BOO agreements are just one of the many ways private and public sectors can work together. Essentially, the private sector takes on the responsibility of building and operating a project while also retaining ownership. The public sector, on the other hand, can make an offer to purchase the project later. In this regard, Karimi & Associates Law Firm can be your consultant to fully secure your interests as a foreign investor in Iran.
Such arrangement can be beneficial for both parties, as it allows for greater efficiency and cost-effectiveness in the long run. However, it is essential to carefully consider the terms of any BOO agreement before entering into one to ensure that it is fair and equitable for all parties involved.
What is a BOO Agreement?
The Build-Own-Operate (BOO) contract is often used for large, complex Public-Private Partnership (PPP) infrastructure projects. In a typical BOO project, a private company finances, builds, and operates infrastructure for a specified period while indefinitely retaining ownership of the infrastructure.
What are the Differences and Similarities between BOO and BOT?
BOO (Build, Own, Operate) and BOT (Build, Operate, Transfer) agreements are commonly used in the construction industry for large projects. One similarity between the two is that a government entity may have the option to purchase or own the completed project. Both agreements provide a framework for constructing and operating major infrastructure and development projects.
But the most significant difference lies in the ownership aspect. Private entities can retain ownership, which can have various implications for the project and its stakeholders. Considering the ownership structure carefully and ensuring all parties understand and agree to the terms is essential.
To access more details on BOT, you can check “BOT in Iran” on our website.
What is PPP?
Public-Private partnerships involve collaboration between a government agency and a private-sector company to finance, build, and operate public projects, such as transportation networks, parks, and convention centers. This type of partnership can accelerate project completion or make it feasible.
BOO’s Implementation Process
1- Defining the project
In the first, the project should be defined and determined. Economic, financial, and technical studies are conducted during the preliminary feasibility stage to determine the project’s requirements and benefits using the BOO method. Expert consultants are required, in this regard, Karimi & Associates Law Firm featuring a team of specialists in various areas of international trade law and contract drafting, is prepared to provide full legal services in this field of law. In case you require legal assistance or consultancy, contact us to enjoy our top-tier services.
2- Negotiation, Agreement and Tender
- Once the project is handed over to the qualified investor and negotiations are completed, a memorandum of understanding (MOU) will be usually signed, leading to the initial contract.
- After defining the project and preparing and publishing the tender documents and the relevant advertisement, the tender will be held, and the winner will be announced.
- Once the agreement is signed, the investors take on various responsibilities to ensure the success of the project company. This includes determining the structure and sharing participation for the project, as well as handling financing agreements, signing contracts with contractors, obtaining commitments, and managing other related matters crucial to the project’s success. By taking these steps, investors can help ensure the project is well-funded, well-managed, and well-positioned to achieve its goals.
- In the final stage of the project, the longest phase will occur: the operation.
Risks of the BOO project
For the Client:
- Failure to fulfill contractual obligations on time by the Contractor,
- Failure to fulfill contractual obligations according to standards by the Contractor,
- Damages, natural disasters, and accidents hinder and delay project implementation,
- The risk caused by the law prohibiting the intervention of government employees,
- Bankruptcy and liquidation risk.
For the Contractor:
- The Client’s delay in obtaining and issuing the necessary permits,
- The Client’s delay in delivering the workplace,
- Natural damages,
- Non-payment of contractual obligations by the Client,
- Insurance of employees and transportation.
How BOO can be used?
The BOO model is well-suited for high-dollar projects with operations that require specialized expertise. It is currently popular in the power and transport sectors.
Notable BOO projects include India’s Kutch and Pipavav Railways, China’s Xiamen Airport Cargo Terminal, Thailand’s Sukhothai Airport, China’s Wuhan Yangluo Container Port, and Indonesia’s Balikapapan Coal Terminal.
In addition, below are some examples of projects that can be operated via BOO agreements:
- Construction of railway lines
- Construction of highways
- Construction of airports
- Petrochemical complexes
- And other massive projects
Development of construction projects by BOO agreements in Iran
Iran has increasingly used BOO agreements to carry out large projects, including implementing multiple power plant projects by the Ministry of Energy. The first of these was the “Pare-sar” combined cycle power plant in Gilan.
According to FIPPA (Foreign Investment Promotion and Protection Act), the legal protection provided by the government allows foreign investors to not only invest in the country but also to ensure the sale of their products.
This can be an excellent opportunity for both the investors and the country’s economy as a whole. The increased trade and investment can lead to job creation, increased productivity, and a boost in the nation’s overall economic growth.
To get more information regarding FIPPA, you can read “FIPPA Protections and Incentives” on our website.
The previous regulations that were in place did not consider or account for new and innovative methods of securing the required credits, such as BOO contracts.
This lack of foresight caused numerous problems concerning developing and renovating the country’s power plant capacities. One of the main reasons behind amending the foreign investment law was to attract more foreign capital, particularly for expensive power plant projects. By doing so, it was hoped that the country could increase its capacity and improve its overall energy infrastructure for the benefit of its citizens.
Although the new regulations provide protection for foreign investors and methods such as BOO agreements, there are some challenges that need to be addressed.
- Principle of 44 of Iran’s Constitution
Based on Principle 44 of Constitution, all large industries and power supply facilities are owned by the government. The government’s ownership of large industries and power supply facilities significantly impacts the private sector’s willingness to participate in Build-Own-Operate (BOO) projects. This is because the private sector may feel hesitant to invest in projects that the government heavily influences, as they may fear that their interests and profits may be compromised.
Additionally, the government’s involvement in BOO projects may lead to a lack of competition and innovation in the market, which could ultimately harm the economy and consumers. Therefore, the government needs to balance its role in the industry and ensure that private sector participation is encouraged and incentivized.
- Banking and Insurance System
The gap between national and international systems in the banking and insurance sectors remains significant despite recent reform efforts. This divide has proven challenging to bridge, and many experts believe that further changes are needed to create a more cohesive and equitable global financial system.
- Investment Risk in Iran
Despite past efforts to increase investment security, the country has not yet achieved a solid global position in this field. This lack of progress is concerning for the economy’s future and its citizens’ financial stability. The government and private sector must work together to find practical solutions to improve investment security and attract more foreign investors. Only then can the country truly compete globally and ensure a prosperous future for all.
Consequently, it is essential to consider BOO agreements.
BOO agreements, or Build-Own-Operate agreements, can help facilitate foreign investment by allowing a company to build and operate a facility in a foreign country while maintaining ownership of the facility.
This approach can provide a level of control and stability for the investing company while also benefiting the host country by creating jobs and contributing to economic growth. Taking advantage of BOO agreements can be a valuable strategy for companies looking to expand their international presence.