Concessions build-operate-transfer (BOT) and design-build-operate (DBO) projects

Instrument Overview

Concessions, Build-Operate-Transfer (BOT) Projects, and Design-Build-Operate (DBO) Projects are types of public-private partnerships that are output focused. BOT and DBO projects typically involve significant design and construction as well as long term operations, for new build (greenfield) or projects involving significant refurbishment and extension (brownfield) [2][4].

Why it matters for cities

Concessions, BOT, and DBO projects help cities deliver essential infrastructure by leveraging private sector expertise, financing, and innovation. They:

• Expand infrastructure without straining budgets – Private investment reduces the need for upfront public funding.
• Improve service quality – Performance-based contracts align incentives with outcomes.
• Build long-term efficiency – Integrated design, build, and operate models reduce lifecycle costs.
• Stimulate local development – These partnerships can create jobs, build local capacity, and transfer technical know-how.

Key features

Concessions [2]

• A concession gives a private concessionaire responsibility not only for operation and maintenance of the assets but also for financing and managing all required investment.
• The concessionaire takes risk for the condition of the assets and for investment.
• A concession may be granted in relation to existing assets, an existing utility, or for extensive rehabilitation and extension of an existing asset (although often new build projects are called concessions).
• A concession is typically for a period of 25 to 30 years (i.e., long enough at least to fully amortize major initial investments).
• Asset ownership typically rests with the awarding authority and all rights in respect to those assets revert to the awarding authority at the end of the concession.
• General public is usually the customer and main source of revenue for the concessionaire.
• Often the concessionaire will be operating the existing assets from the outset of the concession - and so there will be immediate cashflow available to pay concessionaire, set aside for investment, service debt, etc.
• Unlike many management contracts, concessions are focused on outputs - i.e., the delivery of a service in accordance with performance standards. There is less focus on inputs - i.e., the concessionaire is left to determine how to achieve agreed performance standards, although there may be some requirements regarding frequency of asset renewal and consultation with the awarding authority or regulator on such key features as maintenance and renewal of assets, increase in capacity and asset replacement towards the end of the concession term.
• Some infrastructure services are deemed to be essential, and some are monopolies. Limits will probably be placed on the concessionaire – by law, through the contract or through regulation – on tariff levels. The concessionaire will need assurances that it will be able to finance its obligations and still maintain a profitable rate of return and so appropriate safeguards will need to be included in the project or in legislation. It will also need to know that the tariffs will be affordable and so will need to do due diligence on customers.
• In many countries there are sectors where the total collection of tariffs does not cover the cost of operation of the assets let alone further investment. In these cases, a clear basis of alternative cost recovery will need be set out in the concession, whether from general subsidies, from taxation or from loans from government or other sources.
• The concept of a "concession" was first developed in France. As with affermages, the framework for the concession is set out in the law and the contract contains provisions specific to the project. Emphasis is placed in the law on the public nature of the arrangement (because the concessionaire has a direct relationship with the consumer) and safeguards are enshrined in the law to protect the consumer. Similar legal frameworks have been incorporated into civil law systems elsewhere.
• Under French law the concessionaire has the obligation to provide continuity of services (“la continuité du service public”), to treat all consumers equally (“l’égalité des usagers”) and to adapt the service according to changing needs ("l’adaptation du service"). In return, the concessionaire is protected against new concessions which would adversely affect the rights of the concessionaire. It is therefore important when considering concessions in civil law systems to understand what rights are already embodied in the law.
• Within the context of common law systems, the closest comparable legal structure is the BOT, which is typically for the purpose of constructing a facility or system.

BOT Projects [2]

• In a BOT project, the public sector grantor grants to a private company the right to develop and operate a facility or system for a certain period (the "Project Period"), in what would otherwise be a public sector project.
• Usually a discrete, greenfield new build project.
• Operator finances, owns and constructs the facility or system and operates it commercially for the project period, after which the facility is transferred to the authority.
• BOT is the typical structure for project finance. As it relates to new build, there is no revenue stream from the outset. Lenders are therefore anxious to ensure that project assets are ring-fenced within the operating project company and that all risks associated with the project are assumed and passed on to the appropriate actor. The operator is also prohibited from carrying out other activities. The operator is therefore usually a special purpose vehicle.
• The revenues are often obtained from a single "offtake purchaser" such as a utility or government, who purchases project output from the project company (this is different from a pure concession where output is sold directly to consumers and end users). In the power sector, this will take the form of a Power Purchase Agreement. For more, see Power Purchase Agreements. There is likely to be a minimum payment that is required to be paid by the offtaker, provided that the operator can demonstrate that the facility can deliver the service (availability payment) as well as a volumetric payment for quantities delivered above that level.
• Project company obtains financing for the project, and procures the design and construction of the works and operates the facility during the concession period.
• Project company is a special purpose vehicle, its shareholders will often include companies with construction and/or operation experience, and with input supply and offtake purchase capabilities. It is also essential to include shareholders with experience in the management of the appropriate type of projects, such as working with diverse and multicultural partners, given the particular risks specific to these aspects of a BOT project. The offtake purchaser/ utility will be anxious to ensure that the key shareholders remain in the project company for a period of time as the project is likely to have been awarded to it on the basis of their expertise and financial stability.
• Project company will co‑ordinate the construction and operation of the project in accordance with the requirements of the concession agreement. The off-taker will want to know the identity of the construction sub-contractor and the operator.
• The project company (and the lenders) in a power project will be anxious to ensure it has a secure affordable source of fuel. It will often enter into a bulk supply agreement for fuel, and the supplier may be the same entity as the power purchaser under the Power Purchase Agreement, namely the state power company. For examples, click on Fuel Supply/Bulk Supply Agreements. Power is also the main operating cost for a water or wastewater treatment plant and so operators will need certainty as to cost and source of power.
• The revenues generated from the operation phase are intended to cover operating costs, maintenance, repayment of debt principal (which represents a significant portion of development and construction costs), financing costs (including interest and fees), and a return for the shareholders of the special purpose company.
• Lenders provide non‑recourse or limited recourse financing and will, therefore, bear any residual risk along with the project company and its shareholders.
• The project company is assuming a lot of risk. It is anxious to ensure that those risks that stay with the grantor are protected. It is common for a project company to require some form of guarantee from the government and/ or, particularly in the case of power projects, commitments from the government which are incorporated into an Implementation Agreements.
• In order to minimize such residual risk (as the lenders will only want, as far as possible, to bear a limited portion of the commercial risk of the project) the lenders will insist on passing the project company risk to the other project participants through contracts, such as a construction contract, an operation and maintenance contract

How It Works

A Concession gives a concessionaire the long term right to use all utility assets conferred on the concessionaire, including responsibility for operations and some investment. Asset ownership remains with the authority and the authority is typically responsible for replacement of larger assets. Assets revert to the authority at the end of the concession period, including assets purchased by the concessionaire. In a concession the concessionaire typically obtains most of its revenues directly from the consumer and so it has a direct relationship with the consumer. A concession covers an entire infrastructure system (so may include the concessionaire taking over existing assets as well as building and operating new assets). The concessionaire will pay a concession fee to the authority which will usually be ring-fenced and put towards asset replacement and expansion. A concession is a specific term in civil law countries. To make it confusing, in common law countries, projects that are more closely described as BOT projects are called concessions [2].

A Build Operate Transfer (BOT) Project is typically 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). In a BOT Project the project company or operator generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers. In common law countries a number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to BOTs [2].

In a Design-Build-Operate (DBO) Project the public sector owns and finances the construction of new assets. The private sector designs, builds and operates the assets to meet certain agreed outputs. The documentation for a DBO is typically simpler than a BOT or Concession as there are no financing documents and will typically consist of a turnkey construction contract plus an operating contract, or a section added to the turnkey contract covering operations. The Operator is taking no or minimal financing risk on the capital and will typically be paid a sum for the design-build of the plant, payable in instalments on completion of construction milestones, and then an operating fee for the operating period. The operator is responsible for the design and the construction as well as operations and so if parts need to be replaced during the operations period prior to its assumed life span the operator is likely to be responsible for replacement [2].

Benefits & Challenges for Cities [3]

Benefits

• Exploring PPPs as a way of introducing private sector technology and innovation in providing better public services through improved operational efficiency
• Incentivizing the private sector to deliver projects on time and within budget
• Imposing budgetary certainty by setting present and the future costs of infrastructure projects over time
• Utilizing PPPs as a way of developing local private sector capabilities through joint ventures with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services
• Using PPPs as a way of gradually exposing state owned enterprises and government to increasing levels of private sector participation (especially foreign) and structuring PPPs in a way so as to ensure transfer of skills leading to national champions that can run their own operations professionally and eventually export their competencies by bidding for projects/ joint ventures
• Creating persification in the economy by making the country more competitive in terms of its facilitating infrastructure base as well as giving a boost to its business and industry associated with infrastructure development (such as construction, equipment, support services)
• Supplementing limited public sector capacities to meet the growing demand for infrastructure development
• Extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenance

Challenges

• Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes - the government should therefore determine whether the greater costs involved are justified. A number of the PPP and implementation units around the world have developed methods for analysing these costs and looking at Value for Money.
• There is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cashflows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.)
• Some projects may be easier to finance than others (if there is proven technology involved and/ or the extent of the private sectors obligations and liability is clearly identifiable), some projects will generate revenue in local currency only (eg water projects) while others (eg ports and airports) will provide currency in dollar or other international currency and so constraints of local finance markets may have less impact
• Some projects may be more politically or socially challenging to introduce and implement than others - particularly if there is an existing public sector workforce that fears being transferred to the private sector, if significant tariff increases are required to make the project viable, if there are significant land or resettlement issues, etc.
• There is no unlimited risk bearing – private firms (and their lenders) will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets. If they bear these risks then their price for the service will reflect this. Private firms will also want to know that the rules of the game are to be respected by government as regards undertakings to increase tariffs/fair regulation, etc. Private sector will also expect a significant level of control over operations if it is to accept significant risks
• Private sector will do what it is paid to do and no more than that – therefore incentives and performance requirements need to be clearly set out in the contract. Focus should be on performance requirements that are out-put based and relatively easy to monitor
• Government responsibility continues – citizens will continue to hold government accountable for quality of utility services. Government will also need to retain sufficient expertise, whether the implementing agency and/ or via a regulatory body, to be able to understand the PPP arrangements, to carry out its own obligations under the PPP agreement and to monitor performance of the private sector and enforce its obligations
• The private sector is likely to have more expertise and after a short time have an advantage in the data relating to the project. It is important to ensure that there are clear and detailed reporting requirements imposed on the private operator to reduce this potential imbalance
• A clear legal and regulatory framework is crucial to achieving a sustainable solution (for more, go to legislation and Regulation)
• Given the long-term nature of these projects and the complexity associated, it is difficult to identify all possible contingencies during project development and events and issues may arise that were not anticipated in the documents or by the parties at the time of the contract. It is more likely than not that the parties will need to renegotiate the contract to accommodate these contingencies. It is also possible that some of the projects may fail or may be terminated prior to the projected term of the project, for a number of reasons including changes in government policy, failure by the private operator or the government to perform their obligations or indeed due to external circumstances such as force majeure. While some of these issues will be able to be addressed in the PPP agreement, it is likely that some of them will need to be managed during the course of the project

Use Cases

Reducing transaction costs through bulk green procurement of electric buses in Santiago, Chile
The Municipality of Santiago embarked on a mission to transform the public transit system. One of its first steps has been to build investor confidence by tackling a high rate of fare evasion, e.g. through better station access control systems. Subsequently, a pilot scheme was launched with an energy company, Enel X to assess the investment viability of electric buses: several e-buses were purchased and then leased to Metbus, one of the city’s largest privately owned public transit operators. Following the success of the pilot, Metbus and Enel X signed a 10-year lease valued at USD 40 million that included a lease for 100 electric buses and charging infrastructure, as well as necessary grid updates in the two electro terminals. At the end of the contract, the assets would be transferred to the lessee (in this case, Metbus). By 2020, a total of 455 electric buses had been procured (this includes e-buses procured by other private bus operators), with the total investment estimated at USD 136.5 million. In March 2021, this figure increased to 776 e-buses, with ambitions to have a fully electric public transportation system in Santiago by 2035 [1].

Overcoming financing barriers for public street lighting through PPPs in Bhubaneswar, Berhampur, Cuttack, Rourkela, and Sambalpur in Odisha State, India

The project was financed through a PPP model under an eight-year agreement, where selected private service providers committed to create a special purpose vehicle (SPV) that would be entitled to a 90% capital subsidy of the project cost (this subsidy ultimately came from the Odisha Infrastructure Development Fund). The remaining 10% would be covered, in the form of equity, by service providers, equivalent to USD 5 million. The project saw the installation of around 40,000 energyefficient streetlights across the five urban areas and improved service provision through a new control center based on remote operation, real time monitoring, and predictive repair. In addition to installing new streetlights, the pilot project aimed to improve the existing infrastructure. The program has subsequently been rolled out to other urban municipalities across India [1].

When to Use It

Use concessions, BOT, or DBO when:

• Projects are large, complex, or capital-intensive – such as transport, water, or energy systems.
• Private expertise and long-term operations are needed – especially where risk can be clearly allocated.
• Public funds are limited but infrastructure needs are urgent – enabling faster delivery with private financing.

References

[1] https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/Improving-Local-Enabling-Conditions-for-Private-Sector-Climate-Investments-in-Cities.pdf (Pp. 15-17, case study 1 & 3)

[2] Concessions Build-Operate-Transfer (BOT) and Design-Build-Operate (DBO) Projects Public Private Partnership

[3] Government Objectives: Benefits and Risks of PPPs Public Private Partnership

[4] https://citiesclimatefinance.org/financial-instruments/instruments/concessions_build-operate-transfer_bot_and_design-build-operate_dbo_projects_

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