CASE STUDIES ON BUILD OPERATE TRANSFER

CASE STUDIES ON BUILD OPERATE TRANSFER

Prof. Drs. Ir. Sebastiaan C.M. Menheere

Prof. Spiro N. Pollalis, Dipl. Eng., SM., MBA, Ph.D.

Edited by:

Rick Huijbregts
Contributing authors:

Arjan Bol
Rick Huijbregts
Marjan Klein
Sebastiaan Menheere
Priti Paul
Spiro N. Pollalis
Lotte Verhoeven
Copy-editor:

Penelope Hill
Afshan Bokhari

Delft University of Technology

Faculty of Architecture
Project Management and Real Estate Development
P.O. Box 5043
2600 GA Delft
The Netherlands
Tel. +31-(0)-15-278-4159
Fax. +31-(0)-15-278-3171
E-mail: bmvb@bk.tudelft.nl

Copyright 1996 Sebastiaan C.M. Menheere and Spiro N. Pollalis.

pollalis@gsd.harvard.edu
http://www.gsd.harvard.edu/~pollalis
Project Management and Real Estate Development
Delft University of Technology
All rights reserved.
Reproduction or translation of any part of this work without
permission of the copyright owner is unlawful. Requests for
permission or further information should be addressed to Delft
University of Technology, Faculty of Architecture, Project
Management and Real Estate Development, P.O. Box 5043, 2600 GA
Delft, the Netherlands.
The case studies are prepared as a basis for class discussion and
illustrative rendering rather than to illustrate either effective or
ineffective handling of an administrative situation, a design process or
a design itself.
Menheere, Sebastiaan C.M., and, Spiro N., Pollalis
Case Studies on Build Operate Transfer/ Rick Huijbregts
211 p. 23 cm.
ISBN 90-9010335-X
1. Build Operate Transfer 2. Case Studies 3. International Project
Management.

Printed in the Netherlands.

Printing office Rooij & Van der Velde
Edison 35
3241 LS Middelharnis
Tel: +31-(0)-18-748-2207
Fax: +31-(0)-18-748-6206

CONTENTS

TABLE OF CONTENTS
CONTENTS
LIST OF FIGURES
LIST OF TABLES
PREFACE

v
xi
xiii
xv

PART I
FRAMEWORK
0 THE BUILD OPERATE TRANSFER APPROACH
0.1 INTRODUCTION
0.2 BACKGROUND
0.3 DEFINITION
0.4 MAJOR PARTICIPANTS IN BOT PROJECTS

5
5
6
8
9

Concession contract
Financial agreements
Construction contract
Operation contract

12
14
14
14

0.5 STAGES OF BOT PROJECTS

14

Preliminary study
Selection process
Project implementation
Construction
Operation
Transfer

0.6
0.7
0.8
0.9

FINANCING
DESIGN AND CONSTRUCTION
ENVIRONMENTAL FACTORS AFFECTING BOT
WHEN IS BOT APPROPRIATE?

15
16
16
16
16
16

18
21
21
22

PART II
CASE STUDIES: JAILS
1 PLYMOUTH COUNTY CORRECTIONAL FACILITY
1.1 INTRODUCTION

27
28

vi

CONTENTS

1.2 BACKGROUND
Plymouth County Jail and Correction House
United States Marshals Service

1.3 PROGRAM
1.4 ORGANIZATION
1.5 FINANCING
Certificates of Participation
Assignment Agreement and Trust Agreement

1.6 CONTRACTUAL RELATIONSHIPS

Lease contracts
Intergovernmental Agreement
Memorandum of Agreement
Design-Build contract
Technical representative
Memorandum of Understanding

1.7 DESIGN AND CONSTRUCTION

29
30
30

32
33
34
36
37

37
37
38
38
38
40
40

40

Design
Construction

41
43

1.8 OPERATIONS

46

2 DONALD W.WYATT DETENTION FACILITY

2.1 INTRODUCTION
2.2 BACKGROUND
Detention Center Associates
New plans

2.3 PROGRAM
2.4 ORGANIZATION
Cornell Cox and Brown & Root join the team
Special legislation
City approval

2.5 FINANCING
Financing problems
The Port Authority steps in
Loan and Trust agreement

49
50
51
52
53

54
54
55
57
57

57
58
58
59

2.6 CONTRACTUAL RELATIONSHIPS

60

Intergovernmental Agreement
The Arthur Andersen report
Design-Build contract
Operators Agreement
Consulting Agreement

61
61
62
63
63

2.7 DESIGN AND CONSTRUCTION

Design

2.8 OPERATIONS

64
65

65

CONTENTS

vii

PART III
CASE STUDIES: ROADS
3 STATE ROUTE 91 EXPRESS LANES
3.1 INTRODUCTION
3.2 BACKGROUND
Assembly Bill 680
Selection process
State Route 91 concession
Previous plans
Orange County attempts to attract AB 680 projects
Riverside opposition
Negotiations with Riverside County

3.3 PROGRAM
3.4 ORGANIZATION
Cofiroute joins the team
CRSS leaves the project

3.5 CONTRACTUAL RELATIONSHIPS

Concession Agreement
Memorandum of Agreement: The Peace Treaty
Repayment and Cooperation Agreement
Other agreements

3.6 FINANCING
Financial closing

3.7 DESIGN AND CONSTRUCTION

The August 1990 proposal

3.8 OPERATIONS
4 DULLES GREENWAY
4.1 INTRODUCTION
4.2 BACKGROUND
Commission on Transportation for the 21st century
Virginia Highway Corporation Act
Permits and approvals
Commonwealth Transportation Board
State Corporation Commission
Amendments
Environmental issues
Day Permit Extension

4.3 PROGRAM
4.4 FINANCING
Barclays joins the team
Financial closing
Final financial structure

69
70
70
71
71
72
73
74
74
75

76
76
76
78

78
78
79
80
82

82
83

84
85

85
87
88
89
89
90
90
91
92
93
94
94

95
96
97
97
98

viii

CONTENTS

4.5 ORGANIZATION
Project restart
Kiewit leaves the project
New contractor

4.6 DESIGN AND CONSTRUCTION

101
101
102
104

105

Construction

105

4.7 OPERATIONS

106

5 GUANGZHOU-SHENZHEN-ZHUHAI, SUPER HIGHWAY

5.1 INTRODUCTION
5.2 BACKGROUND
The Super Highway
The route
Interchanges

5.3
5.4
5.5
5.6
5.7

PROGRAM
CONTRACTUAL RELATIONSHIPS
FINANCING
DESIGN AND CONSTRUCTION
OPERATIONS

109
110
111
111
112
113

114
115
116
118
119

PART IV
CASE STUDIES:TUNNELS AND BRIDGES
6 WIJKER TUNNEL
6.1 INTRODUCTION
6.2 BACKGROUND
Private financing uncertainties
Green light for the Wijker tunnel
Selection criteria
Negotiations concession agreement
Response of the National Audit Office
Political collision
Remaining tunnels

6.3 PROGRAM
6.4 ORGANIZATION

123
124
125
125
126
127
128
129
131
131

131
132

The contractors consortium

133

6.5 CONTRACTUAL RELATIONSHIPS

133

Concession agreement
Construction contract

6.6 FINANCING
6.7 DESIGN AND CONSTRUCTION
Construction
Tunnel elements
Sink-procedure

133
135

136
138
139
139
140

CONTENTS

6.8 OPERATIONS
Diverting charge bands
Management and maintenance
Fiscal aspects

7 NORTHUMBERLAND STRAIT CROSSING BRIDGE

7.1 INTRODUCTION
7.2 BACKGROUND
Request for Proposal
Selection process
First selection round
Local opposition
Project on hold
Environmental Assessment and Review Process
Environmental and other issues
The proposal rejected
Green light
The final selection process
Environmental and other challenges
Conclusion

7.3 PROGRAM
7.4 ORGANIZATION
Dutch gain membership
Engineering design
Other memberships

7.5 CONTRACTUAL RELATIONSHIPS

Concessionaire and contractor - federal government agreements
Concessionaire - federal / local government agreements
Subsidy agreement
Concession agreement

7.6 FINANCING
Subsidy Agreement and issue of bonds
Security package
Corporate guarantees and risks
7.7 DESIGN AND CONSTRUCTION
Design
Construction
7.8 OPERATIONS

ix

141
141
141
142

143
144
144
145
145
146
146
147
147
147
148
148
149
149
150

150
151
151
151
153

153
153
154
154
154

156
156
158
158
159
159
160
163

PART V
CASE STUDIES: POWER PLANTS
8 DABHOL POWER COMPANY
8.1 INTRODUCTION

167
168

CONTENTS

8.2 BACKGROUND
India: Privatizing the State and opening the
trade door
Power: The industry shortfalls

8.3 PROGRAM
8.4 ORGANIZATION
8.5 CONTRACTUAL RELATIONSHIPS

8.6
8.7
8.8
8.9

170
171
173

174
175
176

Purchase Power Agreement

Guarantees and penalties

176
178

FINANCING
CONSTRUCTION
OPERATIONS
UNEXPECTED CHANGES

179
180
181
181

Project canceled
Fallout
Renegotiations
Leading changes

REFERENCES
LIST OF ABBREVIATIONS

182
184
185
186

189
193

LIST OF FIGURES

xi

LIST OF FIGURES
THE BUILD OPERATE TRANSFER APPROACH
Fig. 0.1:
BOT and other project delivery organizational forms.
Fig. 0.2:
Public and private involvement.
Fig. 0.3:
Alternative project delivery schemes.
Fig. 0.4:
Typical BOT organizational structure.
Fig. 0.5:
Parties and their goals.
Fig. 0.6:
Balancing costs and revenues to optimize unit price and
profits (revenues minus costs). Arrows indicate the
preferred directions towards an optimal condition.
Fig. 0.7:
Contracts and relationships.
Fig. 0.8:
Stages of a BOT project.
Fig. 0.9:
Stages with Selection Process BOT projects.
Fig. 0.10:
Transfer of a BOT facility.
Fig. 0.11:
Cashflow over the concession period.
Fig. 0.12:
Financial BOT structure.
Fig. 0.13:
Payments and revenues for each stage in a BOT project
(duration of stages not in scale).

6
7
9
10
11

12
13
15
15
17
18
19
20

PLYMOUTH COUNTY CORRECTIONAL FACILITY

Fig. 1.1:
Plymouth County, Massachusetts.
28
Fig. 1.2:
Artist impression Plymouth County Correctional Facility. 32
Fig. 1.3:
Organization development scheme.
34
Fig. 1.4:
Financing structure.
36
Fig. 1.5:
Contractual relationship.
39
Fig. 1.6:
Construction site Plymouth County Correctional Facility. 41
Fig. 1.7:
First and second floor plan.
42
Fig. 1.8:
Third and fourth floor plan.
43
Fig. 1.9:
Construction with prefabricated units.
44
DONALD W.WYATT DETENTION FACILITY
Fig. 2.1:
Central Falls in Rhode Island.
Fig. 2.2:
Artist impression of the Donald W. Wyatt facility.
Fig. 2.3:
Organization development scheme.
Fig. 2.4:
Financing structure.
Fig. 2.5:
Contractual relationship.
Fig. 2.6:
The Donald W. Wyatt Detention Facility.
Fig. 2.7:
Second floor plan.

50
55
56
60
62
64
65

xii

LIST OF FIGURES

STATE ROUTE 91 EXPRESS LANES

Fig. 3.1:
Traffic in California.
Fig. 3.2:
Location map.
Fig. 3.3:
Traffic flow trends.
Fig. 3.4:
Organization development scheme.
Fig. 3.5:
Contractual relationship.
Fig. 3.6:
Financing structure.
Fig. 3.7:
Different lanes proposed by CPTC.

70
72
73
77
81
84
85

DULLES GREENWAY
Fig. 4.1:
Loudoun County, Virginia.
Fig. 4.2:
The extension of the Dulles Toll Road.
Fig. 4.3:
Financing structure.
Fig. 4.4:
Organization development scheme.
Fig. 4.5:
Contractual relationship.
Fig. 4.6:
Construction site.
Fig. 4.7:
Dulles Greenway toll-house.

88
95
100
103
104
105
106

GUANGZHOU-SHENZHEN-ZHUHAI, SUPER HIGHWAY

Fig. 5.1:
Guangzhou-Shenzhen-Zhuhai, south-east China.
Fig. 5.2:
Super Highway.
Fig. 5.3:
Commercial interchange.
Fig. 5.4:
Model Super Highway interchange.
Fig. 5.5:
Contractual relationship.
Fig. 5.6:
Organization development scheme.
Fig. 5.7:
Project expenditure.
Fig. 5.8:
Financing structure.
Fig. 5.9:
Toll-house GSZ Super Highway.

110
112
113
114
115
116
117
118
120

WIJKER TUNNEL
Fig. 6.1:
Location Wijker tunnel.
Fig. 6.2:
Organization development scheme.
Fig. 6.3:
Contractual relationship.
Fig. 6.4:
Financing structure.
Fig. 6.5:
Tunnel elements.
Fig. 6.6:
Wijker tunnel.

124
132
135
137
139
141

NORTHUMBERLAND STRAIT CROSSING BRIDGE

Fig. 7.1:
Location map.
Fig. 7.2:
Bordon, PEI and Cape Tormentine, New Brunswick.
Fig. 7.3:
Organization development scheme.
Fig. 7.4:
Contractual relationship.
Fig. 7.5:
Financing structure.
Fig. 7.6:
Design of the Northumberland Strait Bridge.

144
150
152
155
157
159

LIST OF TABLES

Fig.
Fig.
Fig.
Fig.

7.7:
7.8:
7.9:
7.10:

Prince Edward Island staging facility.

Svanen; the heavy-lift floating crane.
Bridge piers.
Real cost to the user ferry versus bridge 1997-2032
four passengers return (1992 constant dollar).

DABHOL POWER COMPANY

Fig. 8.1:
Location map.
Fig. 8.2:
Dabhol, Maharashtra State.
Fig. 8.3:
Organization development scheme.
Fig. 8.4:
Contractual relationship.
Fig. 8.5:
Financing structure.
Fig. 8.6:
Construction site.

xiii

160
161
162
163

168
169
175
177
180
181

LIST OF TABLES
PLYMOUTH COUNTY CORRECTIONAL FACILITY
Table 1.1: Population and capacity of state prisons in
Massachusetts and of Plymouth County Jail.
Table 1.2: Sources and uses of funds.
Table 1.3: Pods and units.
Table 1.4: Projected operating budget for Fiscal Year 1995.

29
35
42
45

DONALD W.WYATT DETENTION FACILITY

Table 2.1: Sources and uses of funds.
Table 2.2: Pods and units.

58
64

STATE ROUTE 91 EXPRESS LANES

Table 3.1: CPTC Reimbursement Amount.
Table 3.2: SR 91 Express Lanes funding.

80
83

DULLES GREENWAY
Table 4.1: Project capitalization.

99

GUANGZHOU-SHENZEN-ZHUHAI, SUPER HIGHWAY

Table 5.1: Construction statistics.
Table 5.2: Major structural items.
Table 5.3: Primary materials and quantities.

118
119
119

WIJKERTUNNEL
Table 6.1: Daily passing vehicles per alternative through the
Wijker- and Velser tunnel.

128

xiv

LIST OF TABLES

Table
Table
Table
Table

6.2:
6.3:
6.4:
6.5:

Cost-division.
Debt to equity division Wijker tunnel-project.
Construction numbers.
Charge bands without a second Coen tunnel.

DABHOL POWER COMPANY

Table 8.1: Electricity, capacity and investment shortfall.
Table 8.2: Chronology of economic reforms.
Table 8.3: Penalties for DPC and its contractor.
Table 8.4: Major issues.

136
137
140
142

170
172
178
183

PREFACE

xv

PREFACE
This book is the result of research on the project delivery scheme of Build
Operate Transfer (BOT). Since 1994, research was conducted simultaneously at the Harvard Design School and the Bouwkunde, Technical
University of Delft, resulting in a series of case studies developed on several
BOT projects in various parts of the world. The case studies identify the
different aspects of the BOT project delivery scheme and draw insights from
the organizational structures employed and the risks assumed by the
participants of the studied BOT projects. Eight of these case studies are
included in this book.

Why study BOT?

The motivation for the research and preparation of this manuscript
stemmed from identifying an immediate opportunity for design and building
professionals to actively participate in and be instrumental in developing
BOT projects. This underlying premise established the following five
objectives within the undertaken research:

to study the BOT project delivery scheme and identify the major
participants and their roles, responsibilities and assumed risks, as well
as their technical and professional expertise.

to establish a framework in which BOT projects are initiated and

developed, and use this to identify the general characteristics of BOT
projects.

to compare the design and construction processes of BOT projects

with traditional projects of a similar size, and examine the changing
roles, if any, of designers, project managers and builders.

to identify the influence of economic cycles in the development of

BOT projects, and investigate how these might affect the availability
of public and private funds.

to identify the benefits and risks of developing BOT projects

overseas, investigating the role of the local government in setting legal
and financial frameworks, and the influence of local culture,
expertise and capital.
The case studies established the backbone to gain insights within a
theoretical framework. The two main criteria for selecting the eight cases for
this book were firstly, a variety of project types and geographic locations,

xvi

PREFACE

and secondly, the level of risks assumed by the private sector. In general, an
effort was made to select cases where the government or other public
organizations did not offer lucrative lease-back options or protective nets
with financial guarantees. Undoubtedly, the case studies are conditioned and
shaped by the points of view of the designers and building professionals,
though, business related issues centered on management, finance and law
are fundamental to BOT and they are given proper consideration.
Although the eight cases are not statistically significant for deriving
general conclusions, they set the stage for how BOT projects work and, as a
result, allow the reader to formulate hypotheses to be tested using additional data. This book therefore can be used as the basis for further research
and as a handbook for those professionals interested in developing BOT
projects. It also provides original material for teaching the BOT project
delivery scheme.

Contents of the Book

Part I contains a proposed theoretical framework of BOT projects. It
introduces a short historical background, the BOT project delivery scheme
and its general characteristics. This is followed by the presentation of the
major participants of a typical BOT project together with the main
contractual relationships based on the case studies. The six distinct stages of
a typical BOT project are presented ranging from preliminary studies to the
eventual transfer of the facility. This section also includes the financing
scheme and particularities of the design and construction for a BOT project
with concluding remarks on the circumstances that make a BOT project
delivery scheme a preferred choice.
The remaining chapters contain eight case studies covering a variety of
BOT projects. Part II includes two case studies of jails, Part III includes three
case studies of highways, Part IV covers the case studies of a tunnel and a
bridge, and Part V includes a case study of a power plant. The projects are
located in Canada, China, India, the Netherlands and the United States.
Each study provides detailed references to the original sources from both
published materials and personal interviews.
A standard format to structure the presentation of the case studies is used
to facilitate comparisons. The contractual relationships and the stages in
each project are presented with standard graphics to allow the reader to
review the similarities and differences of the cases. However, such
standardizations are not always feasible due to significant differences in the
studied projects.

Bas Menheere
Professor of Project Management
Architecture, Delft University of Technology

Spiro N. Pollalis
Professor of Design Technology and Management
Harvard Design School

PART I
FRAMEWORK

THE BUILD OPERATE TRANSFER APPROACH

0
THE BUILD OPERATE TRANSFER
APPROACH
0.1

INTRODUCTION

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 approach
(BOT) is an option for the government to outsource public projects to the
private sector. With BOT, the private sector designs, finances, constructs and
operates the facility and eventually, after a specified concession period, the
ownership is transferred to the government. Therefore, BOT can be seen as
a developing technique for infrastructure projects by using private initiative
and funding. Such infrastructure 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 (Vaughan and Pollard, 1984).
In addition to government, the private sector may initiate BOT projects
when there are limited funds available and there are no enough resources to
execute successfully a required building project. Examples can be seen in
non-profit hospitals and educational institutions as well as manufacturing
facilities. However, none of those cases are included in this book, which
focuses on government related projects.
Several project delivery schemes have developed in recent years (Diaz,
1994). The traditional design-bid-award was enhanced by the introduction
of the project manager as a consultant to the owner, where project manager
advises the owner in formulating a building strategy and supervises the
construction on the owners behalf. As a consulting service, the project
manager works in parallel with the architect for a flat rate fee, with no
fiduciary or construction risk.
Design-build is a one-stop shop for design and construction. Architects
and contractors work under one contract, where total responsibility for all
stages of the project is placed with both parties. Design-build projects are
often of limited sophistication, but hold considerable promise for the future
as a partnership process of project delivery. Bridging allows the separation
of schematic design from design development, with the latter grouped
together with the general contractor. Such a project delivery scheme allows

THE BUILD OPERATE TRANSFER APPROACH

for more sophistication and for transfer of design across geographical and
economic boundaries. With turn key contracts, the owner buys a package of
site, design and finished building, while the developer secures financing,
manages the project flow and coordinates the architect and the contractor.
Such contracts are usually limited in complexity1. BOT is closer to total
product delivery where in addition to financing and development, the
supplier is also responsible for the operation of the facility. Fig. 0.1 presents
visually the grouping of responsibilities of the alternative project delivery
schemes.

Fig. 0.1: BOT and other project delivery organizational forms (after A. Bol and R. Geraedts).

0.2

BACKGROUND2

The first official private facility development under the name Build
Operate Transfer was used in Turkey in 1984, by Prime Minister Ozal, as
part of an enormous privatization program to develop new infrastructure
(Beuker, 1988). However, the BOT approach was used as early as 1834 with
the development of the Suez Canal. This revenue-producing canal, financed
by European capital with Egyptian financial support, had a concession to
design, construct, and operate assigned to the Egyptian ruler Pasha
Muhammad Ali (Levy, 1996).
In the second half of the nineteenth century, railways and roads were
developed with the help of private financing in the western world (Mobsby,
1992) and although the privately operated public facilities became financial
successes, they were not devoid of shortcomings. The infrastructure projects
had to be accessible to everybody but optimizing the economic rate of return
conflicted with public interest.
By the mid-twentieth century, the privatization of public facilities had
experienced a downturn as the development of infrastructure projects by
private funds gained popularity throughout the world, particularly in the
United States. The increase in road traffic resulted in an urgent need for

THE BUILD OPERATE TRANSFER APPROACH

developing highway facilities and this prompted the government to

increasingly use more private funds.
In Europe, however, infrastructure projects remained under governmental
jurisdiction as they were considered public requirements the state had to
provide. Since the 1980s, the attitude of European countries has changed to
include more privatization in their infrastructure development, especially in
France and Britain where privatization was extensive, in order to fulfill
public needs. At the same time, Asia was experiencing an economic boom
that opened the doors for new forms of project delivery, based on the
principle of privatization.
Ernst and Pham (1994) refer to privatization as a process in which the
delivery of goods and services, usually administered by the government, is
shifted to the private sector. Privatization can be divided into primarily three
areas: the selling of governmental holdings (i.e., British Airways and British
Telecom), the subcontracting of government services to private undertakers
(i.e., US Postal Service, park maintenance), and the subcontracting of
financing and developing public facilities (i.e., Channel Tunnel). BOT
belongs to the last category.

Fig. 0.2: Public and private involvement (after M. Klein).

Under a public-private partnership approach, a cooperation between

government and private parties is achieved where the government works
together with the private sector to provide for public requirements.
However, the differences between privatization and public private partnerships are difficult to detect, depending on the level of government
participation (Fig. 0.2). Complete privatization has no government
participation. The Build Operate Transfer approach can be viewed as a welldeveloped public-private partnership, since government participation is
a
l
w
a
y
s
expected in projects of such public scale. This is exemplified in several of the

THE BUILD OPERATE TRANSFER APPROACH

case studies in this book.

0.3

DEFINITION

Build Operate Transfer is a major startup business venture where private

organizations undertake development and operation of a facility normally
done by the government. The termination of the private sector involvement
occurs at the return of the ownership of the facility to the government after
a fixed concession period, usually 25 to 40 years (Tiong, 1990).
Among the various definitions of BOT, the following definition is adopted
in this book that constitutes the premise for conducting this research.
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 ownership of the facility free of liens to the principal
at no cost3.
A key characteristic of BOT is private financing. In BOT, the government
subcontracts the entire development process, including the associated risks,
to the private entity. One of these risks is financing, which must be obtained
by the concessionaire, who is ultimately responsible for all aspects of the
project. A prerequisite for private financing is a need for the facility to be
developed; for example, a highway extension due to increasing traffic jams,
more bed space in detention and correctional facilities due to an increase in
crime and the number of incarcerated individuals, a tunnel or bridge to solve
traffic problems and facilitate accessibility, or a sewage system or power
generation to support the growth in population and industry. If there is no
obvious requirement for the facility, private parties will refuse to participate and provide financial support. Only after market analysis justifies a
need will private parties be willing to financially participate as well as
become involved in developing the facility.
BOT is just one of the many different project delivery schemes within the
context of privatization or public-private-partnerships. The two other
schemes that appear most similar to BOT are Build Own Operate (BOO)
and Build Transfer Operate (BTO). In all three cases, the private party
retains revenues from operating the facility. In BTO, the private party
transfers the ownership of the facility directly after the delivery and
operates the facility on behalf of the principal. In BOO, the private party
retains ownership of the facility, makes returns on investment by operating
it for its useful life, and may sell it at any point at market value.
Besides the three most common approaches, BOT, BOO and BTO, other
variations can also occur (Fig. 0.3). All differ from each other in the way the
level of risk is divided between the private and public parties. Each form is

THE BUILD OPERATE TRANSFER APPROACH

a kind of a public-private-partnership but all are unique in allocating risks

to the individual parties.
Fig. 0.3: Alternative project delivery schemes, illustrating the risks for
the concessionaire (after ENR, 1995).

0.4

MAJOR PARTICIPANTS IN BOT PROJECTS

Five major participants are identified in every BOT project and Fig. 0.4
shows the typical structure. Very simply, the principal grants the concession
to the concessionaire. The concessionaire, usually a consortium of
companies, undertakes the financing and development of the project.

10

THE BUILD OPERATE TRANSFER APPROACH

Financing is obtained from sponsors and lenders. The contractor builds the
facility and the operator runs the facility.
Fig. 0.4: Typical BOT organizational structure (after Walker and Smith, as modified by R. Huijbregts).

Principal
In a BOT project, the principal is usually a government agency, a local or
federal government body that recognizes the need for a public facility but is
unable to financially support the project. The government agency is thus
forced to look for alternative options.
Concessionaire
After the identification of the need for the facility, the government,
following a due process, will grant a concession to the concessionaire. The

THE BUILD OPERATE TRANSFER APPROACH

11

concessionaire is usually a consortium and takes the responsibility of

developing (designing, financing and constructing), maintaining and
operating the facility, on behalf of the principal. The concessionaire is the
owner of the facility during the concession period and realizes profits on the
initial investment through the usage of the facility.
Investors
Financing is supplied by the private sector and the investors include both
shareholders and lenders. The shareholders invest money in exchange for
equity, and lenders support the concessionaire during negotiations with the
principal with promises for loans to be available during the development of
the project. Lenders may include banks, insurance companies and bond
holders.
Contractor
The concessionaire commissions a contractor with the construction of the
facility. In most cases, the contractor is part of the concessionaires
consortium and involvement is favored by all concerned parties. During the
early stages of the process the contractors involvement assures the
consortium of the most effective and efficient design and execution of the
project. Ultimately, the contractor is responsible for the construction of the
project and for hiring subcontractors, suppliers and consultants.
Operator
The operator is also in the concessionaires service and manages the
operational stage of the facility. Similar to the contractor, the operator is
usually part of the concessionaires consortium, because of the critical role
in the revenue stream. In addition, the importance of operating knowledge
for programming, financing, design and construction is required. Often the
operator is supported by a government agency or in some cases, is the
agency. In the Wijker tunnel case, the facility is entirely operated by the
government maintenance department for bridges, dikes and roads, and in

the Plymouth prison project the county Sheriff was part of the con-

12

THE BUILD OPERATE TRANSFER APPROACH

cessionaire and operated the facility upon completion.

Fig. 0.5: Parties and their goals.

Many contracts and agreements are signed for a successful BOT project
to bridge the differences in incentives and goals among the participants. This
process can be very time consuming as some parties may try to cast off risks
and responsibilities to another. A balance has to be found between cost and
quality, by selecting the proper financial scheme, design, construction
methods, materials, maintenance costs, and operation costs in order to
result in low usage fees and high profits. A major task, therefore, is to guide
the incentives and goals of the individual parties in favor of the project. Fig.
0.5 shows the principal goals of the major participants in a BOT project and

Fig. 0.6 shows graphically the optimization levels to be pursued to make the
project a financial success.
Fig. 0.6: Balancing costs and revenues to optimize unit price and profits
(revenues minus costs). Arrows indicate the preferred directions towards an optimal condition.

There may be up to 300 different contracts among all the involved

parties. The main contracts, shown in Fig. 0.7, are presented in the
following paragraphs.

Concession contract
The concession contract is signed between the principal and the
concessionaire. This contract runs from the initial design stage through the
final transfer, and includes the allocation of risks. The main issues addressed
within the concession contract are:

THE BUILD OPERATE TRANSFER APPROACH

13

The length of the concession period; the starting date and the
transfer date.
The structure of the project company (concessionaire).
The financial scheme.
The financial guarantees (principal and concessionaire).
The material guarantees (if the concessionaire is not able to deliver
the facility, the principal has the right to step in and take over).
The financial ceiling of development costs.
The financial ceiling of usage costs.
The construction process.
The completion time of the construction.

The method of operating the project.

Fig. 0.7: Contracts and relationships.

14

THE BUILD OPERATE TRANSFER APPROACH

Financial agreements
The financial agreements are private between the concessionaire and the
equity partners (sponsors) and the lenders (i.e., banks, financial institutions).
The shareholders agreement contains the ratio of debt to equity and a
detailed plan for the distribution of the expected revenues during operation.
The lenders agreement, between the debt providers and the concessionaire,
specifies the various guarantees and the agreed return-on-investment. The
most significant guarantee is provided by the government to step-in in case
of lower than expected revenue levels. One of the extreme guarantees for a
lender is the right to take over the facility in case the concessionaire is
unable to meet financial obligations.
Construction contract
The contract between the concessionaire and the contractor is usually a
fixed price contract or a design-build contract. The concessionaire wants to
delegate risks and, because of the concessionaires responsibilities towards
the principal, the lenders, and the final users of the facility, high fines are
written into the contract for late delivery.
Operation contract
The operation contract is signed between concessionaire and operator.
The rates for usage of the facility are included in the contract, as agreed by
the principal and concessionaire. A major aspect for the operation
agreement is the prognosis of the use of the facility.
All contracts are strictly related to each other and eventually shape the
design, construction and operation of the facility and describe
responsibilities and risks. It is, therefore, crucial to obtain transparent
contracting where all risk and responsibility-bearing parties obligations are
clearly defined. An open information structure and well defined contract
management with agreed risk division will limit misunderstandings.

0.5

STAGES OF BOT PROJECTS

The length of the concession period is determined in the concession

agreement between concessionaire and principal. Within the concession
period, the concessionaire must be able to recover investments for all
funding parties.
Six stages are identified during the concession period (Fig. 0.8). After the
preliminary study, usually conducted by the government, a consortium is
chosen following a specific selection procedure. After the selection, the
concessionaire starts the implementation of the project by forming the team,
executing studies, obtaining permits, and proceeding with design

THE BUILD OPERATE TRANSFER APPROACH

15

development. Once the design is approved, construction begins. Upon

completion of construction, the facility opens for use and the repayment of
the facility is covered by the incoming revenues. After a predetermined

concession period, the facility transfers to the principal and then state
agencies will own and operate the facility.
Fig. 0.8: Stages of a BOT project.

Preliminary study
The preliminary study usually takes place prior to the involvement of the
concessionaire. This stage is executed by, or on behalf of, the principal (Fig.
0.9). Feasibility studies are necessary to prove the forecasted success of the
project, in order to attract private funding. Alternatively, a private party
may identify a need and initiate the BOT project and in such a case, the

preliminary study is conducted by the private entity with limited government involvement.

16

THE BUILD OPERATE TRANSFER APPROACH

Fig. 0.9: Stages with Selection Process BOT project.

Selection process
The selection process depends on who initiates the project. In a public
selection process where the initiative is coming from the public sector
(government), a request for qualification is distributed. After receiving
applications, the government selects a few consortia to submit proposals
(request for proposals) and from these a concessionaire is chosen. During
this process, the consortia will group interested parties as required for the
efficient and adequate execution of the project. Alternatively, in a speculative selection process, the private sector initiates the project and contacts
the appropriate government agency for approval. The project is granted
after proper negotiations.
Project implementation
After the selection stage and the foundation of the concessionaire, the
proposal is finalized. Together with all the involved parties, the
concessionaire develops a detailed program and preliminary design, and
applies for permits. This process can be shortened if a government agency is
actively participating. Once permits are issued, the final concession
agreement
is
signed. During the project implementation stage, in addition to the interests
of the involved parties, the interests of the external parties also require
attention. The influential power of politics, the opposition, and
environmental agencies are significant factors and, if not taken into account,
may hinder or even dissolve the project.
Construction
Once the necessary permits are obtained, construction begins. Often BOT
projects are fast track projects where the design is not complete when
construction starts. This is feasible because of congruent financial interests
within the members of the consortium and the pressing need to complete
construction and start collecting revenues. Less controversial designs allow
a quicker construction period with fewer uncertainties.
Operation
During the operation stage, the facility is operated and maintained by the
operator who is paid by the concessionaire. The concessionaire, as the
owner of the facility during the operation period, is obligated to operate the
facility in a manner that adequately services the public user. The
concessionaire is also responsible for maintaining the facility in working
condition. Both the concession and operation agreements specify the
condition of the facility at the time of transfer to the principal.
Transfer

THE BUILD OPERATE TRANSFER APPROACH

17

The facility is transferred to the principal, usually at no cost (Fig. 0.10).

Transfer time is determined in the concession agreement. Should the
principal chooses to take over the facility earlier than the agreed concession
period, the concessionaire will be financially compensated for the
investment. After transfer, the principal is the sole owner of the facility and
can choose to operate and maintain the facility directly or hire an
independent operator. Although a transfer has not taken place in any of the
cases in this book, it can be expected that the principal will continue with
the
same
operator, as in the concession period, due to history of involvement and
experience with the facility. If the principal is the government, it may
choose after transfer not to charge the final users anymore. In essence, the
facility at that time will have become public, and its maintenance and
operation can be funded by indirect taxation. Another issue to be considered
is to what extend the principal wants to receive the facility. After a typical
concession period of 30 years, the facility may have become obsolete and
could need major rehabilitation or require more resources to operate than a
new facility. In prisons for example, the facility may be inadequate, or in a
power plant the method of generating energy may be inefficient. Active

participation of the principal during the concession period may keep a

facility up to standards or, at transfer, a BOT project could in fact lead to a
new BOT project.
Fig. 0.10: Transfer of a BOT facility.

Due to the external and internal particularities of every BOT project, the
actual organization and process may be different to the presentation in the
previous paragraphs. The starting and completion period of each stage in a
BOT project can change due to a variety of factors, both external and
internal to the project. Among them are the complexity of the development

18

THE BUILD OPERATE TRANSFER APPROACH

process, government regulations, political influences, concerns of

environmental groups, and neighborhood pressures. Such effects have a
m
a
j
o
r
influence on the progress of a project, likely to stall or change theoretical
models. Thus, the development of a precise and detailed framework
applicable for every BOT project is not possible and this must be taken into
consideration for each case study in this book that presents the framework
of a particular project and its external and internal conditions.

0.6

FINANCING

One of the primary features of BOT is private financing which infers the
concessionaire is fully responsible for acquiring the necessary funds to
develop and operate the facility. The concessionaire will raise the required
funding in debt and equity. The return of investment is realized during the
operational stage of the facility (Fig. 0.11).
Fig. 0.11: Cash flow over the concession period.

The concessionaire takes a part of the equity by investing funds and

additional shareholders are usually the parties of the consortium (investors,
contractor, operator). At a certain stage of the development, equity may be
sold to additional shareholders through private and public offerings. The
shareholders require an independent business plan, including predictions of
revenues, development and operating costs and an estimate for the rate of
return. Although no guarantee can be given about dividend payments, other
guarantees must secure investment, such as the financial guarantees that the
government grants, and the amount of secured loans. The greatest risk is
assumed by shareholders as they are paid last, once all short and long term
obligations are met, though, due to the great risk the equity partners
assume, a higher return of investment is expected.
The debt is provided by secondary parties such as banks, financial
institutions and bond holders, with the government sometimes providing

THE BUILD OPERATE TRANSFER APPROACH

19

part of the debt. Most of the financial issues important to shareholders are
also crucial to lenders in order to forecast the financial outcome. The
expected interest and repayment schedule is established prior to closing the
deals and contracts and gives investors a certain reassurance of security. In
addition, lenders often ask for guarantees to minimize their risks and the
government usually provides the larger and most welcomed guarantees.
The equity to debt ratio is determined by the principal and depends on
the financial capacity of the equity partners and their ability to secure long
term loans. The debt to equity ratio is usually established at 1 to 4 (20%
equity, 80% debt). Due to the higher risks assumed by the sponsors
(consortium), a comparably higher return on investments (ROI)
compensates the risks. Average ROIs in the studied cases were 15-20% for
equity and 8-10% for debt. The latter was based on the ROI of state bonds
and
interest,
compensating for the perceived higher risk level.
In most cases, the government retains a financial influence over the
proceedings of a BOT project. In cases where no government is involved, it

appears more difficult to achieve a financially successful project.

The government can be involved in two ways: through subsidies and as a
tenant.
Through subsidies. This type of involvement is based on two factors.

20

THE BUILD OPERATE TRANSFER APPROACH

Firstly, the governments wish not to lose primary control over the
development of the public facility. In the Wijker tunnel project for example,
t
h
e
government made a 15% subsidy available towards the cost of developFig. 0.12: Financial BOT structure.

ment. The second reason may be attributed to the government being forced
to allocate public money to make the project more interesting for the private
sector. In the Strait Crossing Bridge project, the government annually pays
C$ 41 million to lighten the financial burden. The criteria for selecting the
concessionaire for this project were structured to obtain a minimum
required subsidy.
As a tenant. A second approach which enables the government to get
financially involved is to support the off-take, the product, of the facility. In
the Dabhol Power Company project, the state assumed the responsibility to
distribute the produced energy to the final users, charging different regions
different rates for political reasons. In both the prison projects (Plymouth
and the Donald Wyatt), the government entered an agreement to take over
the off-take of the facility where the government (state, federal and local)
would be charged per personday for the prisoners and detainees.
The revenues for a project are generated during operation from the final
users. In the direct payment method, like in toll roads, the end-user directly
pays the operator. In the indirect payment method, the government pays in
favor of the final user, like in the prisons and the Wijker tunnel. The
revenues are allocated to repay the debt plus the interest due within the
concession period as well as the dividends to the shareholders. Fig. 0.12
shows a typical financing structure for a BOT project, with both investment
and revenue streams.
Fig. 0.13 shows schematically the payments (development, construction,

maintenance and operations, interest) and the revenues for each stage in a

THE BUILD OPERATE TRANSFER APPROACH

21

BOT project. At the time when the present net worth of the accumulated
revenues is the same as the present net worth of the accumulated payments,
the concessionaire will have realized the projected investment return that
includes the required interest and profits. Of course, that time depends on
the projected return on investment of the equity holders and lenders. After
that period, the facility will produce net profits for the equity holders.
Fig. 0.13: Payments and revenues for each stage in a BOT project (duration of stages not in scale).

0.7

DESIGN AND CONSTRUCTION

One would expect the participation of many organizations with a wide

range of expertise should result in an efficient and effective design. However,
the case studies show that, in most of the cases, a conservative design and
construction was adopted. This is driven by the concessionaires attitude to
reduce risks and costs. Tested design and construction methods are widely
adopted in BOT projects, with innovative ideas employed only when it will
make the facility more profitable in the long run.
The architect usually works for the contractor under a design-build
contract between the concessionaire and the contractor. During the
preliminary study, however, the principal has already commissioned an
initial design as a part of the feasibility study and to obtain the necessary
permits. Therefore, the architect hired by the principal will transfer work to
the architect hired by the contractor. In some cases, the architect
representing both parties is the same.
One of the major advantages of having so many participants is the fact
that the design will satisfy all parties on completion. Consequently, the
disadvantage is that the design will compromise to the tastes of all those
involved and the design process will be more time consuming. The
participation of the operator can become very important in design. In the
Plymouth County Correctional Facility project, the facility was designed
with the wardens in the center of the building to control the whole facility
from that site. Such a design required less guards and resulted to a more
effective and efficient operation. The active participation of the operator in
the BOT projects is quite innovative and facility operators should be seen as
potential consultants for traditional projects as well.
The participation of many opposition and environmental parties is often
seen as an inconvenience because of design modifications and eventual
delays. However, in the Strait Crossing Bridge case, due to the special
attention given to the design of the pillars, because of the involvement of
these groups, the ice flow during the long winters does not interrupt the
ecology of the area.
The same observations can be made for construction as with the design
process: selection of conservative, well tested methods and materials that
pose little risk. The participation of the contractor in decision making is
important for designing and constructing a durable facility with few

22

THE BUILD OPERATE TRANSFER APPROACH

unknown factors.

0.8

ENVIRONMENTAL FACTORS AFFECTING BOT

Environmental factors include the role of the government, neighborhood

concerns, environmental and sustainability issues, and the economic climate.
Although in defining the BOT process, the governments extensive
participation should be excluded, government agencies are invariably
involved in approving parts of the project or by developing other public
facilities
to
support the specific BOT facility. A governments involvement is advantageous for the project as success seems to be guaranteed. Getting permits
and licenses, for example, is inevitably facilitated by the governments
involvement. However, it is not always beneficial to the project as
opposition within the government can create major hurdles. In the Dabhol
Power Company case, the project was stalled at several intervals following
government elections. Arguing within the Dutch Second Chamber brought
out unforeseen obstacles in the development of the Wijker tunnel.
A major aspect to be considered in BOT projects is the environment and
the environmental agencies. We live in an era where preserving the
environment holds great importance and so development of facilities which
will endanger the environment face major opposition. In the case of the
Northumberland Strait Crossing Bridge, the melting process of the ice and
the disturbance of flora and fauna were major obstacles in the development
of the bridge.
Opposition from a unified neighborhood group can be as disrupting as
government or environmental agencies in scrutinizing and eventually
delaying a BOT project. A group called Friends opposed the initial
Northumberland Strait Crossing Bridge proposal due to perceived loss of
labor, the endangerment of the fishery and the effects on wildlife. In the SR
91 Express Lane case, opposition was expressed by the neighboring county.
Involving the neighborhood at an early stage, through public hearings, can
improve the understanding and cooperation of the neighbors and be
valuable for the development of the facility. In the Donald Wyatt Detention
Center case, many public hearings and elections facilitated the process.
Ultimately, the status of the economy is crucial for a BOT project. The
primary objective for choosing a BOT approach is to obtain private funding.
If there are no private companies interested, a project cannot be developed.
Investing money is always in proportion to the risks involved and the returnon-investment; the risks are higher in a weak economy. Under such
circumstances, negotiations for an equity-debt arrangement with risk
aversion can take a long time, making a BOT project more expensive than
the public option. Thus, when the economy is weak, the government should
consider a public option or at least a certain public investment in the BOT
project. When international financing is considered, the government must

THE BUILD OPERATE TRANSFER APPROACH

23

carefully consider establishing the usage fees, especially if the local economy
is poor and devaluation of the local currency a possibility.

0.9

WHEN IS BOT APPROPRIATE?

In recent years, BOT projects are considered applicable to both

developing countries and developed economies. The greatest advantage of
BOT for the government is the subcontracting of the majority of the risks to
the private sector, with the latter willing to finance and assume risks in the
development of a public facility. At the end of the concession period, the
government will inherit a well-operated project without investing public
funds and with little risks. A consequence of not investing its own money is
that the project can take place even if the governments budget is limited.
The finance is obtained by private organizations and the execution of the
project is independent of the financial planning of the government.
Furthermore, because the design, development, and construction are all the
responsibilities of a single party, the concessionaire, the facility should be
more effective and efficient.
However, BOT is a complex process. Because of the numerous and very
different contracts, organizations and stages, the process management is
more complex, especially at its early stages. Furthermore, the concessionaire accepts to take over the risks from the principal expecting a high
return on investment. For every risk the concessionaire concedes to, the final
customer has to pay. Nevertheless, BOT projects need not necessarily be
more expensive than traditional projects because of the savings in a
privately owned process and because of efficient design, construction and
operation.
Another issue is the uncertainty of predicting the revenues during the
concession period which is the most crucial piece of information for the
concessionaire. The length of the concession period will depend on those
expected revenues and can be up to 30 years, already a considerable
prediction period. Often, the business plan of the concessionaire is based on
inaccurate assumptions that can be devastating for the operation of the
project. This was seen in the Channel Tunnel project between Britain and
France, one of the first European privately financed BOT projects.
Concluding, we would like to quote Mario Cuomo who stated in the
New York Times, on May 1985; It is not the governments obligation to
provide services but to see that theyre provided. As the governments
awareness for subcontracting public facilities to private companies grows,
we can readily observe the increase in public-private partnerships and BOT
will be central to this development.

SOURCES
[1]

Based upon New Organizational Forms in the Construction

24

[2]

[3]
[4]
[5]

[6]

[7]

[8]

THE BUILD OPERATE TRANSFER APPROACH

Industry, HBS-case, February 20, 1991.

Based upon Build Operate Transfer, Naar een theoretisch model
voor de BOT-benadering, Arjan Bol, thesis research, University of
Technology, Delft the Netherlands, March 1995.
Based upon BOT in Nederland, Lotte Verhoeven, thesis research,
University of Technology, Delft the Netherlands, 1997.
BOT Projects, New Schemes to Build a Future, ENR 1995,
Sponsored Section.
Managing Change and Conflict in Architectural Projects: Four
pavilions in Sevilles Expo 92, Alberto Diaz-Hermidas, Doctoral
Dissertation, Harvard Design School, Cambridge, MA, 1994.
Based upon De financiering van Build Operate Transfer, Stephan
Chon, thesis research, University of Technology, Delft the
Netherlands, December 1995.
Based upon Build Operate Transfer (BOT) - een theoretisch model,
Marjan Klein, thesis research, University of Technology, Delft the
Netherlands, 1996.
Based upon Information Technology for Project Management in the
Build Operate Transfer-approach, Jeffrey Huang and Rick
Huijbregts, Harvard Design School, to be officially published