Build Operate Transfer (BOT): Benefits, Model and Contract Example
At least once in your life you have heard the famous expression “divide and conquer.” But have you ever heard about build-operate-transfer? Yes, this is not quite a principle of state management, but this term is worth understanding in order to know how modern project financing works and what are the benefits. In this post, we will tell you what it is all about, in which industries it is popular, and which companies use this form. Also, we will check some clear examples of such projects and sample contracts. But let’s start from the very beginning.
What Is Build Operate Transfer and How It Works
According to Garthner IT Glossary, build-operate-transfer (BOT) is a contractual relationship between an organisation and a build operate transfer company – service provider which should set up, run, and optimize a certain business or info tech process service delivery operation and transfer the operation to the organisation. In other words, this is a process when a company orders the creation of a turnkey business for itself and takes it when everything is ready and working.
In another BOT meaning, from Global Negotiator, build operate transfer is the creation and the management of a manufacturing or services facility for a certain period of time after transferring it to a local government authority. And it is mostly used to finance heavy or complex infrastructure projects in developing countries that cannot finance a project on their own. But as you see, this definition is more about international and intergovernmental relations. Because build operate transfer contract can be signed both between companies and between countries.
The United Nations ESCAP tells us that the basic features of build operate transfer model are an agreement between the parties, a fixed period of performance of obligations, and return of property after its termination. In another list of key features by PPP World Bank there are:
- Relations between the public and private sector for a “project period” when one side asks the other side to build-operate-transfer some facility or system.
- A facility or project should be transferred to the authority (customer) after “project period” when the operator finances, owns and constructs it.
- From the outset, there is no revenue stream, and lenders seek to ensure that project assets are incorporated into an existing project company and that all risks associated with the project are accepted and transferred to the appropriate organization.
- The operator is also prohibited from engaging in other activities.
- The revenues often come from a single “buyer,” such as a utility or government that buys project products from a project company.
- The project company receives funding for the project, provides design and construction, and also operates the facility during the concession period.
- The project company will coordinate the construction and operation of the project in accordance with the requirements of the concession agreement.
- Lenders provide non‑recourse or limited recourse financing and will share the residual risk along with the project company and its shareholders.
- There can also be other contracts involved to reduce the risk. For example, build operate transfer team can pass some part of the risk to the other parties by construction contract, or an operation and maintenance contract.
So this is how build operate and transfer agreement works both in huge intergovernmental deals and between smaller parties. But what makes interaction in build operate transfer projects so beneficial and why is this form convenient and simple for companies and any other participants in the process? Let’s talk about this in more detail and consider this on some particular example.
Build Operate Transfer Model and Its Benefits For Your Company
After we figured out what the build operate transfer model is, let’s now understand what its benefits are and why it is so popular. For example, we have two small IT companies. And one of these companies is creating a specific product. Let’s say it creates an application that helps to create simple and convenient landing pages for providing services or selling goods. And everything would be fine, but if there were more ready-made templates that potential customers of the company could use and it would be just great. But the problem is, the company is small, it has the necessary number of employees and they are all loaded with specific tasks about working on the product and its development. And none of them have neither the time, nor the strength, nor the necessary set of skills in order to take over the creation and testing of these templates. And here the second IT company with the build operate transfer it outsourcing services come to the rescue. Because this company is just engaged in solving such problems.
What Is Build Own Operate Transfer and How It Differs From Build Operate Transfer
In addition to the BOT model that we have already discussed, there is also a BOOT model which means build own operate transfer. And these models are incomplete solely by the fact that in BOOT build-own-operate-transfer there is a part of “own” which means that the company that provides the service, among other things, also owns the project for the time specified in the contract. And uses this time to recover the costs of investment and maintenance.
This is one of the build own operate transfer examples when the company should receive income from what she herself created.
Build Operate Transfer In IT Industry
As you already understood, BOT build operate transfer is widely used in the IT industry and in those industries in general. This model has become very popular because of its convenience, cost reduction, risk, time and resources. This model can be compared to the flow of DIY, which means creating everything you need with your own hands. Including tools for creating something. But why do everything yourself, to get injured and spend energy if there are professionals on the market who can do everything that you need without distracting you from work. And when the work is completed, they will give it to you working and in finished form. Is it convenient? Of course. Has such a scheme become popular? Without a doubt. The usual list of services provided by such a model:
- creating a professional development team
- technical and business management
- support and integration into a clients company
Build Operate Transfer Model Example
Two companies agreed among themselves that an assistant company will help the first company create a new team, for example, from a designer, artist, tester and developer, and streamline the process of creating and selling these templates for landing pages. This project will be started from scratch and will continue until the assistant company returns all the money invested and receives its fair payment for the provision of such services.
Companies sign a build operate transfer contract where the assistant company undertakes to create and set up a new business branch for the customer company, finance it, take all the risks and transfer its ownership to the customer company after it is ready and the project ends. Companies can share risks by signing additional contracts. For example, if a part of new templates will not be bought or if someone from the team quits without completing their part of the project work. Then the responsibility and the proportion of improvements can be divided between the contractors as it suits them.
This is a simple example of how build operate transfer in IT industry works and why it can be beneficial. Briefly by points:
- Build operate transfer IT outsourcing will help your company not to be distracted from the main work and not to waste time on secondary, though important tasks.
- You get a ready and working turnkey project and do not waste time and effort on integrating it into your company.
- You save resources by investing them not in solving your problem but in professionals who will solve it better and faster than you.
- You do not take risks or take only a part of them protecting your future workstream.
- Using a build operate transfer it services you do not need full-time specialists in all matters if you can use a similar contract with any company providing such services.
Let’s consider BOOT mechanism on the same simple example with two IT companies. If they chose the BOOT model instead of the BOT, then the group of people involved in the development and testing of templates should have been used by the executing company as a money-making mechanism for the return of money invested in this project. So, build operate transfer benefits are a great thing too, but the investment and return model is selected for each project individually.
Build Operate Transfer Companies and Projects Examples
In the field of IT, the BOT model is usually used to create a team or part of a team of an individual project or branch of a company. In order not to waste time and effort on finding, attracting and involving experienced specialists into the work on a project, a company can use the BOT mechanism to create an outsourcing component to carry out its tasks. Thus, you do not need to look for an office, worry about renting, hiring a team and other important things. In addition, this approach is usually associated with ESP that helps you to build a team somewhere abroad, where it will be much cheaper. ESP meaning stands for external service providers aimed at better response to customer needs.
For example, Boston Consulting Group (BCG) helps companies increase their digital power and transform their work. Long-term close cooperation helps create talent pools, technology platforms, customize agile work, digital services and applications. The company infuses its specialists to key positions instead of employees of the client company and helps to develop new ways of working. So, in 2016, a digital team of 300 experts was assembled for a company that manufactured cars, and a bunch of functional applications were created. For such a result, the company’s manager worked from day one with the BCG consultants. In 2017, the company assisted the international development of Eastern European telecom company by creating a new business unit with a team of researchers, developers and a commercial team. This completely changed the client’s business model in a year.
What Is Build Operate Transfer Contract
According to BusinessDictionary, build operate transfer contract the contract has two parties – a private company and a government agency. And here is an agreement between them on which a private company is obliged to create and operate a facility for a certain amount of time and then transfer ownership to the second party. In some cases there is no any act of transfer and the governmental body acts as the only buyer.
In our case both sides of agreement are companies. And our “facility” is a fully-functioning and integrated team of IT professionals working on a client-company’s project. Standard BOT contract can contain 12 parts:
- general provisions
- basic agreement
- determination and amendment of the total project cost
- raising and injection of funds
- provisions on design and construction
- provisions on maintenance, management, and operation
- rate of return on project and user fees
- the provision regarding support by the competent authority
- provisions regarding risk sharing
- discharge of agreement
- disposal of rights and refinancing
- dispute resolution
But all these parts can be modified, transformed for the convenience of both parties or divided into several separate contracts. For example, the contract itself and an additional risk sharing agreement. Same with the build own operate transfer.
Summing up, it’s worth saying that if you decide to use the described model to create your own R & D center or improve your business in another way, then you should pay attention to Ukraine. It is famous for its incredible potential and capabilities in the IT field, one of the world’s best professionals in the business, and a growing number of startups, centers, and a number of experienced developers. There are located R&D centers of world famous companies and the IT sector brings huge profits for the country’s GDP. Mobilunity, located here, will help you improve your business, staff your company with a team of the best available professionals and launch the development of any of your projects without distracting you from your main job. So if you are thinking of creating BOT agreement you know who to contact.