Definition
BOT is the acronym of Build-Own-Transfer or Build-Operate-Transfer.
BOT is a business term which defines a specific three stages contract for greenfield projects.
Comments
Usually an end user willing to build a new plant from greenfield goes along the investment decision process until the final investment decision (FID).
Assuming that the project is profitable and meets all the requirements of the end user, this FID is also depending on the financing decision.
The project financing may be provided by loans and cash with the support of external lenders.
All these loans and cash represent the capital expenditure (CAPEX) to be invested in the project.
Then, once in operation, the end user must plan resources in money, called operations expenditure (OPEX), and staff to run the plant.
All together the CAPEX and the OPEX will define the cash-flow, in and out, of the project during its construction phase, then in operations during all the reference period, usually more than 20 years of the project.
Then the end user will consolidate the cash-flow of this particular project with the cash-flow resulting from the:
– Actual plants in operations
– Decided projects already under execution
– Other projects still to be decided
– Financing market
If the cash-flow of that particular project synchronizes well over the years, and assuming that all the projects have similar return on capital employed (ROCE), the end user may make its FID as the operator and owner of the project.
If that synchronization shows peaks at certain periods of time in the cash-flow of the end user along the years to come, he usually postpones it to match.
But in some cases, the end user may not be willing to postpone it for whatever reasons, and therefore he may investigate alternative solutions.
The BOT is one of them as the end user transfers to a third party all the costs, CAPEX and OPEX, for the engineering, procurement and construction (EPC) and operation of the greenfield facility.
B for Build
All the third parties companies willing to bid for a BOT project shall take care of the design, engineering and construction of the plant based on the end user requirements.
By comparison with a usual project where the end users imposes its qualified vendors lists and detailed technical requirements to be used for the project execution, in the case of a BOT project, the end user is limiting his requirements to the performances and functionality of the plant.
All the detailed requirements and vendors lists will be left to the third party.
In addition the BOT contract will include a precisely defined period of construction, since the end user shall expect the production to start at a contractual date.
This contractual date exists also in classical engineering, procurement and construction (EPC) contracts, but in the case of a BOT contract the penalties are based on the value of the production instead of the value of the project.
O for Own or Operate
Once the new facility has been built and is ready to run into operations, all the employees and operating costs (OPEX) are also left to the third party.
It means that the third party shall have the know-how beyond engineering and construction to operate in a safe and profitable manner the new plant.
During the qualification process, the third parties bidding shall provide evidence of their capabilities to meet local good practices and regulations.
In compensation the end user will pay fees to the operating third party.
These fees may be calculated on the volume of production and a fixed amount to be payed periodically regardless of the volume of production.
This new facility will therefore have only one customer, the end user.
These fees are covered by a leasing contract between the end user and the third party.
This leasing contract is a long term contract defined according to the expected first life cycle of the plant, 15 to 30 years in the oil and gas and petrochemical industry.
T for Transfer
The BOT as the other leasing contracts means that the end user and the third party have agreed from day one of the contract to transfer the facility from the third party to the end user at the end of the leasing period.
The amount of this transfer or at least the calculation mode of the amount is also predefined in the BOT contract from day one.
In using a BOT contract an end user can erase the peaks of cash-flow related to a greenfield project from its balance sheet, replacing debts and CAPEX by costs and OPEX.
Assuming that the most strategic projects are supposed to provide the best ROCE, the BOT contract will be used for secondary projects, but anyway necessary to build at inconvenient period of time.
In compensation the end user accepts to leave to the third party a part of his decision regarding all the detailed of the requirements.
Since the third party must be able to design, construct and operate, for the count of the end user, this broad range of capabilities may limit the number of potential bidders.
Thus the BOT contracts will be used mostly for greenfield projects easy to build, easy to operate and profitable to transfer for both parties.
The end user will make the decision to go for BOT contract before the the FID.
