The effect of concession period design on completion risk management of BOT projects

Abstract

The design of concession period for build–operate–transfer (BOT) projects is crucial to financial viability and completion risk management. A systematic analysis shows that concession period design involves the design of concession period structure, the determination of the concession period length and incentive schemes. The concession period may have a single‐period structure or a two‐period structure, its length may be fixed or variable, and it may be combined with incentive schemes. Different designs reflect different risk control strategies for completion time overruns. The single‐period concession structure requires the project company to assume completion risk, while the two‐period concession structure could, to some extent, reduce the completion risk exposure to the project company, depending on the incentive schemes. Through Monte Carlo simulation, this paper evaluates the mean net present value (NPV), variance and NPV‐at‐risk of different concession period structures so that both the government and the concessionaires can understand their risk exposure and rewards. The paper then analyses the influence of project characteristics on concession period design to evaluate the feasibility of the design. It is concluded that a well‐designed concession period structure can create a ‘win–win’ solution for both project promoter and the host government.