The effect of concession period design on completion risk ma

The effect of concession period design on completion risk management of BOT projectsThe 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,the determination of the concession period length and incentive schemes.The concession period may have a single-period structure or a two-period structure,its length may be fixed or variable,and it may be combined with incentive schemes.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 incentive schemes.Through Monte Carlo simulation,this paper evaluates the mean net present value (NPV),variance and NPV-at-risk of different concession period structures so tliat both the government and the concessionaires can understand their risk exposure and rewards.The paper then analyses the influence of project characteristics on concession period design to evaluate the feasibility of the design.It is concluded that a well-designed concession period structure can create a 'win-win' solution for both project promoter and the host government.Keywords:Concession period structure,completion risk management,simulationincentive scheme,privately financed infrastructure,BOT,IntroductionOver the past two decades,a great number of infrastructure projects have been developed under concession contracts.According to the ninth annual surveyconducted by Public Works Financing (2000),over 1370 infrastructure concessions,with estimated capital costs of over $US575 billion,have been proposed,awardedor completed under various forms of public-private parmership in over 100 countries around the world since 1985.At the same time,a considerable number of studieson privately financed infrastructure projects have been presented in seminars,conferences and journals,which cover a wide range of topics from project evaluation,risk management and concession design to regulation.Among them,concession period design is an interesting topic of concern to both the public and private sectors,and closely related to project participants' financial returns and completion risk management.This paper systematically explores the types of concessionstructures for BOT projects (build-operate-transfer - atype of privately financed infrastructure project) and evaluates the effectiveness of different concession period structures on financial return and completion risk management through mathematical analyses and computer simulations.