Build-Operate-Transfer Contract

What Is a Build-Operate-Transfer (BOT) Contract?

A build-operate-transfer (BOT) contract is a model used to finance large projects, typically infrastructure projects developed through public-private partnerships.

The BOT scheme refers to the initial concession by a public entity such as a local government to a private firm to both build and operate the project in question. After a set time frame, typically two or three decades, control over the project is returned to the public entity.

How Build-Operate-Transfer Contracts Work

Under a build-operate-transfer (BOT) contract, an entity — usually a government — grants a concession to a private company to finance, build and operate a project. The company operates the project for a period of time (perhaps 20 or 30 years) with the goal of recouping its investment, then transfers control of the project to the government.

BOT projects are normally large-scale, greenfield infrastructure projects that would otherwise be financed, built and operated solely by the government. Examples include a highway in Pakistan, a wastewater treatment facility in China and a power plant in the Philippines.

In general, BOT contractors are special-purpose companies formed specifically for a given project. During the project period — when the contractor is operating the project it has built — revenues usually come from a single source, an offtake purchaser. This may be a government or state-owned enterprise.

Power purchase agreements, in which a government utility acts as offtaker and purchases electricity from a privately owned plant, are an example of this arrangement. Under a traditional concession, the company would sell to directly to consumers without a government intermediary. BOT agreements often stipulate minimum prices the offtaker must pay.

Variations on the BOT

A number of variations on the basic BOT model exist. Under build-own-operate-transfer (BOOT) contracts, the contractor owns the project during the project period. Under build-lease-transfer (BLT) contracts, the government leases the project form the contractor during the project period and takes charge of the operation. Other variations have the contractor design as well as build the project. One example is a design-build-operate-transfer (DBOT) contract.