Determining concession periods and minimum revenue guarantees in public-private-partnership agreements

Abstract

Public–private partnership (PPP) schemes show strong capability in delivering infrastructure projects. One challenge in designing PPP contracts is optimising the length of the concession period and level of the minimum revenue guarantee (MRG) to satisfy both public and private parties’ interests. Existing research excludes interaction between the concession period and MRG, but a method that can determine their values simultaneously is needed. This study fills the research gap by proposing a synthetic measure to determine the values of the concession period and MRG. An imperfect information bargaining model is created to find the equilibrium return rate on investment. To achieve the equilibrium of the bargaining game, the required length of the concession period and level of the MRG are calculated based on Monte Carlo simulation and real option analysis. Project QJ is created as a numerical example to verify the applicability of the proposed method. The outcome shows the proposed determination process identifies the optimal length of the concession period and level of the MRG. The length of the concession period is inversely proportional to the level of the MRG and this correlation is influenced by the probability of achieving the equilibrium return rate on investment. When this probability equals 70%, an MRG is not required once the concession period exceeds 24 years. The results also show the concession period decision range is sensitive to change in the concession price.