PPP Models: BOT, DBFOM and Concessions

What is PPP?

Public-Private Partnership (PPP / ГЧП) — a long-term (15–30 years) agreement between a government entity and the private sector, under which the private party finances, builds and/or operates infrastructure assets or provides services traditionally within the domain of government.

Key difference from traditional government procurement: In a traditional government contract, the government borrows funds, builds the object itself, and then operates it. With PPP, the private party takes on the risk of financing, construction and/or operation — in exchange for revenues (from users or from the government).

Classic PPP Models

BOT (Build-Operate-Transfer)

Mechanism:

1. The government issues a concession to a private SPV (Special Purpose Vehicle)
2. The SPV finances, designs, and builds the asset
3. The SPV operates the asset during the concession period (20–30 years), receiving revenues
4. At the end of the period, the asset is transferred to the government

Where applied: Toll roads, bridges, tunnels, ports, airports, power plants.

BOT Examples:

• Channel Tunnel (Eurotunnel, 1994): 55-year concession for the construction and operation of the Channel Tunnel. Private financing ~£9.5 billion
• Rion-Antirion Bridge (Greece, 2004): 42-year concession. Designed in 1990 without precedents
• Istanbul Airport: 25-year IGA concession

DBFOM (Design-Build-Finance-Operate-Maintain)

The most comprehensive form of PPP, including all key functions at the private partner:

• Design: Design and engineering
• Build: Construction
• Finance: Raising and servicing debt
• Operate: Operational activity
• Maintain: Technical maintenance

Logic: The government pays for the availability of the service (availability payment), not for construction. The private partner bears the availability risk (if it fails to ensure availability, its income decreases).

Typical for: Hospitals, schools, prisons, administrative buildings (UK PFI/PF2 model).

Concession Agreements (Concession)

A broad concept, encompassing the right for a private company to provide a service or use a government asset.

Types:

• Revenue concession: The concessionaire receives revenues from users (toll roads)
• Availability-based concession: The concessionaire receives fixed payments from the government for ensuring asset availability
• Mixed model: Combination of both

Water supply (Manila, 1997): The government split Manila's water supply system into 2 concessions (Maynilad and Manila Water). Private operators undertook obligations to expand network coverage and reduce water losses.

BOOT (Build-Own-Operate-Transfer)

Difference from BOT: the private company formally owns the asset during the concession period, not just operates it. This may be important for taxation and depreciation.

Typical PPP Project Structure

SPV (Special Purpose Vehicle):

• Legally independent company, established specifically for the project
• Isolates project risks from the sponsors
• Holds the concession and assets

SPV Financing:

• Equity: Sponsor contribution (10–30% of project size)
• Senior Debt: Bank loans or project bonds (60–80%)
• Mezzanine: Subordinated debt (0–15%)

Project financing (non-recourse): The lender seeks recourse only to the SPV's assets, not to the sponsors. Requires careful structuring of cash flows.

Key Contracts in PPP Structure

• Concession Agreement: Between the government and SPV — the main contract defining rights and obligations
• Construction Contract (EPC): SPV → construction contractor (Engineering, Procurement, Construction)
• Operations & Maintenance Contract: SPV → operator (O&M)
• Financing Agreements: SPV ← lending banks
• Direct Agreement: Lending banks ↔ government (step-in rights: lenders can take over management in the event of default)