Build-operate-transfer (BOT) contracts (and the variants such as DBOT, BoTT) are generally designed to bring private capital into the construction of new treatment plants or equipment. Typically, under a BOT, the private firm finances, builds and operates a new plant or network for a set period of time according to performance standards set by the government. The operations period is long enough to allow the private company to pay off the construction costs and realise a profit - typically 10 to 20 years. The government retains ownership of the infrastructure facilities and becomes both the customer and the regulator of the service.
Under BOTs, the private sector provides the capital to build the new facilities. In return, the government agrees to purchase a minimum level of output over time, regardless of the demand from the ultimate consumers. Having the government bear the commercial risk is what distinguishes BOTs from concessions. The purpose is to help ensure that the private operator can recover its costs over the contract period. This requires the government to estimate demand with some accuracy at the time the contract is set. Otherwise, it will have to pay for services that are not being used, even if demand is less than expected. The scale and timeframes associated with BOTs require the development of sophisticated and often complicated financing packages. Frequently, these involve substantial infusions of money directly from the private project developers (in the range of 10 to 30 per cent), combined with money from third parties, usually international commercial banks. The possibility of using bonds to tap the international capital markets is also attracting increasing interest.
BOTs tend to work well for new facilities that require substantial financing. Governments generally issue BOT contracts for the construction of specific infrastructure facilities, such as bulk supply reservoirs and drinking water or wastewater treatment plants (see, for instance, the water treatment project in Izmit, Turkey, described in Box 8.10). While BOTs typically involve the construction and operation of just one facility and not entire delivery systems, the variations among BOT type contracts are extensive and in South Africa the BoTT (build-operate-train-transfer) contract is the primary vehicle adopted by the government of South Africa to rapidly improve water and sanitation services in underserviced rural and peri-urban areas of the country. One of the operators (a subsidiary of Northumbrian-Lyonnaise), stresses that the consortium arrangement developed for the projects (serving 2.2 million people) is a promising entry strategy for Lyonnaise-Ondeo in an otherwise high-risk investment environment.