Government Cost of Extending Concession Term Rights
Publication: Journal of Infrastructure Systems
Volume 24, Issue 3
Abstract
A widespread practice used in concession-based public private–partnerships (PPPs) arrangements consists of granting the concessionaire the right, under certain circumstances, to extend the concession term under a build-operate-finance-transfer (BOFT) arrangement. The asset involved in the project becomes the property of the government on its transfer. Thus, extending the concession period means an opportunity cost for the host government. By using an option-pricing model, this paper proposes a methodology for valuing the impact on the public budget arising from this option. This method can be of use in different transportation infrastructure projects, such as motorways, tunnels, and bridges. A case study is provided to show how the proposed methodology can be applied. The results confirm that the opportunity cost for the government may be high, and the main drivers behind this cost are the extension period, the base interest rates, and the risk premium of the government.
Get full access to this article
View all available purchase options and get full access to this article.
References
Bao, H., Y. Peng, J. H. Ablanedo-Rosas, and H. Gao. 2015. “An alternative incomplete information bargaining model for identifying the reasonable concession period of a BOT project.” Int. J. Project Manage. 33 (5): 1151–1159. https://doi.org/10.1016/j.ijproman.2014.12.004.
Brandao, L. E., and E. Saraiva. 2008. “The option value of government guarantees in infrastructure projects.” Constr. Manage. Econ. 26 (11): 1171–1180. https://doi.org/10.1080/01446190802428051.
Carbonara, N., N. Costantino, and R. Pellegrino. 2014. “Concession period for PPPs: A win-win model for a fair risk sharing.” Int. J. Project Manage. 32 (7): 1223–1232. https://doi.org/10.1016/j.ijproman.2014.01.007.
Chiara, N., and N. Kokkaew. 2013. “Alternative to government revenue guarantees: Dynamic revenue insurance contracts.” J. Infrastruct. Syst. 19 (3): 287–296. https://doi.org/10.1061/(ASCE)IS.1943-555X.0000145.
Convertino, M., R. Muñoz-Carpena, M. L. Chu-Agor, G. A. Kiker, and I. Linkov. 2014. “Untangling drivers of species distributions: Global sensitivity and uncertainty analyses of MaxEnt.” Environ. Modell. Software 51: 296–309. https://doi.org/10.1016/j.envsoft.2013.10.001.
Hanaoka, S., and H. P. Palapus. 2012. “Reasonable concession period for build-operate-transfer road projects in the Philippines.” Int. J. Project Manage. 30 (8): 938–949. https://doi.org/10.1016/j.ijproman.2012.02.001.
Jun, J. 2011. “Appraisal of combined agreements in BOT project finance: Focused on minimum revenue guarantee and revenue cap agreements.” Int. J. Strategic Property Manage. 14 (2): 139–155. https://doi.org/10.3846/ijspm.2010.11.
Kokkaew, N., and N. Chiara. 2013. “A modeling government revenue guarantees in privately built transportation projects: A risk-adjusted approach.” Transport 28 (2): 186–192. https://doi.org/10.3846/16484142.2013.803262.
Kokkaew, N., N. Chiara, J. Sunkpho, and F. Dong. 2011. “Valuing expansion opportunities in BOT highway projects: A branching and folding back (BFB) method.” J. East. Asia Soc. Transp. Stud. 9: 66–81. https://doi.org/10.11175/easts.9.66.
Laffont, J. J., and J. Tirole. 1993. A theory of incentives in procurement and regulation. Cambridge, MA: MIT Press.
Liou, F. M., and C. P. Huang. 2008. “Automated approach to negotiations of BOT contracts with the consideration of project risk.” J. Constr. Eng. Manage. 134 (1): 18–24. https://doi.org/10.1061/(ASCE)0733-9364(2008)134:1(18).
Liu, J., and C. Y. Cheah. 2009. “Real option application in PPP/PFI project negotiation.” Constr. Manage. Econ. 27 (4): 331–342. https://doi.org/10.1080/01446190902807071.
Lüdtke, N., S. Panzeri, M. Brown, D. S. Broomhead, J. Knowles, M. A. Montemurro, and D. B. Kell. 2008. “Information-theoretic sensitivity analysis: A general method for credit assignment in complex networks.” J. R. Soc. Interface 5 (19): 223–235. https://doi.org/10.1098/rsif.2007.1079.
Lv, J., G. Ye, W. Liu, L. Shen, and H. Wang. 2014. “Alternative model for determining the optimal concession period in managing BOT transportation projects.” J. Manage. Eng. 31 (4): 04014066. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000291.
Mirzadeh, I., and B. Birgisson. 2016. “Evaluation of highway projects under government support mechanisms based on an option-pricing framework.” J. Constr. Eng. Manage. 141 (4): 04015094. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001079.
Ng, S. T., J. Xie, Y. K. Cheung, and M. Jefferies. 2007. “A simulation model for optimizing the concession period of public-private partnerships schemes.” Int. J. Project Manage. 25 (8): 791–798. https://doi.org/10.1016/j.ijproman.2007.05.004.
Ngee, L., R. L. K. Tiong, and J. Alum. 1997. “Automated approach to negotiation of BOT contracts.” J. Comput. Civ. Eng. 11 (2): 121–128. https://doi.org/10.1061/(ASCE)0887-3801(1997)11:2(121).
Peng, W., Q. Cui, and J. Chen. 2014. “Option game model for optimizing concession length and public subsidies of public-private partnerships.” Transp. Res. Rec. 2450: 109–117. https://doi.org/10.3141/2450-14.
Ruizheng, F., and W. Li. 2010. “The optimal concession period in the built-operate-transfer project.” In Proc., 4th Int. Conf. on Management of e-Commerce and e-Government, 223–227. Los Alamitos, CA: IEEE.
Saltelli, A., M. Ratto, T. Andres, F. Campolongo, J. Cariboni, D. Gatelli, and S. Tarantola. 2008. Global sensitivity analysis: The primer. Hoboken, NJ: Wiley.
Schmidt, K. M. 1996. “The costs and benefits of privatization: An incomplete contracts approach.” J. Law Econ. Organ. 12 (1): 1–24. https://doi.org/10.1093/oxfordjournals.jleo.a023354.
Shan, L., M. J. Garvin, and R. Kumar. 2010. “Collar options to manage revenue risks in real toll public-private partnership transportation projects.” Constr. Manage. Econ. 28 (10): 1057–1069. https://doi.org/10.1080/01446193.2010.506645.
Shen, L. Y., H. J. Bao, Y. Z. Wu, and W. S. Lu. 2007. “Using bargaining-game theory for negotiating concession period for BOT-type contract.” J. Constr. Eng. Manage. 133 (5): 385–392. https://doi.org/10.1061/(ASCE)0733-9364(2007)133:5(385).
Smith, N. J. 1995. Engineering project management. Boston, MA: Blackwell Science.
Wu, M., K. Wing Chau, Q. Shen, and L. Yin Shen. 2011. “Net asset value-based concession duration model for BOT contracts.” J. Constr. Eng. Manage. 138 (2): 304–308. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000397.
Xu, J. W., and S. Moon. 2013. “Stochastic revenue and cost model for determining a BOT concession period under multiple project constraints.” J. Manage. Eng. 30 (3): 04014011. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000182.
Ye, S., and R. L. Tiong. 2003. “The effect of concession period design on completion risk management of BOT projects.” Constr. Manage. Econ. 21 (5): 471–482. https://doi.org/10.1080/0144619032000073488.
Yu, C. Y., and K. C. Lam. 2013. “A decision support system for the determination of concession period length in transportation project under BOT contract.” Autom. Constr. 31: 114–127. https://doi.org/10.1016/j.autcon.2012.11.012.
Zhang, X. 2009. “Win–win concession period determination methodology.” J. Constr. Eng. Manage. 135 (6): 550–558. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000012.
Zhang, X., and S. M. AbouRizk. 2006. “Determining a reasonable concession period for private sector provision of public works and service.” Can. J. Civ. Eng. 33 (5): 622–631. https://doi.org/10.1139/l06-010.
Zhang, X., H. Bao, H. Wang, and M. Skitmore. 2016. “A model for determining the optimal project life spam and concession period of BOT projects.” Int. J. Project Manage. 34 (3): 523–532. https://doi.org/10.1016/j.ijproman.2016.01.005.
Information & Authors
Information
Published In
Journal of Infrastructure Systems
Volume 24 • Issue 3 • September 2018
Copyright
©2018 American Society of Civil Engineers.
History
Received: Jan 13, 2017
Accepted: Feb 6, 2018
Published online: May 31, 2018
Published in print: Sep 1, 2018
Discussion open until: Oct 31, 2018
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.