Determining a reasonable concession period for risky transportation BOT projects with government subsidies based on cumulative prospect theory

Abstract

PurposeThis paper explores the impact of both government subsidies and decision makers' loss-averse behavior on the determination of transportation build-operate-transfer (BOT) concession periods based on cumulative prospect theory (CPT). The prospect value of a transportation project under traffic risk can be formulated according to the value function for gains and losses and the decision weight for gains and losses. As an extra income for investors, government subsidy is designed for highly risky aspects of BOT transportation projects: uncertain initial traffic volumes and fluctuating growth rates.Design/methodology/approachA decision-making model determining the concession period of a transportation BOT project is proposed by using the Monte-Carlo simulation method based on CPT, and the effects of risky behaviors of private investors on concession period decision making are analyzed. A subsidy method related to the internal rate-of-return (IRR) corresponding to a specific initial traffic volume and growth rate is proposed. The case of an actual BOT highway project is examined to illustrate how the method proposed can be used to determine the concession period of a transportation BOT project considering decision makers' loss-averse behavior and government subsidy. Contingency analysis is discussed to cope with possible misestimating of key factors such as initial traffic volume and cost coefficients. Sensitivity analysis is employed to investigate the impact of CPT parameters on the concession period decisions. An actual BOT case which failed to attract private capital is introduced to show the practical application. The results are then interpreted to conclude this paper.FindingsBased on comparisons drawn between a concession period decision-making model considering the psychological behaviors of decision makers and a model not considering them, the authors conclude that the concession period based on CPT is distinctly different from that of the loss-neutral model. The concession period based on CPT is longer than the loss-neutral concession period. That is, loss-averse private investors tend to ask for long concession periods to make up for losses they will face in the future. Government subsidies serve as extra income for investors, allowing appointed profits to be secured sooner. For the benefit side of contingency variables, the normal state of initial traffic volume, average annual traffic growth rate and bias degree and the government subsidy need to be paid close attention during the project life span. For the cost side of contingency variables, the annual operating cost variable has a significant impact on the length of predicted concession period, while the large-scale cost variable has minor impact.Originality/valueWith an actual BOT highway project, the determination of transportation BOT concession periods based on the psychological behaviors of decision makers is analyzed in this paper. As the psychological behaviors of decision makers heavily impact the decision-making process, the authors analyze their impacts on concession period decision making. Government subsidy is specifically designed for various states of initial traffic volume and fluctuating growth rates to cope with corresponding high risks and mitigate private investors' loss-averse behaviors. Contingency analysis and sensitivity analysis are discussed as the estimated values of parameters may not be authentic in actual situations.

A Systematic Review of the Public–private Partnership Literature Published Between 2012 and 2021

“…Research in the prior decade has focused on what factors influence contract success in the concession period and real options models were often utilized to optimize concession periods (Chen et al, 2018). The main factors mentioned in these models mainly include stakeholders (Hanaoka & Palapus, 2012;Zhang et al, 2018), the public (Song et al, 2015), government subsidies (Guo et al, 2021), financial interests (Jin et al, 2019;Mirzadeh & Birgisson, 2015), social benefits and costs (Zhang et al, 2016b). Because of the many factors involved in the concession period, it is difficult to accurately forecast the parameter fluctuation with dynamic nature because of long-term operation.…”

Driving Factors of Concession Period in Healthcare Public Private Partnerships

“…The interplay between project risk and concession period is intricate, dynamic, and profoundly influenced by the nature and magnitude of the associated risks [27]. These risks yield substantial influence over the economic feasibility of projects, alongside their capacity to allure investments and secure financing [4]. The rationale behind this lies in the potential for risks to precipitate substantial financial losses and obligations, consequently undermining the financial robustness of these projects and diminishing their attractiveness to investors and financiers [28].…”

“…Moreover, the public share, representing the proportion of the initial project investment paid directly through public subsidies, is another significant factor. Several studies have attempted to use public financing and government subsidies as a determinant of the concession period [4,36,44]. A balance between the level of government subsidies provided and risks borne by the private sector is crucial to the concession period [4].…”

“…An essential aspect of a PPP contract is the concession period, which refers to the time during which a business entity, namely, Special Purpose Vehicle (SPV), is responsible for financing, building, operating, and maintaining a public asset before transferring it back to the granting authority [4]. The duration of the concession period may span from 10 to 99 years, but usually lasts from 20 to 30 years.…”

“…Although there are countless papers on models to determine "optimal" concession periods of PPP projects [4,11,13,[15][16][17], far less attention has been devoted to understanding the determinants of the concession period based on evidence from projects conducted within national PPP programs. Moreover, the definition of an adequate concession period becomes more complex for social infrastructure PPPs, particularly under an availability payment mechanism.…”