Method for determining the optimum concession period in highway projects to be tendered with build-operate-transfer

The build-operate-transfer model is increasingly applied in our country as it is in the whole world especially in infrastructure projects. One of the most important criterion for this model, the concession period, is covered in the thesis study. Generally, a longer concession period is more beneficial to the private investor, but a prolonged concession period may induce loss to the concerned government. Alternatively, if the concession period is too short, the investor will either reject the contract or be forced to increase the service fees in the operation of the project. Consequently, the risk burden due to the short concession period will be shifted to the public who use and pay for the facilities. Therefore, an appropriate concession period is one of the most important decisions when agreeing upon a build-operate-transfer contract. There are many different financial models in the literature for the calculation of the concession period. Shen has proposed a concession financial model that protects both the interests of the government and the private sector. Shen's proposed financial model has been updated by using parameters, which are the variable discount rate based on years, expropriation value and the annual average daily traffic volume. In addition, the limit of repayment period for private sector and positive net cash flow boundries have been added in proposed financial model. Total and annual construction cost, construction period, maintenance-operation cost, credit interest rate provided by credit institutions, inflation, toll fee, taxes, expropriation value, annual vehicle traffic volume and other revenues were determined as input parameters for build-operate-transfer project financial model. The distribution of the concession time for the build-operate-transfer project was obtained by using net present value method and Monte Carlo simulation method withcertain parameters defining the deterministic value and the uncertain parameters defining probability distribution. After that, the concession period was determined as the single value according to the risk attitudes of the private equity company and the state. Bargaining game theory will be applied between the government and private sector at the end of financial model to create the most profitable situation for both parties. Basic principles of bargaining game theory is depended on rational behavior of two players (government and private sector). Also, equation of this theory is covered bargaining cost, bargaining payoff and time value (discount factor). The selection of a particular concession period in committing a BOT contract is described in this study as a bargaining process between the private investor and the government concerned, and bargaining theory is therefore applied to examine how a specific period is agreed upon between the two sides. In addition to this some scenarios have been produced; such as when the project is undertaken by the government, when the guaranteed annual average daily traffic (AADT) given to the government by the government participates in the guarantee or not. In line with these scenarios, the profitability ratios of the project for both government and private sector has been calculated. As a result, the government has chosen the most profitable proposal for its benefit. In this proposal, the government will pay approximately 668.275.470 € to private sector because of guarantee AADT which is given by government to private sector. The profitability ratio of private sector for winner is %16,1. On the other hand, the government will gain profit after 09 May 2037 from Ankara Nigde Highway Project. For second profitable proposal which is offered by private sector is the most suitable for our proposed financial model. In this proposal, the profitability ratio of private sector is %39,4. In conclusion, the key factor of a BOT project is the agreement on the length of concession period. The proposed financial model for motorway/highway tenders to be tendered by build-operate-transfer in our country can be applied quickly, practically and correctly. The proposed financial model can also be used to analyze the risk situation that the private sector or the government has undertaken for previously tendered projects. It should not be forgotten that the main purpose of our financial model is to maximize the profit of both the state and the private sector.