urban infrastructure.
Often a multitude of projects are
offered in quick succession after
MCM611-IDP Prof. Rajiv Gupta
3
long pauses.
 With the current and future growth in
infrastructure, there has been a
rapid increase in the number of
players in this business.

 This has led to declining margins.

 To maintain high growth rates, HCC

believes that it must graduate from
being just a builder / contractor to
being in all three spaces of
infrastructure business: Develop,
4 Build and Operate.
MCM611-IDP Prof. Rajiv Gupta
 On the ‘Build-cum-Operate front. HCC has
started actively looking at Build-Operate-
Transfer (BOT) projects in the roads sector.

 During 2006-07 the company bagged a prestigious

30 km highway development contract in Andhra
Pradesh under NHDP Phase II on BOT Annuity
basis.
 The contract envisages design, construction,
development, finance, operation and maintenance
of 30 km of four-lane highway between Kadtal and
Armur on NH-7.
 This is the first time that HCC will operate in this
integrated role. Going forward the company will
further
5 develop its expertise on the BOT models.
MCM611-IDP Prof. Rajiv Gupta
 The company has a strong presence
in the transportation sector, with
projects in concrete roads, bituminous
roads, rail and road bridges and rail
and road tunnels.

 HCC is executing 10 national highway

projects spread across six states in
the country. The total length of roads
under construction by HCC aggregate
418 km.

6 MCM611-IDP Prof. Rajiv Gupta

 In 2007- 08 recognising the need to
define itself as an integrated
infrastructure developer HCC
launched “HCC Infrastructure
Limited”.

 This company will play a key role in

envisaging projects with appropriate
financial models, developing partners,
executing construction works and
managing infrastructure assets
through their entire operational and
financial life-cycle.
7 MCM611-IDP Prof. Rajiv Gupta
The BOT family

 All variants of DBFO – design, build,

finance, operate aspects of a project.
 What is the use of naming the projects
under different categories like BOT,
BOOT, BOO etc.?

8 MCM611-IDP Prof. Rajiv Gupta

Most common variants:
 BT: Build-Transfer
 BLT: Build-Lease-Transfer

 BOT: Build-Operate-Transfer

 BOO: Build-Own-Operate

 BOOT: Build-Own-Operate-Transfer

 BTO: Build-Transfer-Operate

 CAO: Contract-Add-Operate

 DOT: Develop-Operate-Transfer

 ROT: Rehabilitate-Operate-Transfer


9
ROO: Rehabilitate-Own-Operate
MCM611-IDP Prof. Rajiv Gupta
BT: Build -Transfer
 A Contractual Agreement
 Contractor undertakes financing and
construction of a facility.
 After completion hands it over to the
Government.
 Government reimburses the total project
investment on the basis of an agreed
schedule.
 May be employed for all types of
projects including critical facilities which
for security or strategic reasons must be
operated directly by the government.
10 MCM611-IDP Prof. Rajiv Gupta
BLT: Build-Lease-Transfer
 A Contractual Agreement
 Contractor undertakes to finance and
construct.
 On completion hands it over to the
Govt. on a Lease arrangement for a
fixed period.
 After completion of the fixed period,
ownership of the facility is
automatically transferred to the
government.
11 MCM611-IDP Prof. Rajiv Gupta
BOT: Build-Operate-Transfer
 A contractual agreement
 Developer undertakes construction
(including financing) and operation and
maintenance thereof.
 Developer operates the facility over a
fixed term.
 Allowed to charge the facility users
appropriate tolls, fees, rental to enable
recovery of his investment.
 User charges should not exceed amount
proposed in the bid or as negotiated.
MCM611-IDP Prof. Rajiv Gupta
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 BOT: Build-Operate-Transfer …contd.

 Developer transfers the facility to the

government at the end of the fixed term.
 These types of projects shall include a
supply-and-operate situation:
- The supplier of equipment and machinery
for a given infrastructure facility –if the
interest of the government so requires-
operates the facility and in the process
provides technology transfer and training
to the government nominated individuals.
13 MCM611-IDP Prof. Rajiv Gupta
 BOO: Build-Own-Operate
 A contractual agreement
 Developer undertakes construction (including
financing) and operation and maintenance
thereof.
 Allowed to recover his total investment by
collecting user levies from facility users.
 Developer who owns the assets of the facility
can choose to assign its operation and
maintenance to a facility operator.
 No transfer to the government is envisaged
but the government may terminate its
obligations after specified time period.
MCM611-IDP Prof. Rajiv Gupta
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BOOT: Build-Own-Operate-Transfer

 Similar to BOO but liable to transfer

the project to the government after
expiry of the specified period of
operation.
 Difference between BOT and BOOT is
about ownership.

15 MCM611-IDP Prof. Rajiv Gupta

 BTO: Build-Transfer-Operate
 A contractual agreement.
 The government contracts out an
infrastructure facility to a developer
 To construct the facility on a turn-key basis
assuming all cost overruns, delays and
specified performance risks.
 Once the facility is commissioned
satisfactorily the developer is given the right
to collect the user fee under a concession
agreement.
 The title of the facilities always vests with the
government. MCM611-IDP Prof. Rajiv Gupta
16
CAO: Contract-Add-Operate
 A contractual agreement

 Developer adds to an existing facility which it

rents from the government and operates the
expanded project.

 Collects user levies to recover the investment

over an agreed period.

 There may or may not be a transfer

arrangement with regard to the added facility
provided by the developer.
17 MCM611-IDP Prof. Rajiv Gupta
DOT: Develop-Operate-Transfer
 A contractual agreement
 Favorable conditions external to a new
project which is to be built by a
developer are integrated in the BOT
arrangement by giving that entity the
right to develop adjoining property and
thus enjoy some of the benefits the
investment creates such as higher
property or rent values.

18 MCM611-IDP Prof. Rajiv Gupta

ROT: Rehabilitate-Operate-Transfer
 A contractual agreement
 Existing facility is handed over to the
private sector to refurbish, operate
(collect user levies to recover the
investment).
 At the end of the term the facility is
transferred back to the government.
 Also for purchase of an existing facility
from abroad, importing, refurbishing,
erecting and consuming it within the
host country.
19 MCM611-IDP Prof. Rajiv Gupta
ROO: Rehabilitate-Own-Operate
 A contractual agreement
 An existing facility is handed over to
the operator to refurbish and operate
with no time limitation imposed on
ownership.
 As long as the operator is not in
violation of its franchise, it can
continue to operate the facility and
collect user levies in perpetuity.

20 MCM611-IDP Prof. Rajiv Gupta

A few other models:
 Reverse BOOT – the public entity builds
the infrastructure and progrssively
transfers it to the private sector.

 BOST: Build-Operate-Share-Transfer

 BOOM: Buy-Own-Operate-Maintain.

21 MCM611-IDP Prof. Rajiv Gupta

 BOT Contracts – Selection Criteria
 Lowest bid in terms of the present value of user fees.
 Highest revenue share to the government.
 Highest up-front fee.
 Shortest concession period.
 Lowest present value of the subsidy.
 Lowest capital cost and O& M cost for projects
having a definite scope.
 Highest equity premium
 Quantum of State support solicited in present value.

Further reading: The A.P. Infrastructure Development Enabling Act,

2001 (Act no. 36 of 2001) also known as AP IDEA
MCM611-IDP Prof. Rajiv Gupta
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 THANK YOU
… for your attention

23 MCM611-IDP Prof. Rajiv Gupta