Decision On BOT Project Concession Period Considering Social Benefit And Flexibility

BOT has become one of the most important modes of infrastructure construction since the late1970’s and the early1980’s. Whether a BOT project can succeed or not depends on a lot, in which concession period is one of the critical factors. If the concession period is too long, the interests of the government and the public will be damaged, while if it is too short, the private sectors will not take part in the project. The current research on BOT concession period focus on the financial income of the project. Although there are a few studies paying attention to the social benefit of the BOT project, it is assumed that the government has more private information than the project company, which seems not to be the case.In order to solve these problems, by analyzing the drawbacks of those assumptions, an information symmetry model taking social benefit of the BOT project into account is proposed to decide the proper concession period. It turns out to be that, the maximization of the social benefit can be realized, but the government could not always get the extra financial income as in the past studies. If there is some difference on the evaluation of the project risk between the government and the project company, the decision on concession period could be classified into four circumstances, in which the social benefit and the possible subsidy varies all the time. When the project company is more optimistic than the government, there is little subsidy from the government, otherwise, the government has to pay much more.Moreover, by examining the limitation of the fixed concession period, the feasibility and the advantages of the flexible concession period is analyzed. Taking the social benefit of the project into account, a basic framework of flexible concession period is proposed from the perspectives of the incentive and the option to improve the method of the Least Present Value of Revenue.At last, an example of BOT project is shown to illustrate the use procedure of the concession period model considering social benefit and project risks.The methodology proposed here could help the government and the project company to decide the concession period of the BOT project, and the social benefit of the project and the flexibility of the concession period could be elevated at the same time.