Win–Win Concession Period Determination Methodology

Abstract

In infrastructure development through public-private partnerships (PPPs), governments worldwide often preset the concession period to a fixed length and then invite the private sector to bid on other aspects of the project. This practice has potential economic, financial, and social problems as shown in a case study of Hong Kong tunnel projects. To overcome these problems, this paper has proposed a win–win concession period determination methodology, in which PPPs are addressed as a principal-agent maximization problem. Both deterministic and simulation-based methods are provided to determine the concession period, with detailed step-by-step procedures. These methods take into consideration the financial characteristics of PPPs and the construction and operation requirements. In particular, the simulation-based approach combines the critical path method and Monte Carlo simulation technique in an effort to quantify construction and market risks for informed decision making. Furthermore, some issues related to the proposed methodology also have been discussed. These issues include (1) factors in determining a reasonable rate of return to the concessionaire’s equity investment; (2) advantages and disadvantages of rate of return regulation; (3) concession period as a tender evaluation criterion; (4) efficiency check of the concessionaire’s cost performance; (5) workable pricing mechanism; and (6) a practical approach to establishing statistical construction cost/duration distributions.