Government Cost of Extending Concession Term Rights

Abstract

A widespread practice used in concession-based public private–partnerships (PPPs) arrangements consists of granting the concessionaire the right, under certain circumstances, to extend the concession term under a build-operate-finance-transfer (BOFT) arrangement. The asset involved in the project becomes the property of the government on its transfer. Thus, extending the concession period means an opportunity cost for the host government. By using an option-pricing model, this paper proposes a methodology for valuing the impact on the public budget arising from this option. This method can be of use in different transportation infrastructure projects, such as motorways, tunnels, and bridges. A case study is provided to show how the proposed methodology can be applied. The results confirm that the opportunity cost for the government may be high, and the main drivers behind this cost are the extension period, the base interest rates, and the risk premium of the government.