A simulation model for optimizing the concession period of public-private partnerships schemes

Abstract

Public-private partnerships (PPP) are becoming an increasingly popular option of project delivery. Under the concession-based PPP arrangement, the private partner is responsible for funding the scheme, while their capital investment will be recovered through the operation revenue over the concession period. Therefore, calculating an appropriate investment return over the concession period becomes a very important aspect that influences success of the PPP project, particularly so as the concessionaire may be tempted to increase their toll/tariff should the revenue fall short of their expected. However, due to the difficulties in estimating the long-term uncertainties and wider-risk profiles at the tendering stage, the government would conduct the traditional net present value and payback period analyses to determine the concession period. In this paper, a simulation model which aims to assist the public partner to determine an optimal concession period is proposed. A hypothetical example is worked through to illustrate the concept of the simulation model. The results show that the risks and uncertainties, such as a change in inflation rate, traffic flow and operation cost, could influence the decision on the concession period. With the help of the simulation model, the impact of risk can be taken into account when establishing an ideal concession period. © 2007 Elsevier Ltd and IPMA.