Determination of the optimal concession period for BOT contract projects based on a discrete stochastic process model

The concession period is one of the most important issues in the contractual arrangement of build-operate-transfer (BOT) projects. When planning a BOT project, the government should aim for a trade-off between the concerned government's satisfaction and the private concessionaire's profit. The objective of this paper is to present a discrete stochastic process model to obtain an optimal concession period considering the trade-off. The process model is developed for a highway project by analyzing the actual traffic data. The net present value (NPV) is calculated for use as a constraint condition that indicates the boundary of risk preference in a utility function. Using a utility function, this paper estimates the duration of concession periods at which the government can both attract investments from private concessionaires and satisfy public opinion. A numerical simulation is applied to demonstrate the applicability of the methodology presented. The result of the simulation shows that the discrete stochastic process model contributes to a better understanding of trade-offs in determining the optimal concession period.