The Build-Operate-Transfer (BOT) structure for projects has gained considerable
popularity as a form of private - public partnership that enables private participation
in the development of public infrastructure. The essence of the BOT structure
is that the private sector takes responsibility for the detailed design, construction,
commissioning and operation of a particular project. In return it receives a
payment for providing the services once operational, either from the public
sector or from users, in the form of a long-term contract. After an agreed period
(typically of between 10 and 30 years) the project is transferred back to the
public sector. Finance for BOT projects is usually provided through project
finance, discussed earlier. Equity investors usually include strategic investors
such as the private construction or equipment companies, and public sector partners
may also take an equity holding.
BOT and related arrangements(e.g. BOOT Build Own Operate Transfer and BOO Build Own Operate) have been very successful in opening up public infrastructure to the private sector finance, and they have a number of advantages. They bring private sector disciplines to the project development and design process, and the public sector is far less exposed to risks of cost overruns or below expected performance. By enabling focus on a particular facility they can be more readily financed and do not impose a burden on public funds, and have thus probably helped encourage financial flows. The costs of financing are relatively low, with the bulk of the capital cost being financed by bank lending at modest margins. (UNIDO, 1996; World Bank, 1994; World Bank Group, 1994)
However, there is increasing recognition of some of the limitations of BOTs. The costs are increased by high project arrangement fees, and with private sector finance being more costly than public finance, the overall costs of the output can be higher than, e.g., a well managed project by a public sector utility. The long term contract typically provided to the project by the public sector is inflexible and can become a burden to the public spending if for example demand falls or prices change, particularly if certain risks have been passed through to the public sector (e.g., fuel costs). Finally, BOT projects can lead to a project based focus (e.g., what is the cheapest power project at present), to the detriment of broader considerations (e.g., what other power options, such as energy efficiency, are best). Thus, in certain areas attention is moving away from BOTs to other mechanisms (such as merchant power plants which sell power in a deregulated market).
From the perspective of ESTs, BOT projects usually encourage the use of modern equipment and there is an incentive to be efficient, with climate benefits. However, it is worth noting that the BOT mechanism is heavily used in sectors with major climate impacts (power, transport, oil & gas). Thus the success of the mechanism itself could be seen to be contributing to increasing greenhouse gas production. More significantly, there is some indication that the BOT mechanism favours climate unfriendly technologies (e.g., coal power generation) over alternatives (such as wind power), because of the need for proven technology, the preference for established project paradigms, the large scale of BOTs and the failure of governments to internalise environmental costs.
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