Build-Operate-Transfer (Lease-Back)
Public
entities are increasingly facing higher budget deficits and public
funding obstacles that are creating barriers in pursuing much-needed
public projects that could serve to stimulate a struggling local
economy or provide services to a community. The financial strain
these entities faced often require imaginative solutions, but
solutions that are proven and minimize the risk they face.
One such solution is a public-private partnership called Build-Operate-Transfer
(BOT). BOT is a relatively new approach to infrastructure development
which enables direct private sector investment in large scale
public projects. It involves a private partner, often a consortium,
who constructs a facility to specifications agreed to by the public
agency. The partner then operates the facility for a specified
time period under contract to the agency. At the end of this period,
the partner transfers the facility to the agency. Often, the private
partner is responsible for providing some, or all, of the financing
for the facility. At the end of the period, the public owner may
assume operating responsibility for the facility or choose to
contract the operations back to the original or a new private
operations partner.
While this solution may not be initially familiar to many public
officials, it is one that has been used for decades and has become
commonplace in countries around the world and in many states.
Former New York Governor Mario Cuomo sums up the concept by stating,
“It is not the government’s obligation to provide
services, but to see that they’re provided.
In BOT projects, there are typically two major parties: (1) the
“Principal” is typically the local government body
that has recognized the need for the new public facility, but
is unable to financially support it; (2) the “Concessionaire”
is the party responsible for the development, maintenance and
operation of the facility, on behalf of the Principal. The Concessionaire
is often made of up of a consortium of professionals from across
the business arena. These professionals can include: Investors,
including shareholders and lender; the Contractor, who is responsible
for most aspects of the preconstruction and construction process;
and the Operator, who is responsible for managing the facility
and the revenue stream that it generates during the period from
completion to when the facility is transferred to the public entity.
Advantages
While some of the advantages
of using BOT for new public construction are fairly obvious, there
are other, more elusive benefits that can be realized as well.
- Most of the costs and risks of financing, building and operating the facilities fall on the shoulders of the Concessionaires who are often in a much better position to bear these burdens than the financially stretched public entities
- Many
important public projects, that would otherwise have to
wait for allocation of scarce public resources, can be executed
years sooner – often leading to additional benefits
including:
- The costs for the project will be captured in current dollars, rather than in future dollars when costs will be higher
- Economic growth that typically accompanies large public projects can be realized in the short term when it is likely needed most
- At the end of the operating period, the ownership of the facility will be transferred to the public entity, requiring a much lower investment and little risk
- By financially involving private sector professionals in the process, the public entity gains the benefits of the experience, innovativeness and efficiency of the private parties which are often inherently superior to those in the public sector
- The centralization of the all aspects of the development process under one private entity will likely result in a more cost effective and efficient project
- By involving private investors and financiers, the project will likely undergo a higher level of scrutiny regarding costs and benefits, priorities and paybacks
- Because of the private involvement in the project without full-scale privatization, adverse political repercussions can often be avoided or minimized
- By having a BOT facility, public officials can have a “benchmark” by which to compare the efficiency of the construction and operation of other public projects
The Owner's Responsibility
While a bulk
of the risk lies with the Concessionaires in a BOT project, the
public entity continues to have significant responsibilities. The
public entity is responsible for:
- Some assets for the project including land
- Subsidies in those cases where the project is not economically self-sustaining
- Lease-back costs when users of the facility are not being charged directly by the Concessionaires