**Plc,Research, and External Affairs**

**If rastructure**

# WPS 498

- This paper commissioned by the Bank's Legal Department and co-sponsored by the Technical Department, Europe, Middle East, and North Africa Regional Office and by the Infrastructure and Urban Development - Department is part of a larger effort in the World Bank to review different techniques of privatization of traditional public sector activities, examine how they have been applied in practice, and evaluate their strengths, their shortcomings, and thc conditions for their successful application in World Bank member countries. Copies are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Dolie Schein, room F4-026, cxtension 70291 (51 pages, plus 46 pages of annexes).

Augenblick and Custer review the BOT (build, operate, and transfer) approach to building and financing such infrastructure projects as power plants, toll roads, port facilitics, transmission lines, and water supply systems in developing countries.

- In BOT projects, privatc-sector sponsors usually international construction contractors, heavy equipment suppliers, and plant and system operators, - often together with local partners make equity investments (typically 10-30 percent of the total project cost) in a private project company that will _build_ the project, _operate_ it long enough to pay back the project debt and equity investment, and then _transfer_ it to the host governmcnL

The project company raises debt financing (typically 70-90 percent of project costs) from commercial sources, usually backed by export credit guarantee agencies and by bilateral and multilateral Icnders. Substantial support from host governments is required.

The BOT approach was developed in the late 1970s in response to constrained developing country budgets and a downtum in work available for international construction firms. Construction firms may no longer be as interested in promoting BOT projects as they were earlier. Many BOT projects have been proposed, but few have procecded to financial closure, lct alone full implementation, in developing countries.

The BOT formula for infrastructure projects is by no means a panacea, concludc Augenblick and Custer. BOT projects are exceedingly complex, financially and legally. If countries can implement the same project in a more traditional way - with sovereign borrowings financing a turnkey construction contractthe time saved and the grcater certainty of the project going forward may warrant the more traditional approach.

- But if a country is unable or for budgetary or policy reasons prefers not - to finance all needed infrastructurc from budget resources or sovereign borrowings, the BOT approach is one option. And in the right context it appears to be workable.

Moreover, BOT projects should become easier to negotiate and implement as their basic structure is better understood and as standard solutions to common issues becomc more accepted by host governments and in the marketplace.

A BOT project may provide some "additionality" in tapping sources of private financing that otherwise might be unavailable. The sponsors' commitment of substantial equity to a project assures that they will remain committed to the project's successful operaLion over the concession period. Their "at-risk" investment provides a strong incentive to have **the** project perform above its minimum expectations. If the project is properly structured, the benefits of such enhanced performance will bc shared with the host govemment. Having the design, implementation, and operation of a BOT project largely in the private sector's hands may provide economies and efficiencies that balance or even outweigh the higher financing costs of nonsovereign borrowing and equity investment.

But a host government that wants to promote BOT projects must understand and be willing to accept the complexity and time-consuming nature of the process, the extensive host government support that must be provided, and the rates of return that commercial lenders and private equity investors will expect.

The PRE Working Paper Scrics disseminates the findings of work undcr wav in the Bank's Policy, Rcscarch, and Extemal AffairsComplcx. An objective of the series is to get these findings outquickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in thcsc papers do not necessarily represent ofticial Bank policy.

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