Social Welfare–Based Concession Model for Build/Operate/Transfer Contracts

Abstract

The concession period is one of the critical factors in the arrangement of a build-operate-transfer contract. For infrastructure that has major strategic, economic, and social effects, the concession period should balance the interests among the private investors, the government, and the users. However, existing research has more frequently discussed economic benefits rather than social welfare. In this regard, this paper proposes an improved model based on the traditional concession model by taking into account the case that the government might lower the service price in the posttransfer period to increase social welfare. This paper also introduces the optimal pricing methods for both concession and posttransfer period. The proposed methodology suggests a narrower concession interval, which helps improve the negotiation efficiency between the government and the private investor to a certain extent. The application of the proposed model is demonstrated by a case study of Western Harbor Tunnel in Hong Kong, and the outcome shows that a significant improvement was made when taking into account social welfare.