Design of Concession Period Considering Risk Management for a Road Project

Abstract

The design of concession period for build–operate–transfer (BOT) projects is crucial to financial viability and completion risk management. A systematic analysis shows that concession period design involves the design of concession period structure as well as the determination of the concession period length. The concession period may have a single-period structure or a two-period structure; its length may be fixed or variable. Different designs reflect different risk control strategies for completion time overruns. The single-period concession structure requires the project company to assume completion risk, while the two-period concession structure could, to some extent, reduce the completion risk exposure to the project company, depending on the various parameters. Through Monte Carlo simulation, this paper evaluates the mean net present value (NPV), variance and NPV-at-risk of different concession period structures, so that both the government and the concessionaires can understand their risk exposure and rewards. The paper then analyzes the influence of project characteristics on concession period design to evaluate the feasibility of the design. Expected concession period has been calculated using Monte Carlo simulation method, and expected concession periods have been found to be 28.25 years and 26.46 years based on level of service and 95 % risk consideration.