Using bargaining-game model to negotiate compensation for the early termination of BOT highway projects

Abstract

Build-operate-transfer (BOT) highway projects are widespread around the world. However, many BOT highway projects are terminated before the expiry of the concession period for a variety of reasons, such as unreasonable decisions and a lack of a risk allocation mechanism. As the most concerning issue for the government and private sector, compensation for early termination has been a major controversy due to the lack of a fair and reasonable decision approach. This paper proposes an effective method to evaluate the compensation amount for projects with incomplete contracts using game theory. First, a bargaining-game model with complete information is constructed to analyse the process of negotiation, for which the influences of the government investing in a new road and the traffic demand changes of the early terminated project on bargaining are taken into consideration. Then, the Nash equilibrium solution of the model is derived by backward induction, and a discussion of the properties of the solution is presented. Finally, the model results are verified using the Wutong Mountain Tunnel BOT project in China. This paper provides a solution to compensation for early termination of BOT highway projects with incomplete contracts.