Concession Pricing Of BOT Expressway Projects Based On Risk Allocation

Concession pricing is a critical issue in BOT project auction and concession contract negotiation, which has been paid extensive attention to by project financing practitioners and researchers. However, there exist some aborted projects due to improper concession prices. And also there is lack of pricing methods to assure benefit balance between governments and private sectors. Under the situation of promoting private initiative finance in the reform of infrastructure investment in China, effective cooperative pricing between governments and private sectors has become key to assure successful operation of BOT projects.Taken BOT expressway projects as research objects, three critical issues relating to concession pricing have been put forward, including identification of key risks influencing concession pricing, determination of key risk allocation scale, calculation of base concession price and arrangement of price adjustment.Literature about risk identification, risk allocation and concession pricing has been reviewed. The results indicate that existing researches have not solved the problem of concession pricing yet. The main limitations are the disconnection of concession pricing and risk allocation, and neglecting the risk influence to pricing.First of all, in order to identify key risks influencing concession pricing, seven assumptions about key risk influencing degree to pricing have been made. The assumptions have been verified by developing a structural equation model and analyzing statistical data collected through questionnaire survey. It finds that completion risks have the greatest influence to concession pricing in BOT expressway projects of China, which are classified the first-order risks. Force majeure risks, legislation risks and market risks have the greater influence to concession pricing, which are classified the second-order risks. Sovereignty risks, operation risks and finance risks have the least influence to concession pricing, which are classified the third-order risks and can be neglected in pricing.Secondly, the responsibilities of bearing key risks have been allocated between governments and private sectors, through summarizing the statistical results of key risk allocation given by other researchers. Under the assumption of symmetrical risk information between both parties, introducing risk influences into social welfare function and profit function, two-person cooperative games model can be established. Using Nash Product mapping, Nash negotiation solution to risk allocation can be achieved. The results of the games model can be references to concession base price decision and adjustment mechanism design.Thirdly, fixed-term and flexible-term base concession pricing mechanisms have been analyzed. Two pricing modes have been classified in fixed-term base concession pricing. In pricing modeâ… , bidders can be classified into three types according to risk preference degree, namely risk fancy, risk aversive and risk neutral bidders. In order to calculate base concession price, stochastic programming models have been developed according to pricing goals pursued by different risk preference degree bidders. Adopting auction with 3-dimentional bids of investment, concession price and risks born by governments, governments select the bidder with the lowest total rank of 3-dimentional bids as the first candidate to negotiate, whose concession price offer is the final base price.In concession pricing modeâ…¡and flexible-term pricing, it is assumed that governments have neutral risk preference. Governments determine base concession price level by solving the stochastic programming model with the goal of maximizing social benefit under the constraint of profit demanded by private sectors.Then the key risks to adjust price have been confirmed. Four principles to adjust concession price are presented in BOT expressway projects, including the principle of systematically taking into account risk influence, the principle of promoting efficiency improvement, the principle of keeping reasonable return, the principle of adjusting price periodically. It is suggested that price adjustment period should be corresponding to the risk allocation period, and adjustment delay risk should be considered when making decisions.According to the relationship between the actual profit and balance point, four methods to deal with profit and loss of previous period have been designed, to achieve the goals of promoting the project company to improve efficiency, and assuring the company to obtain reasonable return. The adjustment condition is that future net present value should not be less than minimum value demand by the project company at the given confidence level. And price adjustment methods have also been developed for pricing modeâ… andâ…¡.Finally, using the data of Xiang-jing expressway BOT project, making probability distribution assumptions of key risks, applying Crystal Ball 7.22 software as the simulation tool, stochastic programming models of concession pricing have been verified and illustrated. The simulation results show that the models of concession pricing and adjustment can produce satisfying prices for governments and private sectors based on risk evaluation and reasonable allocation.