Build, Operate & Transfer (BOT)

“ BOT” stands for “Build, Operate and Transfer, a phrase originally attributed to Turgat Ozal, Prime Minister of Turkey in the 1980s. A BOT project involves a grantor providing a private company with a concession to build and operate a project. The private company builds and then operates the project for the term of the concession (the “concession period”), receiving revenues in exchange for operation of the project.  The revenues are typically obtained from a single offtake purchaser, who purchases project output from the project company (this is different from a pure concession where output is sold directly to consumers and end users).

In a typical BOT project the public sector grantor grants a concession to a private company to develop and operate what would traditionally be a public sector project.  This private company, or project company, obtains financing for the project, and procures the design and construction of the works and operates the facility during the concession period. Thus the project company must have or obtain access to, resources sufficient to satisfy these obligations.

Project company shareholders will often include companies with construction and/or operation experience, and with input supply and offtake purchase capabilities.  It is also essential to include shareholders with experience in the management of the appropriate type of projects, such as working with diverse and multicultural partners, given the particular risks specific to these aspects of a BOT project.  The project company will then co-ordinate the construction and operation of the project in accordance with the requirements of the concession agreement.
The operation of the facility will then generate revenues from an offtake purchaser who compensates the project company for delivery of the project output or provision of the project service.  The revenues generated from the operation phase are intended to cover operating costs, maintenance, repayment of debt principal (which represents a significant portion of development and construction costs), financing costs (including interest and fees), and a return for the shareholders.

The financiers will be providing non recourse or limited recourse financing and will, therefore, bear any residual risk along with the project company and its shareholders.  In order to minimize such residual risk (as the financiers will only want, as far as possible, to bear a limited portion of the commercial risk of the project) the financiers will insist on passing the project company risk to the other project participants.

The chart below shows the contractual structure of a typical BOT project.

Each project will involve some variation of this contractual structure depending on its particular requirements. For example, not all BOT projects will require a guaranteed supply of input, therefore an input supply agreement may not be necessary. Similarly, the payment stream may not be guaranteed by an offtake purchaser, but rather by the grantor through the concession agreement, or possibly the project company may bear the market risk of offtake demand.  The structure demonstrated above should therefore be considered as a template to be adapted to the needs of each particular project.  Other derivate forms of this model include PPP (Public, Private Partnership and BOOT (Build, Own, Operate and Transfer).