Bargaining Game Model to Determine Concessionary Items in Build-Operate-Transfer Contracts

Abstract

The parties involved in build-operate-transfer (BOT) projects have conflicting financial interests regarding the value of concessionary items, including concession period length and equity to debt ratio. Determining the value of these items has a crucial role for successful implementation of BOT projects, especially in BOT projects with direct-negotiation procurement. In this research, first, a financial model of BOT projects is developed according to a real-world situation of bargaining. Then, a finite-horizon alternating-offers bargaining game, as a conflict-resolution tool, is chosen and applied. Uncertainties and risks are taken into account. Based on the sponsor’s and government’s share of the project’s financial benefit, the value of concession period length and equity to debt ratio are determined taking into account the lender’s requirements. Finally, the proposed model is implemented in a real-world BOT project to evaluate its applicability and performance. The proposed model enables one to predict the final agreement on concession period length and equity to debt ratio and prevents an unsuccessful negotiation or costly renegotiations.