BOTs have been widely used to attract private financing to the construction or renovation of infrastructure. BOT agreements tend to reduce commercial risk for the private partner because there is often only one customer, the government. The private partner must be confident however that the purchase agreement will be honored.
Box 8: Build-Own-Operate and Transfer Contract to Develop, Operate, and Maintain a Toll Road in Gujarat, India |
The contract for this 32-kilometer toll road facility includes the design and completion of the project road, including the pavement, cross-drainage works, bridges, toll facilities, medians, and separators. It also covers management, and operation and maintenance, including toll collection, operation of the toll plaza, traffic regulation, and maintenance of the facility. The contractor has relative autonomy to determine its work methods and plan its maintenance. Toll rates are based on a fixed formula and increase annually in line with an escalation formula linked to the consumer price index. For a higher toll increase than approved in the contract, a toll review committee is constituted to provide a recommendation to the Government. An independent engineer and independent auditor are hired to oversee the contract agreement and report to the Government and the contractor. Risks are mitigated as follows: • Land acquisition risk: the Government bears all responsibility for completion. • Revenue risk: Borne by contractor but tolls are automatically revised every year through an agreed indexation formula. • Inflation risk: Borne by the contractor but this is transferred to the contractor because of the fixed price nature of the contract. • Risk of shortfall in traffic: provision to extend the contract in case of nonachievement of a 20% return over the 30-year period. Additional revenue is also possible at the discretion of the Government. • Force majeure risks: comprehensive insurance coverage and a temporary toll review provision to mitigate loss of revenue for a short period due to force majeure. |
Source: World Bank. Tool Kit for Public-Private Partnership in Highways. Available: http://rru.worldbank.org/Documents/Toolkits/Highways/22carac//222.htm |
An advantage to DBFO projects is that they are financed partly or completely by debt, which leverages revenue streams dedicated to the project. Direct user fees (like tolls) are the most common revenue source. However, other sources of finance in the road sector, for instance, might include lease payments, shadow tolls, and vehicle registration fees.