Option Game Model for Optimizing Concession Length and Public Subsidies of Public–Private Partnerships

Abstract

As public–private partnership (PPP) to address a significant funding shortage for transportation gains momentum in the United States, public agencies are also under pressure to demonstrate value for money and to deliver more for less on PPP deals. One critical challenge is how to optimize the concession length and amount of public subsidies so that a successful partnership can be established without undue sacrifice of the public interest. This paper presents an option game model for optimizing the concession length and public subsidy on a PPP project. The model integrates the flexibility of project expansion into the life-cycle analysis of project value, in addition to considering key factors, including subsidies, toll rate, and traffic uncertainty. The First Coast Outer Beltway project is used as an example to illustrate the process and merit of the option game model. In particular, by analyzing the trade-off between concession length and public subsidy, the paper provides new insights and implications for better PPP deal design.