Imperfect Information Bargaining Model for Determining Concession Period of PPPs under Revenue Uncertainty

Abstract

The concession period is a critical contractual parameters for public-private partnership (PPP) projects whose value can significantly influence the financial interests of project participants. However, it has become a common practice to predetermine the length of the concession period without plausible reasoning, and this can incur postcontractual renegotiation and even project failure. To identify the most appropriate length of the concession period, researchers and practitioners have attempted to develop mathematical models. These models are often constructed with the prerequisite that perfect information is available for decision making, but this is not an appropriate assumption in real-life PPP projects. Therefore, this paper develops an innovative model to help governments identify a specific length for the concession period when their information about the private investor is imperfect. Revenue uncertainty is also evaluated to explore the way of determining an appropriate length of the concession period to cope with revenue uncertainties for both parties. Based on a real highway PPP project in China, Project BA is created as a numerical example to validate the proposed model. The outcome of data analysis verifies the effectiveness of the model and also indicates that the preferences of governments strongly influence the optimal length of the concession period. Even though there may not be a negotiation stage when the government and private investor bargain on the length of the concession period, the concession period identified here provides a useful reference for governments to determine the length of a concession period before launching a request for proposal.