Net Asset Value–Based Concession Duration Model for BOT Contracts

Abstract

A concession period is a key decision variable in the arrangement of a build-operate-transfer (BOT)-type contract. Recently, an innovative BOT concession model (BOTCcM) was developed to quantitatively determine the value of a concession period. The model could propose an interval for possible negotiations between a host government and a private investor. Nevertheless, this paper identifies a major limitation of this model and proposes an alternative model for improvement. Under a BOT arrangement, the project becomes a property of the host government upon its transfer. The project’s net asset value at the transfer time is usually significantly greater than zero, representing revenue to the host government. This revenue, thus, cannot be ignored. However, this revenue was not considered in the analysis of BOTCcM. This study improves the second critical point in BOTCcM by considering project net asset value at the transfer time. The application of the new model is demonstrated by using the same example case quoted in BOTCcM and shows that a significantly different decision will be made when project net asset value at its transfer time is considered.