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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