Build-Operate-Transfer Contract

Have you ever wondered who builds the public infrastructure and service models or how they do it? These projects need extensive financial planning and a significant amount of resources, including a collaboration between government authorities and private organisations. The government authority may enter into a contract known as a “Build-Operate-Transfer” with a private organisation to grant that entity the right to design, construct, operate, and eventually transfer ownership of a public or private asset for a specified time period.

In this article, we will discuss build-operate-transfer contracts, how these contracts function, the risk factors involved, and the pros and cons of using these contracts. 

Build-Operate-Transfer: What is a build-operate-transfer contract?

A build-operate-transfer contract is a method of delivering public works projects in which a government entity contracts with a private company to build and run a facility following the terms of an agreed-upon design. The government agency or the project’s end users pay the private sector partner to take on these responsibilities. The private sector participant may contribute to the project’s funding in particular circumstances. When the contract ends, the government agency takes over project management.

Build-Operate-Transfer: How does a build-operate-transfer function?

Under this type of contract, a government agency will grant a concession to a private company to design, construct, and operate a facility for a predetermined amount of time (usually between 25 and 30 years), with the intention of the private company recouping the amount of money invested in the project so that the government can take control of the project after the concession period has ended.

Typically, government-funded projects, either brand-new ones or those that have been there for a while but are still receiving government funding, are the ones that get build-operate-transfer contracts. Private entities are responsible for securing the necessary funding for the infrastructure or project and operating and maintaining the facility while keeping any profits from its use. After the concession period, the infrastructure will be returned to the government. The government reimburses private organisations for a fee that might take the form of a predetermined amount, milestone payments, or both.

When a build-operate-transfer contract is in place, the project business or operator will often derive its income not from the tariffs paid to customers but rather from a fee payable to the utility or the government. In this particular scenario, the government is the one that owns the building in question.

The government often enters into such agreements for two primary reasons: first, it allows the concessionaire to participate in the project’s risk, and second, it allows private firms to generate the necessary funds for the project. Having these features means that government agencies will favour the build-operate-transfer system.

Build-operate-transfer variations

• Build-Own-Operate-Transfer

In this arrangement, the private company builds and owns the facility for the duration stipulated in the contract, with the government’s primary interest being to recoup its investment cost throughout the facility’s operating phase. After the contract, the government receives possession of the completed project or facility. This strategy is often used when a substantial financial outlay is necessary, such as when constructing a school, hospital, port, etc.

• Build-Own-Operate

This approach is quite similar to the build-operate-transfer model described above. The important difference is that the ownership of a facility or project that has been constructed does not eventually pass to the government. These kinds of models are qualified for a tax exemption and are often used in the construction of projects involving power plants and water treatment facilities.

• Design-Build

This approach calls for the performance specification contract to be awarded to a single private firm rather than to a consortium. As a result, both time and money will be saved, and the performance guarantee will be offered at a more favourable price.

• Design-Build-Finance

According to this approach, and as the name implies, a private firm will be the one to develop a facility and fund the financial expenses associated for the sole duration of the construction time. 

Parties involved in build-operate-transfer contract

• Government agency

The government initiates the infrastructure project and, considering other economic and political aspects, determines whether the build-operate-transfer model suits its requirements.

• Private entities/concessionaire

They get together to create an organisation with a particular goal and contribute money toward meeting the project’s overall financial requirements.

• Banks

The bank will provide “non-recourse” financing for the project, meaning it will not have any legal claim on the SPE’s assets if the SPE fails to make its loan repayments.

• Other parties

To fulfil its contractual duties, the special purpose organisation will hire another company to provide it with supplies and other resources. 

Build-Operate-Transfer: Advantages

• Since the private sector funds the project, there is a reduction in the amount of money borrowed by the public sector and the amount of money spent directly by the public sector.
• The government can use the best management abilities in the building, operation, and the project’s maintenance if it collaborates with private businesses that are specialists in their respective sectors and engages those entities.
• It helps save a great deal of time and moves the process of developing the project forward more quickly.
• The involvement of private organisations guarantees high levels of productivity and quality by enabling access to the most advanced tools and resources.
• It shifts the risk and responsibility for the project away from the government and onto the private firms, who otherwise would have been responsible for it.
• These projects are carried out following the requirements for bids and are thus finished at the most economical cost.

Build-Operate-Transfer: Disadvantages

• The transaction expenses associated with the project are considerable and account for between 5 and 10 percent of the project’s entire cost.
• These kinds of agreements are not appropriate for use with less significant projects.
• The risk level associated with the project is rather high, and the achievement of the desired level of financial backing is directly proportional to the project’s outcome.
• The institutional and legal foundation applied to build-operate-transfer contract contracts is complex due to the involvement of various entities in its financing.
• The build-operate-transfer contract passing process may take some time to guarantee that all advantages will be obtained.

Build-Operate-Transfer: Essential clauses under build-operate-transfer contract

• Definition clause

This clause includes the definition of a selection of certain terminology that is used throughout the agreement.

• Scope of the project

The contractor’s obligations under the agreement, including those that are essential, required, and incidental, are specified in this clause. Everything from conceptualisation through completion, including funding, operations, and maintenance, falls within the agreement’s purview.

• Grant of concession

For the duration of the concession term, the government agency has the jurisdiction to provide the contractor with concessions in the areas of financing, design, construction, and operation of the facility under this clause.

• Partnerships with third parties

This clause details the arrangements that the contractor has made with third parties, including employees, suppliers, and other minor contractors and local bodies, to ensure the successful completion of the project following the terms of the agreement.

• Legal requirements and authorisations

This clause outlines all of the essential and obligatory licences, approvals, and consents that must be acquired from the relevant authorities, as well as any other prerequisite precedence that the contractor is obligated to adhere to by the terms and the agreement’s terms.

• Time for completion

This provision specifies the time frame during which the agreement’s terms and conditions must be complied with for the contractor to be held liable for any unfinished work on the project.

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