PACIFIC ISLANDS FORUM SECRETARIAT

FORUM ECONOMIC MINISTERS MEETING

Honiara, Solomon Islands
03-05 J uly 2006

PUBLIC PRIVATE PARTNERSHIPS AND BUILD, OPERATE AND
TRANSFER (BOT) AND SUCHLIKE SCHEMES
Purpose
This paper presents information on Public-Private Partnerships, and the use of
Build, Operate and Transfer (BOT) and suchlike schemes as arrangements within these,
as alternative options for infrastructure financing and highlights regional and
international experiences - in particular Fiji and South Africa - in this regard.

Background

2. At FEMM 2005, Ministers requested, amongst other things, that the Pacific
Islands Forum Secretariat (PIFS) compile a set of case studies and practical experiences,
from within and outside the region, for the information of members in the use of Build,
Operate and Transfer (BOT)/Build, Own, Operate and Transfer (BOOT) and suchlike
schemes.

3. Given that BOT/BOOT schemes are designed and implemented as Public-Private
Partnership (PPP) arrangements, the approach adopted in covering this issue has been to
focus on BOT/BOOT schemes within the broader context rather than as a separate issue.

Issues

Public-Private Partnerships

4. The private sector is playing an increasingly crucial role in the financing and
provision of services that were traditionally the domain of the public sector. One of the
key reasons is that governments are unable to cope with the ever-increasing demands on
their budgets. Most infrastructure expenditures in developing countries have been funded
directly from fiscal budgets but several factors such as macroeconomic instability and
growing investment requirements have shown that public financing is volatile and, in
many countries, rarely meet crucial infrastructure expenditure requirements in a timely
and adequate manner.
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1
Ferreira and Khatami (1996)
2

5. Furthermore, there are efficiency gains arising from innovation, management and
marketing skills offered by the private sector and greater incentives for the control of
construction, operating and maintenance costs. More so, the provision of additional
finance for infrastructure projects enables projects to be brought forward in time, thus
generating earlier economic benefits.
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6. The diagram below illustrates the continuum of options for involving the private
sector in the provision of infrastructure delivery.
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Diagram 1: Range of Private Sector Options



7. At the left are supply and service contracts, which tend to be of short duration and
require less private commitment than the options higher in the continuum. The private
contractor is not directly responsible for providing the service, but instead for performing
specified tasks, such as supplying inputs, constructing works, maintaining facilities, or
billing customers. At the left are the longer term arrangements which require significant
private sector commitment.

Options for PPP

8. There is a range of options for involving private sector participation that vary with
regards to ownership, operations and maintenance, financing, risk allocation and
duration. A summary of these options can be viewed in Table 1.

Table 1: Allocation of key responsibilities under the main private sector participation options

Option Asset
Ownership
Operations
and
Maintenance
Capital
Investment
Commercial
Risk
Duration
Service
contract
Public Public and
Private
Public Public 1-2 years
Management
contract
Public Private Public Public 3-5 years

Lease Public Private Public Shared 8-15 years
Concession Public Private Private Private 25-30 years

2
Haley (1996)
3
World Bank (1995)
3
Option Asset
Ownership
Operations
and
Maintenance
Capital
Investment
Commercial
Risk
Duration

Build
Operate
Transfer
Private and
public

Private Private Private

20-30 years
Divestiture

Private or
private and
public
Private Private Private Indefinite
(may be
limited by
license)

Source: World Bank (1997)

Service contract

9. Under this option, the private sector performs a specific operational service for a
fee, for example meter reading, billing and collection.

Management contract

10. In this option, the private sector is paid a fee for operating and maintaining a
government-owned business and making management decisions.

Lease

11. Under the lease option, the private sector leases facilities and is responsible for
operation and maintenance.

Concession

12. Under concessions, the private sector finances the project and also has full
responsibility for operations and maintenance. The government owns the asset and all full
use rights must revert to the government after the specified period of time.

Divestiture

13. This option can take two forms partial or complete divestiture. A complete
divestiture, like a concession, gives the private sector full responsibility for operations,
maintenance and investment, but unlike a concession, a divestiture transfers ownership of
the assets to the private sector.

14. Discussion on the build, operate and transfer (BOT) options is covered more fully
in the next section.



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BOT/ BOOT Schemes

15. The build, operate, transfer (BOT) approach has in recent years played a growing
role in the implementation of industrial and infrastructure projects such as toll roads,
water supply and treatment facilities in both industrialised and developing countries.
They are designed and implemented as Public-Private Partnership (PPP) arrangements.

16. In the FIC region, the need to develop and implement innovative project financing
methods such as BOT is more pronounced given the costs of providing infrastructure
services are naturally high. Small scale, dispersed populations, remoteness and
susceptibility to natural disasters mean that [Pacific countries] dont benefit from the
economies of scale infrastructure normally offers, services are often more costly to
produce and maintain, and it is costly to increase access to rural areas.
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What is BOT?

17. BOT is the terminology for a model or structure that uses private investment to
undertake the infrastructure development that has historically been undertaken by the
public sector.
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In a BOT project, a private company is given a concession to build and
operate a facility that would normally be built and operated by the government. The
private company is also responsible for financing and designing the project. At the end of
the concession period, the private company returns ownership of the project to the
government (although this need not be the case). The concession period is determined
primarily by the length of time needed for the facilitys revenue stream to pay off the
companys debt and provide a reasonable rate of return for its effort and risk.

Other types of BOT

18. The acronym BOT is often used interchangeably with BOOT or build-own-
operate-transfer. Variants include BOO (build-own-operate without any obligation to
transfer); BT (build and transfer); BLT or BRT (build, rent or lease and transfer); BT
(build and transfer immediately), BTO (build, transfer and operate)
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, DBFO (design,
build, finance and operate); and DCMF (design, construct, manage and finance); MOT
(modernize, own/ operate and transfer); ROO (rehabilitate, own and operate); and ROT
(rehabilitate, own and transfer).

19. The table provided below reviews the BOT option and its variants, describes
some characteristics of these different procurement arrangements and depicts the
relationship between these different procurement methods and the financing of the
project.



4
Castalia (2005)
5
UNIDO (1998)
6
Possibly subject to installment payments of the purchase price.
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Table 2: BOT project procurement structures

BOT Project Type Characteristics
Build Own Operate Transfer (BOOT)

The service provider is responsible for
design and construction, finance,
operations, maintenance and commercial
risks associated with the project.
The service provider owns the project
throughout the concession period
The asset is transferred back to the
government at the end of the term, often at
no cost.

Build Own Operate (BOO)

Similar to BOOT projects, but the service
provider retains ownership of the asset in
perpetuity.
The government only agrees to purchase
the services produced for a fixed length of
time

Design Build Operate (DBO)

A design and construction contract linked
to an operation and maintenance contract.
The service provider is usually responsible
for financing the project during
construction.
The government purchases the asset from
the developer for a pre-agreed price prior
to (or immediately after) commissioning
and takes all ownership risks from that
time.

Lease Own Operate (LOO)

Similar to a BOO project but an existing
asset is leased from the government for a
specified time.
The asset may require refurbishment or
expansion.
Source: Arndt (1999)

20. In a BOT project, the host government decides on the need for the project and its
scope, requires that the design, performance and maintenance of the project be tailored to
the countrys objectives and selects the private company by means of an appropriate
bidding or evaluation process in order to arrive at a price that is fair to both the host
government and the company.

21. BOT projects, when properly designed, offer significant potential for technology
transfer and local capacity building as well as helping develop national capital markets.

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