Cons:

♤ Highly complex to implement and administer.

♤ Difficult to implement in an untested PPP market.

♤ May have underlying fiscal costs to the government.

♤ Negotiation between parties and finally making a project deal may require long time.

♤ May require close regulatory oversight.

♤ Contingent liabilities on government in the medium and long term

BOT Model

In a Build-Operate-Transfer or BOT type of concession (and its other variants namely, Build- Transfer-Operate (BTO), Build-Rehabilitate-Operate-Transfer (BROT), Build-Lease-Transfer

(BLT) type of arrangement), the concessionaire makes investments and operates the facility for a fixed period of time after which the ownership reverts back to the public sector. In a BOT model, operational and investment risks can be substantially transferred to the concessionaire. In a BOT model, the government has, however, explicit and implicit contingent liabilities that may arise due to loan guarantees and sub-ordinate loans provided, and default of a sub- sovereign government and public or private entity on non- guaranteed loans.

By retaining ultimate ownership, the government controls the policy and can allocate risks to parties that are best suited to assume or remove them. BOT projects may also require direct government support to make them commercially viable. The concessionaire’s revenue in a BOT project comes from managing and marketing of the user facilities (for example, toll revenue in a toll road project) and renting of commercial space where possible. Concessions for BOT projects can be structured on either maximum revenue share for a fixed concession period or minimum concession period for a fixed revenue share, a combination of both, or only minimum concession period.

The problem of this model include the appropriate sharing of risks. In general, a project is financially viable for the private entity if the revenues generated by the project cover its cost and provide sufficient return on investment. The private entity is expected to bring the expertise and efficiency as well as the risk transfer. These are some types of the most common risks involved:

♤ Political risk: especially in the developing countries because of the possibility of dramatic overnight political change.

♤ Technical risk: construction difficulties, for example unforeseen soil conditions, breakdown of equipment

♤ Financing risk: foreign exchange rate risk and interest rate fluctuation, market risk (change in the price of raw materials), income risk (over-optimistic cash-flow forecasts), cost overrun risk.

BOOT (build–own–operate–transfer)

A BOOT structure differs from BOT in that the private entity owns the works. During the concession period the private company owns and operates the facility with the prime goal to recover the costs of investment and maintenance while trying to achieve higher margin on project. The specific characteristics of BOOT make it suitable for infrastructure projects like highways, roads mass transit, railway transport and power generation and as such they have political importance for the social welfare but are not attractive for other types of private investments. BOOT & BOT are methods which find very extensive application in countries which desire ownership transfer and operations including. Some advantages of BOOT projects are:

♤ Encourage private investment

♤ Inject new foreign capital to the country

♤ Transfer of technology and know-how

♤ Completing project within time frame and planned budget

♤ Providing additional financial source for other priority projects

♤ Releasing the burden on public budget for infrastructure development

BOO (build–own–operate)

In a BOO project ownership of the project remains usually with the project company for example a mobile phone network. Therefore, the private company gets the benefits of any residual value of the project. This framework is used when the physical life of the project coincides with the concession period. A BOO scheme involves large amounts of finance and long payback period. Some examples of BOO projects come from the water treatment plants.

This facilities run by private companies process raw water, provided by the public sector entity, into filtered water, which is after returned to the public sector utility to deliver to the customers.

BLT (build–lease–transfer)

Under BLT a private entity builds a complete project and leases it to the government. On this way the control over the project is transferred from the project owner to a lessee. In other words, the ownership remains by the shareholders but operation purposes are leased. After the expiry of the leasing the ownership of the asset and the operational responsibility are transferred to the government at a previously agreed price. For foreign investors taking into account the country risk BLT provides good conditions because the project company maintains the property rights while avoiding operational risk.

Private Finance Initiative (PFI) Model

♤ In the private finance initiative model, the private sector remains responsible for the design, construction and operation of an infrastructure facility. In some cases, the public sector may relinquish the right of ownership of assets to the private sector.

♤ In this model, the public sector purchases infrastructure services from the private sector through a long-term agreement. PFI projects, therefore, bear direct financial obligations to the government in any event. In addition, explicit and implicit contingent liabilities may also arise due to loan guarantees provided to the lenders and default of a public or private entity on non-guaranteed loans. A PFI project can be structured on minimum payment by the government over a fixed contract tenure, or minimum contract tenure for a fixed annual payment, or a combination of both payment and tenure.

♤ In the PFI model, asset ownership at the end of the contract period is generally transferred to the public sector. Setting up of a Special Purpose Vehicle (SPV) may not be always necessary. A PFI contract may be awarded to an existing company. For the purpose of financing, the lenders may, however, require the establishment of an SPV. The PFI model also has many variants.

♤ In a PFI project, as the same entity builds and operates the services, and is paid for the successful supply of services at a pre-defined standard, the SPV / private company has no incentive to reduce the quality or quantity of services. This form of contractual agreement reduces the risks of cost overruns during the design and construction phases or of choosing an inefficient technology, since the operator’s future earnings depend on controlling the costs. The public sector’s main advantages lie in the relief from bearing the costs of design and construction, the transfer of certain risks to the private sector and the promise of better project design, construction and operation.