What is Build-Operate-Transfer Contract?

Definition

A Build-Operate-Transfer (BOT) contract is a model used to finance large projects, typically infrastructure projects developed through public-private partnerships. It involves a private company building and operating a project for a certain period before transferring it to a public entity.

Origin

The BOT model originated in the 1980s, initially used in developing countries for infrastructure project financing. With globalization, this model has been adopted by governments worldwide to promote public infrastructure development.

Categories and Features

BOT contracts are typically categorized into several types, including pure BOT, BOOT (Build-Own-Operate-Transfer), and BTO (Build-Transfer-Operate). In a pure BOT model, the private company transfers the project entirely to the public entity at the end of the contract period. The BOOT model allows the private company to own the project assets during the contract period, while the BTO model transfers ownership immediately after construction, but the private company continues to operate it.

Case Studies

A typical BOT case is the Hong Kong Chek Lap Kok Airport project. This project was built and operated by a private consortium and transferred to the Hong Kong government upon contract completion. Another example is Istanbul's Third Airport in Turkey, developed through the BOT model, where the private company is responsible for construction and operation, eventually transferring it to the government.

Common Issues

Common issues investors might face when applying BOT contracts include project risk management, the complexity of contract terms, and uncertainty in long-term investment returns. A common misconception is that BOT projects are entirely controlled by private companies, whereas public entities still play a significant role in the contract.