Build.Operate.Transfer: Fire-Bearing Prometheus or Inevitable Pandora’s Box

Public-Private Partnerships (PPPs) are seen as the tightrope along which a developing economy must walk in order to evade corporate exploitation and public red-tapism. However, their success has been largely stalled by a grappling for supremacy between enterprises and states. In these cases, schemes like Build, Operate and Transfer (BOT) and Build, Own, Operate and Transfer (BOOT) offer the economy the best of both worlds. These schemes combine the industrial efficiency and promotion of infrastructural development that we associate with the private sector, with the focus on accessibility and promotion of public welfare that is characteristic of a state enterprise. However, what exactly is the B.O.T mechanism? Why do companies and states even want to be a part of a model of this sort? Are we looking at a possible answer to some of the most pressing challenges we face today as a developing economy? What are some of the challenges faced in the implementation of these schemes?

These are the questions I’d like to explore through this piece.

 

What is the B.O.T mechanism?

The United Nations Industrial Development Organization (UNIDO) describe a BOT project as “a private company being given a concession to operate a facility that would normally be built and operated by the government for a period of time. At the conclusion of the decided time period, ownership of the project is transferred or returned to the government.”[1] The types of projects undertaken can greatly vary across sectors and have in the past included power plants, toll roads, airports, water treatment plants, hotels and food security companies.

 

Why do Companies and States Even Want B.O.T projects?

How is this model distinct, or even preferable to a simple tax break? When a company is awarded a tax break, it can operate independently while paying very little or no taxes at all for a period of time. There isn’t even the question of transferring or of government supervision, as is characteristic of a Build-Operate-Transfer scheme, if you’re allowed to operate your own enterprise with significant financial benefits.

The main distinction arises in terms of reach and the establishment of a public identity.

If a government requests assistance in the delivering of a service, it is highly likely that the service is an essential one that is availed by a significant proportion of the population of a region. Let’s take the example of the metro rail service. Especially in large cities, the metro is used by tens of thousands of people everyday. Even with a tax break, that sort of consumer base is uncommon for most companies. The prices are decided upon and reviewed in conjunction with a government with the sheer number of people, combined with the concessions offered, making even highly subsidised pricing models attractive. In this way, a company is given a wider reach.

Let us consider the case of Veolia Transport (now Transdev), a French international transport services company, which wasn’t widely known outside of Europe before 2009. In the year 2009 the company became a part of a joint venture company, along with Reliance Infrastructure, to build and operate Line 1 of the Mumbai metro. Since this project, they have expanded their service offerings to to various regions of China, South Korea, Hong Kong and the Philippines, becoming a leading public transport service provider in Asia and serving millions of people daily. They are considered by most cities, both in India and other parts of Asia, as the preferred partner in the development of a metro rail service. In this way, a company that primarily operated in Europe was able to establish an identity in South and East Asia.

Looking at this case, the question may arise: how is this beneficial to a government?

With a large-scale and officially sanctioned project to provide essential services, time is of the essence. Experience has shown that government initiatives tend to face delays. They also lack the technical know-how and potential for research and development of new methods. This could lead to public borrowing. To avoid such circumstances, the involvement of the private sector could prove to be beneficial. With the promise of eventual transfer, it ensures these benefits can be reaped without facing the danger of exploitation.

 

A Brief Case Study : When The B.O.T Model has Worked, and Why?

(In the context of the Projek Lebuhraya Utara-Selatan- PLUS Malaysia)

PLUS Expressways Berhad, a highway concessionary operator in Malaysia, took over a project to connect Bukit Kayu Hitam to Johor Bahru in 1988. The project was completed in 1994, 15 months ahead of time, leading to the concession period being extended from 33 to 45 years, only concluding in 2030. The highway has reduced travel time, made the journey a safe and comfortable one and aided in the economic development of cities along the path of the highway. Further, Plus Expressways shares toll revenue with the government.

Several factors contributed to the B.O.T. model working well in this case.The legal frameworks were excellently designed so as to ensure  both the government and PLUS become beneficiaries. Due to the fact that the entire process and the rights of all involved parties were clearly enshrined along with supporting constitutional amendments, there was accountability. This ensured the process was regulated enough to not be  detrimental to PLUS or its consumers.

 

Challenges Faced in the Implementation of the B.O.T Model

Both countries and companies face a multitude of challenges in their attempts to implement the B.O.T model. One of the most prominent has been currency fluctuations. Lack of availability of foreign exchange systems and weakening local currencies have lead to foreign investors being exceedingly wary of investing in developing nations. Governments have been accused of corruption and industrialisation projects being used as a tool to spread political propaganda. Reports of labour law violations in B.O.T projects are also not uncommon.

However, studies conducted by the World Bank[2], the International Monetary Fund[3] and the United Nations Industrial Development Organization[4] have established that these potential risks and common challenges can be addressed through the creation of a body that exclusively focuses on risk minimisation and liabilities. It should ideally consist of representatives of the government, of the company and independent economists and legal and technical specialists. By taking into account the unique economic conditions of a specific country and prevalent laws and circumstances, the body will ideally work on coming up with frameworks to avoid and tackle common problems and to set up a system of compensation towards either the government or the company (in case a problem is unavoidable).

Is the B.O.T mechanism then the answer to a lot of our problems or a problem in itself? This is a point of contention. However, it is important to note that a lot of the arguments against the mechanism seem to arise from a misunderstanding of the utility of the mechanism. It is not a solution to all of the problems of the developing world and it is not a substitute for government-funding into welfare initiatives. It does not work in all sectors and in all countries. A B.O.T project, when implemented in favourable conditions, is meant to improve the infrastructure of a country, promote industrialisation and provide quality services to a country while also remaining accessible, improving the unemployment rate and working to establish a company’s influence in a region. It is the belief of this writer that B.O.T schemes have almost always succeeded in the achievement of these goals and therefore should be looked into by more states and enterprises.

[1]https://open.unido.org/api/documents/4808368/download/UNIDO

[2]http://documents.worldbank.org/curated/en/919341468766792679/pdf/multi-page.pdf

[3] “Public-Private Partnerships, Government Guarantees, and Fiscal Risk”- Richard Hemming for the International Monetary Fund, Washington D.C- 2006

[4] https://open.unido.org/api/documents/4808368/download/UNIDO

Share

Visalakshi (Lex) is a first-year, prospective Economics and Finance major at Ashoka University. Her fields of interest include development economics, behavioural economics, cognitive neuroscience and East Asian literature. Born and raised in Bangalore, her hobbies include reading, solving jigsaw puzzles and coming up with innovative ways to get people to pronounce/spell her name right. She hopes to be able to bring to the Review her unique perspective and help make it widely accessible to individuals from all backgrounds.

One Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

You don't have permission to register