Build-operate-transfer (BOT) and similar arrangements are a kind of specialized concession in which a private partner or consortium invests and develops a new infrastructure project or a major component of a government project according to performance standards set by the government.
Under a BOT, the private partner provides the capital required to design, build, and operate the new facility. The private partner owns the assets for a period set by the contract-sufficient to allow the developer time to recover investment costs through user-fee charges. The government partner agrees to subsidize the operations, usually in the form of a purchase guarantee or tax holiday. As most BOTs are greenfield endeavors, this is to assure the private partner of recovering its costs during operation in exchange for undertaking the risks of investing and operating in an untested field. A difficulty emerges if the government partner has overestimated demand and finds itself purchasing output under such an agreement when the demand does not exist. BOTs generally require complicated financing packages to achieve the large financing amounts and long repayment periods required. As such, the government partner should put in safety features that would prevent the emergence of regulatory capture.
At the end of the contract, the government partner takes over ownership of the assets, but can opt to contract the operation to the same private partner or to a new contractor or partner.
BOTs have a project-specific application so they are potentially a good vehicle for a specific investment, but with less impact on overall system performance. However, because the scope of BOTs are usually very expansive, and often only one private partner is negotiated to provide the service, a form of "state-sanctioned" monopoly is put into place. As such, wastage, poor quality, and minimal innovation may result if measures to infuse competition are not pre-set.