Length Of Concession Period Research Articles

Modeling the effects of government subsidy and regulation on BOT transport project contract design within contractible service quality

Government subsidy and regulation are frequently employed to encourage the private sector to participate fully in Build-Operate-Transfer (BOT) transport projects. Besides service charge, the service quality of BOT transport project (i.e., maintenance quality, toll service, operational monitoring, emergency management, safety management and so on) is also an important factor affecting the choice of users. This paper studies the optimal service quality decisions in both concession period (CP) and post-CP, in which we assume that the market demand is dependent on both service price and service quality. Firstly, in the absence of subsidy scheme, we derive the related players’ optimal decisions of toll charge, contractible service quality, project capacity and length of CP in the BOT contract design process. Secondly, we investigate how to design an optimal BOT transport project contract when the government subsidizes the private sector. Thirdly, we explore the effects of government regulation policies (i.e., price cap regulation and service quality floor regulation) on the BOT contract design. Finally, we make three extensions to further examine the impacts of the demand uncertainty, the risk-aversion attitude of private sector, the asymmetric cost information and the nonlinear demand function on the BOT contract design. From our model results, some policy implications are derived regarding BOT transport project contract design when the service quality is a fundamental contractible variable.

Optimal BOT contracts in a two-road transportation network

We consider the Build–Operate–Transfer (BOT) contracts for a newly built road within a transportation network which includes another existing free access road. We consider a standard BOT contract in which the firm builds and operates the new road in the concession period and then transfers it to the government in the post-concession period. We find that the government may not prefer the length of concession period as long as possible. Next, we consider a coordinated BOT contract between the government and the firm to form a board to build and operate the new road over the whole life. In such a case, we transform a bi-objective programming problem as a weighted sum of the profit of firm and social welfare of the society. We find that social welfare may not always increase with the government’s weight. Besides, if the government weight is low, the coordinated BOT contract will lead to a wider road than the standard BOT contract, even if the construction cost is high. If the government weight is high, the coordinated BOT contract will lead to a wider road if the construction cost is very low. In other cases, the coordinated BOT contract leads to a narrower road compared to the standard BOT contract.

Bargaining Game Model to Determine Concessionary Items in Build-Operate-Transfer Contracts

AbstractThe parties involved in build-operate-transfer (BOT) projects have conflicting financial interests regarding the value of concessionary items, including concession period length and equity ...

Financial conflict resolution model in BOT contracts using bargaining game theory

Purpose This study aims to determine the optimal value of concession period length in combination with capital structure in build–operate–transfer (BOT) contracts, based on direct negotiation procurement and considering the conflicting financial interests of different parties involved in the project. Design/methodology/approach The financial model of a BOT project is developed considering all the influencing factors. Then, fuzzy set theory is used to take into account the existing risks and uncertainties. Bilateral bargaining game based on alternating-offers protocol is applied between the government and the sponsor to divide project financial benefit considering the lender’s requirements. Finally, concession period and equity level will be determined simultaneously according to the sponsor’s and government’s share of project financial benefit and the lender’s requirements. Findings The proposed model is implemented on a real case study, and a fair and efficient agreement on concession period length and capital structure is achieved between the government and the sponsor considering the lender’s requirements. It is revealed that being the first proposer in the bargaining process will affect the concession period length; however, it will not affect the equity level. Moreover, it is shown that considering income tax as a part of government’s financial benefit increases the length of concession period. Research limitations/implications The presented model concentrates on direct negotiation procurement in BOT projects where the sponsor and government bargain on dividing financial benefits of project. It is assumed that the product/service price is determined before according to market analysis or users’ affordability. All the revenue of project during concession period is assumed to belong to the sponsor. Practical implications The proposed model provides a practical tool to aid BOT participants to reach a fair and efficient agreement on concession period and capital structure. This could prevent failing or prolonging the negotiation and costly renegotiation. Originality/value By investigation of previous studies, it is revealed that none of them can determine the optimal value of concession period length and capital structure simultaneously considering the BOT negotiation process and different financial interests of parties involved in the project. The proposed model presents a new approach to determine the financial variables considering the conflicting interests of involved parties. The other novelty aspects of the presented model are as follows: introducing a new approach for calculating the sponsor and the government’s share of project financial benefit that will affect the determination of the concession period length and considering the effect of existing risks and uncertainties on final agreement between the involved parties using fuzzy set theory.

Optimizing the concession period of PPP projects for fair allocation of financial risk

Purpose Targeting public–private partnership (PPP) projects, the purpose of this paper is to help decision makers fairly allocate financial risk between governments and private investors through a properly designed length of concession period. Design/methodology/approach On the one hand, the length of the concession period should be long enough to help private investors to achieve their expected profits. On the other hand, the length of a concession period cannot be decided without agreeing on an upper limit, since an overlong concession period takes too much time for governments to recover their investment and leads to an overly lucrative condition for private investors. Following this logic, the concession period decision range is decided, which defines the lower and upper limits for the length of the concession period. The net present values (NPVs) for governments and private investors are estimated via Monte Carlo simulation to better reflect the uncertainties. To further decide on the optimal length of the concession period, the principle of fair risk allocation between governments and private investors is adopted. The concession period, as an important project parameter, should help to minimize the financial risk gap between governments and private investors. Findings The developed concession period determination process is validated using a numerical example of a PPP transportation project. The analysis outcomes show that the proposed methodology is capable of determining the length of the concession period so as to control private investors’ profit within a reasonable range while achieving a fair allocation of financial risk between governments and private investors. The outcomes also indicate that, before determining the optimal length for the concession period, governments may need to make a choice between better financial risk allocation or stringent profit control for private investors. Research limitations/implications The determination process developed here may be inapplicable to social infrastructure PPPs where the income stream is less predictable. In addition, the data analysis targets a highway project with a capital subsidy provided by the government. To strengthen the effectiveness of the proposed determination process, further research should apply the model to PPPs with other kinds of government support. Originality/value The concession period for a PPP project is an important parameter and it is a common practice for governments to predetermine the length of the concession period before inviting tenders. The existing models for determining the concession period focus too much on the simulation of NPVs for project parties and neglect the importance of risk allocation in signing and maintaining a long-term contract. There is also a lack of research to evaluate the influence of governments’ preferences on the length of the concession period. To overcome the limitations of the existing models and enrich the methodology for concession period determination, this paper contributes to the body of knowledge by developing a concession period determination process which can help governments to make better decisions. The financial risk is expected to be more evenly shared between governments and private investors with the concession period derived from the proposed process. This determination process is also capable of evaluating the influence of governments’ preferences on the length of the concession period.

Determining Optimal Capital Structure and Concession Period Length in BOT Scheme Using Trilateral Bargaining Game Model

AbstractEquity:debt ratio and concession period length are the most important financial variables to consider when analyzing a build-operate-transfer (BOT) agreement. Because the involved parties h...

Price, capacity and concession period decisions of Pareto-efficient BOT contracts with demand uncertainty

In this paper, we study the impact of demand uncertainty on the build-operate-transfer (BOT) contract design by optimizing a bi-objective problem via three critical decisions: toll, capacity and concession period. We derive the optimums and identify the public and private sector’s economic incentives. We find that the optimal length of concession period and the service quality of the infrastructure depend on the two parties’ operational costs and negotiation powers. Under mild conditions, we prove that the government will build a larger capacity but charge less than the private sector. Furthermore, the efficiency of BOT contract is improved with demand uncertainty.

Factors That Influence the Concession Period Length for Tunnel Projects under BOT Contracts

This article investigates the factors and corresponding subfactors affecting the length of the concession period for a build-operate-transfer (BOT) tunnel project. It includes five steps, namely, identifying the influential factors of concession period length determination, identifying the subinfluential factors, quantification of the factors, variable ranking, and variable testing. The influential factors and subfactors were identified through an extensive review of literature and a questionnaire survey. Qualitative factors were then quantified and all the factors were scaled and ranked by the entropy method, and finally tested by a support vector machine-based prediction model. In the end, a set of key influential factors of concession period length was developed. It is expected that the developed factors can improve the accuracy and effectiveness of concession period length determination.

A Decision Support System for the determination of concession period length in transportation project under BOT contract

The determination of the concession period length directly affects both the involved government and private investors' financial returns and risks in a Build–Operate–Transfer project. In existing methods, the concession period is usually determined by the concessionaire depending on their expected investment return, or predicted without comprehensive analysis of the influential factors. In view of this, a Decision Support System for concession period length determination (CPLD) was developed and, as demonstrated herein provides a possible way of solving the concession period problem, especially under the impact of influential factors. The influential factors were firstly investigated. Then the overall model was developed using the Monte Carlo method. A dataset of a simulated highway project was employed to verify the model. The results show that the developed model can generate a set of alternatives, among which a reasonable one could be selected after balancing the interests of both sides.

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

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.