Should they BOT or go it alone?

It sounds like a dream. A government needs a new water treatment plant, airport or railway system. The cost of developing the project is potentially huge and then there’s the headache of managing it after construction is complete.

Along comes a big company, usually with a solid track record of achievement, and offers to build the whole thing for you. Not only that, but you receive some kind of financial incentive in return and are given the entire development back at the end of a 25 or 30-year period.

This is more or less the concept behind BOT (build-operate-transfer), an idea that seems to be perfect for Gulf countries. The key development problem the GCC currently faces is not so much funding, which is plentiful in most countries, but the sheer growth in demand for infrastructure.

Even if governments could afford to simultaneously fund the construction of an airport, water treatment plant and power station, would they want the job of managing and overseeing the process? Outsourcing the overhead to an expert in the field seems a perfect solution.

The tricky part of the equation is setting the terms of such deals. For example, should governments be compensated by the BOT operator through a fixed payment, a proportion of project revenues, or both? The details need to be worked out and specified clearly in the contract.

There is also the question of how much management control governments have over a project and how much they can influence key issues such as pricing. Governments in the region have clear workforce nationalisation agendas; private sector operators do not want to be bound by nationalisation quotas that restrict their ability to hire and fire.

Some governments also deliberately subsidise vital services such as power and water. Private sector operators want to provide services to customers at a profit.

Done right, BOT could represent a perfect way for regional governments to overcome infrastructure bottlenecks and deal with the needs of rapidly growing populations. But if the terms of BOT deals are not set out clearly in the contract, they could also become a source of costly legal disputes.

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