Incorporating Social Benefits in Concession Price Negotiation for Public–Private Partnership Contracts

Abstract

Public–private partnership (PPP) has become the most popular contract agreement form for infrastructure projects. To fully enjoy the benefits of PPP contracting, the value of the concession price should be carefully determined with quantitative justification. Traditional methods of determining the value of concession price are based on the evaluation of financial indexes such as net present value and financial return on investment. However, more and more research has highlighted the importance of evaluating social benefits in decision-making due to its capability to assess not only the financial performance of the projects but also the social and environmental values. Therefore, this research innovatively investigates the role of social benefit in concession price negotiation and aims to determine the optimal concession price with a specific focus on government-pays PPPs. Following quantification of social benefits, the payoffs of project parties for concession price negotiation are modeled mathematically, and bargaining game theory is employed to explore the bargaining behaviors of project parties during negotiation. A numerical example is used to demonstrate the developed negotiation-based determination process. The data analysis results show that the proposed method can successfully determine the optimal concession price. Also, considering the monetary value of social benefits in concession price negotiation, the payoffs for the government and corporate social responsibility (CSR)–oriented concessionaire are significantly improved. When determining other critical concession parameters such as the concession period, scholars and practitioners can follow the modeling process developed in this research to incorporate social benefit into the discussion. In practical implementation, governments can conduct a prospective social benefit analysis during the project feasibility studies. The social benefit quantification results should be added to the request for proposal (RFP) so that CSR-oriented concessionaires can also update their payoffs by incorporating the monetary value of the social benefits. Other key financial parameters, e.g., government subsidy and maximum financial return rate on investment, should also be clearly stated in the RFP, which will allow both parties to estimate their payoffs and determine the concession price negotiation range. After receiving the responses to the RFP and shortlisting the tenders, governments can simulate the negotiation process using the proposed method and determine the optimal concession price to avoid unnecessary negotiation or even renegotiation after tendering. The calculated concession prices can be used as a reference for the final tender selection. For example, if the government believes that the opportunity cost for a concessionaire should range from 10% to 15% of the investment, the government can calculate the optimal concession prices (CPCOl and CPCOh) as per the proposed method. If the bidding price is lower than CPCOl, then the tender may deliberately lower the price in order to win or there is a high possibility that the tender will initiate a concession price negotiation after being selected. On the other hand, if the bidding price is higher than CPCOh, then it may be too high to be accepted. For concessionaires, they can also utilize the developed method to design the bidding price and avoid proposing a price that is not favored by the government.