A model for determining the optimal project life span and concession period of BOT projects

Zhang, Xiaoling, Bao, Haijun, Wang, Hongdi, & Skitmore, Martin (2016) A model for determining the optimal project life span and concession period of BOT projects. International Journal of Project Management, 34(3), pp. 523-532.

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Abstract

The concession agreement is the core feature of BOT projects, with the concession period being the most essential feature in determining the time span of the various rights, obligations and responsibilities of the government and concessionaire. Concession period design is therefore crucial for financial viability and determining the benefit/cost allocation between the host government and the concessionaire. However, while the concession period and project life span are essentially interdependent, most methods to date consider their determination as contiguous events that are determined exogenously. Moreover, these methods seldom consider the, often uncertain, social benefits and costs involved that are critical in defining, pricing and distributing benefits and costs between the various parties and evaluating potentially distributable cash flows. In this paper, we present the results of the first stage of a research project aimed at determining the optimal build-operate-transfer (BOT) project life span and concession period endogenously and interdependently by maximizing the combined benefits of stakeholders. Based on the estimation of the economic and social development involved, a negotiation space of the concession period interval is obtained, with its lower boundary creating the desired financial return for the private investors and its upper boundary ensuring the economic feasibility of the host government as well as the maximized welfare within the project life. The outcome of the new quantitative model is considered as a suitable basis for future field trials prior to implementation. The structure and details of the model are provided in the paper with Hong Kong tunnel project as a case study to demonstrate its detailed application.

The basic contributions of the paper to the theory of construction procurement are that the project life span and concession period are determined jointly and the social benefits taken into account in the examination of project financial benefits. In practical terms, the model goes beyond the current practice of linear-process thinking and should enable engineering consultants to provide project information more rationally and accurately to BOT project bidders and increase the government's prospects of successfully entering into a contract with a concessionaire. This is expected to generate more negotiation space for the government and concessionaire in determining the major socioeconomic features of individual BOT contracts when negotiating the concession period. As a result, the use of the model should increase the total benefit to both parties.

Impact and interest:

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ID Code: 93677
Item Type: Journal Article
Refereed: Yes
Keywords: Project Management, Build-Operate-Transfer, project life span, concession period, optimization
DOI: 10.1016/j.ijproman.2016.01.005
ISSN: 0263-7863
Divisions: Current > Schools > School of Civil Engineering & Built Environment
Current > QUT Faculties and Divisions > Science & Engineering Faculty
Copyright Owner: Copyright 2016 Elsevier
Copyright Statement: Licensed under the Creative Commons Attribution; Non-Commercial; No-Derivatives 4.0 International. DOI: 10.1016/j.ijproman.2016.01.005
Deposited On: 14 Mar 2016 03:06
Last Modified: 20 Mar 2016 04:38

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