Research On The Early Termination Compensation Of BOT Projects Based On CAPM Theory

BOT method, which works effectively on relieving government’s financial pressure and improving projects efficiency, got warm welcome and wide concern all over the world as soon as it was brought out. However, shortage comes along with merit. BOT mode also has the characteristics of large investment, long concession-period, and high risks. When these characteristics combine with the current condition of lacking of theoretical guidance and practical experience, they may easily leads to early termination.When it comes to early termination, termination compensation is the vital problem for the government and the project company to solve. Appropriate and reasonable compensation helps a lot in avoiding the two parties’dispute, speeding up the buyback process and guaranteeing the interest for both sides. Given this, this thesis carried out the research on the compensation of BOT projects facing early termination.Firstly, this research started with the study and review of related literature. The paper concluded the influencing factors, responsibility allocations, and the compensation decision-making methods of the BOT projects facing termination. Meanwhile, introduced the theory and basic assumptions of CAPM model, and analyzed the applicability of applying CAPM to determining the termination compensation of BOT projects.Secondly, analyze the shortage of current NPV method used to work out the termination compensation. CAPM model was conducted to solve the problem of termination compensation decision-making. To have a more accurate estimation on the remaining concession period’s NPV, on one hand the paper used CAPM and WACC theory to determine a more appropriate discount rate, on the other Time Series Method was used to estimate the traffic volume. This paper introduced the concept of return rate of risk compensation in the CAPM, and raised the idea that the termination compensation should be the value of the unrecovered risk compensation, despite considering the initial investment. Based on the above theory, the thesis constructed CAPM model and gave reasonable suggestion on the allocation of the estimated NPV between government and the project company. Meanwhile, parameters’quantification were also discussed.In the end, the paper applied the constructed CAPM model on a BOT projects case, and worked out a compensation suggestion. This application verified the applicability of the CAPM model constructed.