Day 32 – Q 5.What is the BOT investment model? Ids it suited for India’s infrastructure sector? Critically comment.

5. What is the BOT investment model? Ids it suited for India’s infrastructure sector? Critically comment. 

बीओटी निवेश मॉडल क्या है? भारत के बुनियादी ढाँचे के क्षेत्र के लिए क्या यह अनुकूल है? समालोचनात्मक टिप्पणी करें।

Introduction:

BOT Investment model is a Public Private Partnership model where the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector. Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it. In return, the public sector will allow it to collect revenue from the users.

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Advantages of BOT Investment model:

• Discreet asset: It is used to develop a discrete asset rather than a whole network and is generally entirely new or Greenfield in nature (although refurbishment may be involved).
• Advantages of BOT for governments: Include reduced development and infrastructure budget and transfer of risk to the concession company. 
• Advantages for the concession company: Include better management of many construction risks, and possible countering of any adverse effects by benefits during operation.
• Efficiency: BOT provides a mechanism and incentives for enterprises to improve efficiency through performance-based contracts and output-oriented targets.
• Competitive bidding: The projects are conducted in a fully competitive bidding situation and are thus completed at the lowest possible cost.

Disadvantages of BOT Investment model:

• Higher then debt cost: There is a profit element in the equity portion of the financing, which is higher than the debt cost. This is the price paid for passing of the risk to the private sector
• Long duration: It may take a long time and considerable up front expenses to prepare and close a BOT financing deal as it involves multiple entities and requires a relatively complicated legal and institutional framework. There the BOT may not be suitable for small projects
• Institutional framework: It may take time to develop the necessary institutional capacity to ensure that the full benefits of BOT are realized, such as development and enforcement of transparent and fair bidding and evaluation procedures and the resolution of potential disputes during implementation.

Model that suits India’s infrastructure sector:

The Hybrid Annuity Model (HAM):

• HAM is a mix of BOT Annuity and EPC (engineering, procurement and construction model) models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer.
• Example: NHAI in India. The private player has no role in the road’s ownership, toll collection or maintenance (it is taken care of by the government)
• Hybrid annuity means the first 40% payment is made as fixed amount in five equal instalments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.
• Advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government.

Conclusion

HAM is a good trade-off, spreading the risk between developers and the Government. Moody’s also notes that the improving credit profiles of infrastructure developers are increasing their capacity to participate in PPP projects. However, their access to funding remains a key concern, with banks constrained by sector-specific exposure limits and existing stressed assets in their infrastructure portfolios.