This article will discuss BOT Agreements as a type of PPP (Public-Private Partnership) mechanism in Iran. As an investor who intends to start investing in Iran, there are various methods to choose from, according to your goals, demands, and circumstances. The matter of foreign investment, as a risky matter, requires professional legal services and consultancy. In this regard, you can contact Karimi & Associates Law Firm through the Contact Us section, enjoy top-tier legal services and secure your investment and capital in Iran.
Public-Private Partnership in Iran
Attracting investments and capital, which will lead to economic growth, has become one of the main goals of most developing countries to compensate for the underdevelopment in different fields, including economic, social, cultural, etc.
On the other hand, developed and industrialized countries and large-scale or multinational companies also tend to bring their capital into developing countries to enjoy a vast new market, human resources, and tax incentives.
Public-Private Partnership mechanism (PPP) is one of the most crucial tools to enhance a country’s general economic, financial, technological, and manufacturing conditions. Since the Public Sector is typically based on traditional ground rules and structures, the participation of the Private Sector in projects and services of the Public Sector could be of considerable assistance.
As mentioned above, Public-Private Partnership (PPP) acts as a vital tool in enhancing different aspects of a country’s development, consisting of various legal mechanisms and agreements, including BOT Agreements.
What is a BOT Agreement?
BOT or Build-Operate-Transfer Agreement is the most prevalent and common type of Public-Private Partnership. In this method, a developing country’s government, as the recipient of foreign investment, provides a Concession to a private entity or consortium (an association of several domestic or foreign companies) the development of a public project. The consortium might be consisted of foreign companies, and in many cases, the private entity constructing the Public Sector’s projects is a foreign company.
After the construction is accomplished, the consortium will develop, operate, and maintain the infrastructure facility for a predetermined amount of time, to reimburse its construction costs and make profits from the project’s operation. Afterwards, the consortium, which has fully recovered the expenses and gained profits, will transfer the project to the government and the BOT agreement will come to an end.
Usages of BOT Model
The construction of infrastructure projects is the most important utilization of BOT contracts. Some points including the significant monetary benefits of the project and the high efficiency can act as factors, encouraging the investors to get started and keep up the implementation of such contracts. Here are some projects that might utilize BOT contracts:
- Construction and development of highways, airports, railway lines, etc.
- Construction of power plants
- Construction of dams and quays
- Petrochemical complexes and petroleum processing facilities
BOT Agreements’ Mechanism
This agreement will be carried out in 3 phases:
- In the first phase, a private entity or consortium undertakes to build an enormous, costly project, to lead it to the stage of construction and then, operation, by using and bringing its existing financial capacities and potentials, to the recipient country.
- The second phase is mainly operating the project by the investor. At this stage, the private entity or consortium will operate the project for the predetermined period, which is often 20 or 30 years, and within all this time, the consortium will be entitled to enjoy all the profits and privileges gained from the project’s operation, to reimburse its costs and expenses during the construction or first phase, and also receive the negotiated profit from the project.
- The third and final phase is fully transferring the project to the government or Public Sector. After the expiration of the operation phase, where the investor company or consortium has accomplishedly obtained the agreed profits, all the intellectual and material rights of the project will be absolutely transferred to the government, without imposing any costs on the government.
Advantages & Disadvantages of BOT Agreements
In this part we point out several significant pros and cons of BOT model, as below:
- BOT Agreements will decrease and even minimize the Public Sector’s costs for developing the infrastructures.
- By concluding such agreements with foreign companies or consortiums, new technologies, knowledges, and resources, along with professional experts working and monitoring the project.
- As the BOT model is a long-term partnership between public and private sector, it will lead to sustainability and will reduce the risks and operational and infrastructure costs for both sides.
- Under such agreements, communication and collaboration will be facilitated and the project’s efficiency will be quite higher.
FIPPA (Foreign Investment Promotion and Protection Act)
You may have heard about FIPPA or Foreign Investment Promotion and Protection Act, ratified by the Iranian parliament, to increase the amount of foreign direct and indirect investments, by proposing the foreign investors many incentives and benefits.
One of the most crucial aspects of this Act is in regard with BOT Agreements, and it is evident that investing in Iran respecting the FIPPA and through possible mechanisms, including BOT model, will cherish the investors by granting them tax exemptions, work and residence permit, protection against Nationalization, etc.
To access more details on the FIPPA, you can check “FIPPA Protections and Incentives” on our website.
Disadvantages and Risks of BOT Model
It is crucial to evaluate the potential risks and obstacles that may lie ahead in the process of BOT contracts. Additionally, foreign investors demand a guarantee for their investment’s return, which is one the most challenging issues. Experts and legal advisers from both Public and Private Sectors attempt to analyze all potential risks and challenges in order to reduce them or anticipate an ideal solution, if any.
Among the most important risks of BOT contracts, the following can be mentioned:
- Tax risks, export, and import restrictions, or a failure to provide the required permissions.
- Modification of laws and regulations
- Change of government and revolution in the recipient country
- Exchange rate and inflation risks
- Risks related to the construction, operation, and transfer processes, including the difficulty of obtaining permits and approval; potential interruptions in the work; and risks and changes connected with supply and demand.
It is vital to apply maximum diligence and caution while concluding BOT contracts due to the high importance of such agreements as well as the risks that the parties may encounter at each step of these contracts. One of the most efficient and reliable methods to conclude a comprehensive BOT agreement with the fewest risks is to consult with legal experts and attorneys, professional in the field of drafting and concluding BOT Agreements.
Karimi & Associates Law Firm, featuring a team of specialists in several 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.