Government Decisions In BOT Toll Roads:Policy Support And Contract Design

Public roads have been increasingly provided by private investors via the Build-Operate-Transfer(BOT)approach.In this approach,a private investor builds and operates a road and transfers the ownership at no cost to the government at the end of the contract.For the BOT road projects,the private sector recoups investment and obtains profit mainly through toll revenue during the operation stage.However,due to high level of demand risk in BOT roads,the expected toll revenue often fails to cover the private sector's investment.As a result,a properly designed policy support and concession contract becomes important in attracting private sector's participation.This paper aims to investigate the government's optimal decisions on policy and contract design in BOT toll roads in the presence of demand uncertainty.In this paper,with regard to policy design,the government needs to decide on government guarantee and government subsidy;With regard to contract design,the government needs to decide on toll charge and concession structure.The main contributions and conclusions of this paper are as follows:(1)Previous literature on government guarantees in BOT toll roads mainly focuses on government guarantees' option value or on their impact on economic feasibility of the projects.These literature neglects incentives inherent in government guarantees and thus impact of government guarantees on the projects.This paper aims to fill this theoretical gap by investigating the impact of government guarantees – minimum traffic guarantee,minimum revenue guarantee,and price compensation guarantee – on the private sector's choices of three project characteristics: toll charge,road quality,and road capacity.The main results are:(i)Minimum traffic guarantee increases toll charge while decreasing road quality.Under a low guarantee level,minimum traffic guar antee has no impact on road capacity.However,it improves road capacity when a high guarantee level is performed.(ii)Under minimum revenue guarantee,if the guarantee level is sufficiently high,the optimal toll charge will be sufficiently large,but road quality and road capacity will approach zero.(iii)Price compensation guarantee decreases toll charge and increases both road quality and road capacity.This paper further investigates the impact of government guarantees when the contract is auctioned.This paper finds that auction reduces the impact of government guarantees on toll charge while failing to affect the impact of government guarantees on road quality and capacity.(2)In private toll roads,previous literature has recognized the role of government subsidy in attracting private operators and in providing incentives on performance improvement.An implicit assumption underlying these literature is that the private operator's performance can be perfectly measured ex post.Therefore,their analysis is built upon formal contract that can be enforced by the court.However,in practice,some elements of the private operator's performance are noncontractible.As a result,the government cannot employ subsidy to motivate the private operator to improve these noncontractible performance elements through a formal contract.This paper uses noncontractible service quality to capture these performance elements.By employing a relational contract approach,this paper aims to investigate the optimal subsidy design to motivate the private operator to improve noncontractible service quality when the government commits to and not to compensating the private operator,respectively,upon termination of the relationship.This paper finds that government subsidy is effective in quality improvement when the discount factor is sufficiently high and social cost of public funds is sufficiently small.Moreover,the optimal government subsidy depends on discount factor and reservation utilities of consumers and the private sector.(3)Previous literature on optimal toll charge in BOT toll roads tends to treat toll charge and government subsidy as two independent variables,which thus overlooks the impact of toll charge on the subsidy design.Based on the derived optimal subsidy design,this paper further investigates the optimal toll charge.This paper finds that if the government commits not to compensating the private sector upon termination of transaction,the optimal toll charge generates zero surplus for the private operator and positive surplus for consumers;otherwise,the optimal toll charge can generate a positive surplus for the private sector.(4)Previous literature on the design of concession period in BOT toll roads mainly focuses on the optimal length of concession period under a given concession structure.These literature neglects the incentives inherent in concession structure to motivate the private sector to complete the projects early.To provide decision support for the government to choose appropriate concession structures for BOT road projects,this paper compares profit of the private sector,social welfare,and consumer surplus under single-and two-period concession structures by taking into account demand uncertainty and uncertainty of actual construction completion date for BOT road projects.The results show that the private sector's profit is higher under single-period concession structure.However,when price elasticity of traffic demand is sufficiently low,social welfare and consumer surplus are higher under single-and two-period concession structures,respectively.Based on the derived model results,the last chapter further discusses their practical implications.Moreover,this chapter presents some limitations of the analysis and gives some suggestions for future work.