Study On BOT Concession Period Based On Principal-agent Theory

BOT project financing is not only an important creative way in infrastructure construction, but also an important means for private investment in public goods. With the characteristics of integrating financial innovation and institutional innovation, BOT project raises widespread attention in the theory and practice from its birth date. At present, both in the developed and developing countries BOT projects are widely used in infrastructure construction with an expanding trend. These years our country is developing BOT project financing to increase the supply of infrastructure. In the aspect of sewage treatment plants, For example, many cities have been encouraging private capital in the construction and operation of sewage treatment plants. In practice, however, the re-negotiations between the project company and the government indicate that many projects failed. The project failure causes damage to the benefit of private investors, and more importantly reduces social welfare. Thereby, the core of our concern is the reasonable franchise agreement signed between the government and the project company, which not only protects the benefits of both sides but also stimulates the project company to work hard and then ensures the success of the project.The opinion of this paper is that making an incentive concession period is one of the key factors to ensure the success of the project; the concession period of BOT project is not only the interest-dividing and risk-sharing instrument between the government and the project company but also an important means to stimulate and constrain the project company to work hard. The increase in project investment, indicating that project company works hard, will help improve the project quality and extend the project life cycle then the increase in social welfare. On behalf of social welfare, the government expects the project company to increase its investment; but the real investment is the project company's private information; hence information is asymmetric between the government and the project company. Only if the government makes an incentive concession period, the project company would increase project investment and improve social welfare. Based on the ideas above, this paper uses principal-agent theory and makes a study on the designing of the incentive BOT concession period.The structure of the paper develops as follow:Part One is preface. This part includes three aspects: the first is study background and the issues studied; the second is the definition of the conception involved and clarification of the scope studied; and the third is the meanings of our study. Part Two is literature review. This part consists of two aspects: the first is the review of the study on principal-agent theory and the second is the review of BOT project financing theory.Part Three, according to the characteristic of BOT project market, divides BOT projects into two kinds: market-decided projects facing directly to end-users and cost-decided projects where sales agreements are signed between the project company and the government. Different kind of projects faces different risk. This paper analyzes various uncertainties and risk faced by the project company and the government in different types, the result is that for the market-decided projects, the project's main risk is revenue reduction caused by insufficient demand; for the cost-decided projects, the project's main risk is the increase in operating cost induced by fluctuations in the prices of raw materials; and the government's main risk is moral hazard due to asymmetric information. Further more, this part makes a statistical analysis on collected dada of BOT projects.Part Four, based on social utility, uses game theory and studies the game course between the government and the project company. We fiind that the concession period made by the government is an important factor for project company to decide whether to participate and invest in the project construction or not: if the concession period is so short that the project company can not strive to reach the expected utility, the project company will refuse to participate; by contrary, the company does not strive and achieves substantial revenue, and then the concession period loses its incentive role. Therefore, theoretically, the concession period made by the government not only ensures the project company to engage in the construction and operation of the project but also constrains the company to strive to work. This conclusion gives theoretic basis in using principal-agent theory to design the incentive concession period.Part Five and Part Six use principal-agent theory and make a study on how to decide BOT project concession period with both participation constraint and incentive constraints on the condition of symmetric information and asymmetric information respectively from the view of government, and these two parts fully discuss the relevant factors that influences the concession period.Part Five studies that on the condition of symmetric information, the government determines the incentive concession period of BOT project according to the company's revenue and cost. We find that the concession period is a risk-sharing instrument between the project company and the government and the period is decided according to the company's attitude to the risk: for the project company, the bigger the risk aversion coefficient is, the more reluctant the company is to participate in the project with short concession period and large income flow per term; vice versa.Part Six, on the condition of asymmetric Information, studies the shortest concession period (Tjion) inducing companies to participate in the projects and the win-win concession period (T~*) . The result is that initial investment, team management, maintenance cost parameter, the operating income of the project and the opportunity cost of the project company etc are the main factors impacting on the win-win situation which can be reflected by the relevant data of the project and the market. Therefore, in practice, the government may be able to calculate out the concession period with the incentive constraint and participation constraint. Further more, we find the incentive constraint and participation constraint differ as the type of the project changes. For the market-decided project, the initial investment of the project is the key element and it is very sensitive to the expected revenue and the risk of the product; for the cost-decided project, the price of the product is the key point for win-win situation.Part Seven uses econometric methodology and analyzes the regression relationship between the concession period and the standardized investment with Eviews software. The result shows that project investment is the key element to determine the concession period, which indicates that present concession period satisfies participation constraint. On the regression of the standardized investment with term as the explaining variable we find that the concession period influences the investment amount insignificantly, which indicates the incentive role of the concession period is slight. This proves that the concession period of BOT project plays a role of both incentive constraint and participation constraint in the behavior of the project company; however the incentive role is not significant at present.