Determining Optimal Capital Structure and Concession Period Length in BOT Scheme Using Trilateral Bargaining Game Model

Abstract

Equity:debt ratio and concession period length are the most important financial variables to consider when analyzing a build-operate-transfer (BOT) agreement. Because the involved parties have conflicting interests regarding these variables, this research introduces a new trilateral bargaining model which helps the BOT participants to model the BOT negotiation process (especially in a procurement process based on direct negotiation) and reach an efficient agreement on the concession period length and equity:debt ratio considering the conflicting interests and different bargaining powers of the sponsor, government, and lender. First, a mathematical interpretation of conflicting financial interests of the parties is introduced. Then the noncooperative and cooperative bilateral bargaining games are combined as a novelty of this research to develop a trilateral bargaining game model enabling consideration of the negotiation process in BOT projects. The proposed model can be used to predict the concession period length and capital structure simultaneously. Finally, the proposed model is implemented in a real-world BOT project and the application and performance of the proposed model are illustrated.