‘Build-Transfer-Operate(BTO)', one variation of project financing, has been widely used to finance the infrastructure projects. To induce private participation in the infrastructure projects with low (or even negative) rate of returns, BTO arrangements were supplemented with ‘minimum rate of return guarantee' by the government. This ‘BTO with minimum rate of return guarantee' caused much economic inefficiencies-overestimation of the demands and resulting waste of tax money-due to the perverse incentives inherent in the arrangements. This paper analyzes the BTO arrangement using simple economic models and suggests some measures to mitigates the inefficiencies.