Alternative Model for Determining the Optimal Concession Period in Managing BOT Transportation Projects

Abstract

The concession period is one of the most crucial variables influencing the success of a transportation project under the build-operate-transfer (BOT) procurement model. Since BOT transportation projects are characterized by irreversibility and uncertainty, project values tend to be underestimated by ignoring the value of the option to defer in the evaluation process, and thereby a long concession period is required by the concessionaire and a high subsidy is invariably paid by the government concerned when a project is financially nonviable. However, the existing net present value (NPV) method for making a concession period decision cannot properly capture the managerial flexibility value in BOT projects. In addition, the existing Nash bargaining model used in the concession period negotiation process cannot define an optimal concession period but can only narrow the interval of the concession period. This paper presents an alternative method for determining the optimal concession period by considering the investment in BOT-type transportation projects under dynamic uncertainty. In the proposed model, real options theory is used to identify an effective interval of concession period for a BOT transportation project, and Nash negotiation theory is applied to find the optimal value of the concession period. An actual transportation project in China is referred to as demonstrating the effectiveness of the proposed model.