BOT contract – What is it, definition and concept | 2022

The BOT contract is a type of agreement by which the development of a project is entrusted. Once the work is finished, the contractor transfers ownership of the assets to the client or contractor, and then collects for the investment made.

That is to say, a BOT contract is a type of contract by which the contracted company is in charge of executing a work, but does not maintain ownership of it, but instead hands over ownership to its client.

The BOT contract name comes from the English words Build, Operate and Transferwhich in Spanish means build, operate and transfer.

This type of contract normally occurs within the framework of a public-private association, where the private party is the contractor and the contracting party, the State.

This is a modality through which public works are developed, but calling on private companies that will contribute their resources, experience, technology, knowledge and equipment. Likewise, the risk is distributed between the private sector and the State.

Through this type of association, large infrastructure works are usually carried out, for example, to provide public services. For these projects, one of the possible contract modalities is the BOT contract, but it is not the only one.

Characteristics of the BOT contract

Some characteristics of the BOT contract that we can highlight are the following:

  • Once the private party transfers ownership of the work to the State, the latter must be in charge of paying off the amount of the debt contracted with the private party (which includes interest such as any loan).
  • The private is not only in charge of executing the project, but also designs it. That is why we say that he contributes his knowledge and experience.
  • It is a common type of contract in the electricity sector, although it can also be used in other areas such as water and sanitation.
  • The private company develops the work, initially assuming the risk, and then whoever operates it (it may be the Government) charges for the use or exploitation of said project.
  • Due to the risk assumed, the private sector usually asks for some guarantees from the Government.
  • The main difference with other types of contract is that the private contract does not maintain ownership of the project. For example, in the BOO contract (build, own, operate), the private sector does retain ownership of the work and the State acts as regulator.
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Example

An example of a BOT contract could be when the Government, through the ministry or portfolio of energy, seeks to develop a new hydroelectric plant. So, it makes a call to the private sector to choose a company that can carry out the work.

Once a company is chosen, it wins the award. The firm has presented a project with a design and an estimated execution time of the investment. Thus, if a BOT contract is signed, once the plant is finished, for example, in five years, the company will transfer all the assets to the State.

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