13 Build Own Operate Transfer Advantages and Disadvantages

Build-own-operate-transfer (BOOT) is one type of a public-private partnership, or PPP. Under this project model, a private organization will develop a large project under the contract of a public partner. It is a way to create large infrastructure projects for the public, while being able to use private funding for it.

At the end of the contract period, which may be 40+ years in length, ownership of the project transfers from the private enterprise to the public sector.

Here are the advantages and disadvantages of using the BOOT model for development.

List of the Advantages of Build-Own-Operate-Transfer

1. It minimizes the public cost for infrastructure development.

Using the BOOT model, the public sector is able to take advantage of the efficiencies found in the private sector for a minimal investment. Many PPP relationship using this model will offer an incentive, such as tax breaks, to the private organization to develop the infrastructure. Because the private sector assumes the risk for planning and use, they are given an opportunity to profit from the structure by recruiting tenants for it. Then, after the contracted time, the public sector takes over ownership.

2. It reduces public debt.

Private companies assume the debts involved in the initial phases of a BOOT relationship. Even in PPP structures where some initial funding may be provided by the public sector, the majority of the initial development cost will be the responsibility of the private organization. This allows the public sector to maintain a balanced budget while reducing its influence in how the new infrastructure is developed.

3. It allows for innovation.

The public sector brings in the best private contractors possible when developing infrastructure using the BOOT model. This process encourages innovation, which allows the community to benefit from advanced technologies which would be included with the project. If the project was implemented by the public sector only, this inclusion factor would not always be possible because of the costs involved.

4. It provides a chance to bring in expertise.

The public sector is tasked with the need to bring in the best possible private companies to complete the contract. If the necessary expertise is not available locally, then national or international private enterprises might be brought in to create the required infrastructure. This process allows for the companies with the most expertise to be brought in, no matter where in the world they happen to be.

5. It allows each party to focus on their strengths.

In the BOOT model, the private and public sectors are able to both focus on what they do best. That allows projects to be completed faster, often with reduce delays, because the public sector provides structure and cost containment, while the private sector provides efficiencies and resource access.

6. It keeps public-sector funds where they are most needed.

Because the private sector is managing the funding aspect of the project, the public sector is able to direct resources to other areas of socioeconomic welfare required by the community. This allows the processes of governing to continue unimpeded while the infrastructure requirements can be met at the same time.

7. It is a process that is fully appraised.

If there is one constant in the world today, it is that the word of a government official or program is not always accurate. By bringing in a private enterprise to develop the project, more trust can be brought into the process to avoid any unrealistic expectations or promises from being released to the community.

List of the Disadvantages of Build-Own-Operate-Transfer

1. It can have higher transaction costs.

Although the purpose of a BOOT structure is to limit the cost liabilities to the public sector, this type of transaction cost can be higher than other contract opportunities. The incentive to pursue the build-own-operate-transfer is for the public sector to limit their overall liability with the project. By having the private sector take all the initial risks of ownership and operations, the public sector can avoid most of the risks of a financial loss from the partnership.

2. It only works for large projects.

The BOOT model is only suitable for large-scale infrastructure projects within a community. It is not a suitable PPP for most of the smaller projects that communities tend to need development help with each year. Think of it like this: if your community has a skyscraper it needs built in the public interest, a BOOT contract would be an option. If what you need is a strip mall, it would not generally be a suitable choice.

3. It requires fund-raising to be successful.

The private sector will not get started on the infrastructure project until there are funds in place to begin the planning phase of the project. If no funds can be raised to complete the project, then it won’t get done. For that reason, the public sector often looks for private entities which already have a funding mechanism in place to complete the proposed project. If no such entities are interested in the project, then it may stall out before it gets a chance to begin.

4. It may require substantial operational revenues to be successful.

For the BOOT model to be successful from a private standpoint, there must be large revenues generated during the operational phase of the contract. That is why BOOT contracts have such a lengthy transfer stipulation. By stretching out the relationship to four decades or more, the private organization has the best possible chance of making their investment back, plus some profits to enjoy, before losing control of what they built.

5. It requires strong corporate governance.

In this PPP relationship, the public sector must stay involved with the supervision of the project during the ownership phase to ensure it remains successful. One of the most common reasons for the BOOT structure failure is a lack of communication between the private and public entities involved. When the program is being managed poorly on the private side, the public side must be able to step in and change things up for the good of everyone involved.

6. It can place the public sector at a disadvantage.

If the public sector has limited expertise in the infrastructure matters being considered, then the private sector can take advantage of that fact. Both sides must have knowledge of the complexity, competitiveness, and risks involved to ensure a balanced relationship is possible.

These build-own-operate-transfer advantages and disadvantages offer one solution for community development. There are several other solutions available, such as BROT (build-rent-own-transfer) and BLOT (build-lease-operate-transfer) that may be a better option in certain circumstances. Although the private companies take on risk with the BOOT model, they also have the best chance to profit from the contract. That is why it is often a first-choice option.