BOT finds extensive application in infrastructure projects and in public–private partnership. In the BOT framework a third party, for example the public administration, delegates to a private sector entity to design and build infrastructure and to operate and maintain these facilities for a certain period. During this period the private party has the responsibility to raise the finance for the project and is entitled to retain all revenues generated by the project and is the owner of the regarded facilities. The facility will be then transferred to the public administration at the end of the concession agreement, without any remuneration of the private entity involved. Some or even all of the following different parties could be involved in any BOT project:
The host government: Normally, the government is the initiator of the infrastructure project and decides if the BOT model is appropriate to meet its needs. In addition, the political and economic circumstances are main factors for this decision. The government provides normally support for the project in some form.
The concessionaire: The project sponsors who act as concessionaire create a special purpose entity which is capitalised through their financial contributions.
Lending banks: Most BOT projects are funded to a big extent by commercial debt. The bank will be expected to finance the project on "non-recourse" basis meaning that it has recourse to the special purpose entity and all its assets for the repayment of the debt.
Other lenders: The special purpose entity might have other lenders such as national or regional development banks.
Parties to the project contracts: Because the special purpose entity has only limited workforce, it will subcontract a third party to perform its obligations under the concession agreement. Additionally, it has to assure that it has adequate supply contracts in place for the supply of raw materials and other resources necessary for the project.
A BOT project is typically used to develop a discrete asset rather than a whole network and is generally entirely new or greenfield in nature. In a BOT project the project company or operator generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers. A number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to BOTs. In general, a project is financially viable for the private entity if the revenues generated by the project cover its cost and provide sufficient return on investment. On the other hand, the viability of the project for the host government depends on its efficiency in comparison with the economics of financing the project with public funds. Even if the host government could borrow money on better conditions than a private company could, other factors could offset this particular advantage. For example, the expertise and efficiency that the private entity is expected to bring as well as the risk transfer. Therefore, the private entity bears a substantial part of the risk. These are some types of the most common risks involved:
Political risk: especially in the developing countries because of the possibility of dramatic overnight political change.
Technical risk: construction difficulties, for example unforeseen soil conditions, breakdown of equipment
Modified versions of the BOT model exist to better suit different types of public-private partnership projects and needs.
Economic theory
In contract theory, several authors have studied the pros and cons of bundling the building and operating stages of infrastructure projects. In particular, Oliver Hart has used the incomplete contracting approach in order to investigate whether incentives to make non-contractible investments are smaller or larger when the different stages of the project are combined under one private contractor. Hart argues that under bundling incentives to make cost-reducing investments are larger than under unbundling. However, sometimes the incentives to make cost-reducing investments may be excessive because they lead to overly large reductions of quality, so it depends on the details of the project whether bundling or unbundling is optimal. Hart's work has been extended in many directions. For example, Bennett and Iossa and Martimort and Pouyet investigate the interaction of bundling and ownership rights, while Hoppe and Schmitz explore the implications of bundling for making innovations.
