Subscriber Benefit
As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe Now
The Build-Operate-Transfer statute (Indiana Code 5-23) offers governmental entities a framework for constructing infrastructure through partnerships with private developers.
Recently, Build-Operate-Transfer projects, or BOTs, have gained traction among Indiana’s state and local governments for building fire stations, parks, student housing, and other public facilities.
While the statute offers great flexibility in public-private investment, the absence of legal guidelines gives it the stability of a rubber band: pliable to a point, but risky if you pull too far.
For these reasons, a well-defined request for proposals is the cornerstone of a BOT project designed to withstand scrutiny and deliver transformative, community-driven results. Poorly drafted RFPs and agreements, coupled with insufficient oversight, undermine accountability and erode trust.
Whereas effective RFPs strengthen transparency, competition, and compliance throughout the project’s lifecycle.
Under a BOT, the government partners with a developer (the “Operator”) to plan, finance, design, construct, operate or maintain a public facility.
Operators may provide a range of services, including development and financing, design and construction, and operations and maintenance services. Unlike other procurement methods contemplated in the Indiana Code (i.e., IC 5-23, IC 5-30, and IC 5-16), the BOT statute allows public entities to offload risks associated with development, financing, operations, and maintenance of public facilities onto the operator.
This approach, while having the potential to lessen the public entity’s immediate financial burdens, may increase second order risks and overall costs.
The primary concern is hidden costs. BOT agreements often include expenses like developer fees, legal fees, allowances, contingencies, and markups. If provisions are not clearly outlined in the BOT documents, taxpayers may miss out on potential cost savings during the facility’s construction.
Additionally, legal ambiguity poses a considerable challenge in today’s environment, where entities increasingly use the BOT model as a construction delivery method akin to CMc or Design-Build.
Indiana’s BOT statute can be characterized by its lack of clarity—especially concerning the operators’ obligation to adhere to public procurement requirements— creating challenges for the political subdivision’s governance and compliance efforts.
Lastly, the potential loss of control over design services may result in facilities that do not meet the subdivision’s needs. While public entities prioritize access and service, private developers emphasize financial returns. A focus on privatization and profitability can conflict with public interests.
Despite its risks, the BOT model offers valuable advantages. Private financing is recognized as a core benefit of public-private partnerships worldwide. Operators are motivated to create efficient, high-quality facilities that generate revenue, leading to innovative, cost-effective solutions. This approach promotes operational efficiency and enhances the facility’s long-term value. Unfortunately, Indiana’s BOT statute procedurally limits original operational terms, which can restrict the advantages of long-term maintenance and operational continuity.
To maximize the benefits of a BOT arrangement and minimize its risks, significant elements of BOT projects must be carefully defined.
The RFP must specify services, pricing, and accountability measures to ensure transparency and facilitate collaboration. Offerors must be required to break down their costs for services and their fees for design and construction oversight, so agents can evaluate responses and manage public expenses objectively.
Professional development services: The RFP should detail, and request fees for, the development services required from the private partner, such as master planning, project feasibility, financial modeling, legal advisory, site analysis, and securing financial commitments, among other aspects of the project’s concept, definition, and planning stages.
Financing services: Financing terms should be clarified upfront on whether the project is funded through private lending, government financing (e.g., government securities or tax increment financing), or a mix of both. When funding sources are still being decided, the RFP should nevertheless request lending costs to enable a competitive review of financial closing fees, equity returns, and debt service rates. Adherence to public procurement standards is essential for transparency if public financing is used.
Design and construction services: Design requirements should be carefully programmed, including a comprehensive document specifying project programming and functional requirements to ensure the facility aligns with community goals.
Operational services: Operational requirements for public services can vary widely and must be customized for each project. The RFP should outline performance criteria, establish regular review processes, and provide enforcement mechanisms safeguarding the public interest. This approach provides a clear framework for assessing the operator’s performance and enables practical enforcement standards.
Maintenance services: A maintenance service must not be conflated with the construction warranty period. If anticipated, the RFP should clarify facility maintenance requirements and request management fees. Public entities could specify a monthly maintenance fee, placing risk on the operator, or an administrative markup over accrued costs with obligations for transparent accounting. The governmental entity should require the operator to deliver a facility assessment program to ensure that the facility remains in good condition, extending its lifespan and preserving the public investment beyond the transfer of the building.
BOT’s success balances private sector expertise with public sector accountability. In the RFP, public officials should set forth clear guidelines, service expectations, and transparent fee structures
Developing a robust RFP under the BOT statute requires strategic planning to address potential risks, such as hidden costs, legal ambiguities, design control limitations, and operational challenges.
When adequately executed, BOT projects deliver high-quality, efficiently managed facilities that serve the public, safeguard its interests, and align with community needs.•
__________
Nelson S. Frech is recent graduate of the Indiana University McKinney School of Law and senior project manager at Skender construction company. Opinions expressed are those of the author.
Please enable JavaScript to view this content.