Study On Pareto-efficient Contracts Of BOT Road Projects

BOT, Build-Operate-Transfer, is an important part of PPP, Public Private Parternerships, and the main form of private capital participation in road construction. In China, private capital, began to enter into road projects in the1980’s. Since90’s, the main form of its participation has been BOT mode. In a BOT road project, the government and the private sector come on to a franchising agreement, which stipulates that the private sector build the road at its own expense, operate it for a certain time limit, named concession period, and then transfer the road to the government without compensation. BOT road projects was warmly welcomed for promoting the development of road infrastructure in our country with several prominent advantages, including greatly reducing the fund pressure on the local government for building and operating the road all by themselves, improving the road service quality and operating efficiency. However, just as other toll roads, when we analyze the current development of BOT roads in China, several problems have been noticed, such as high charge, poor service, unreasonable concession period and operating costs. All these problems turn out to stem from irrational franchising contracts.There two reasons for irrational contracts, one from the BOT road project itself, the other from the two principal parties of the contract, the government and the private sector. From the side of the BOT road project, the essence of which is very clear, such as large investment, long project cycle, many stakeholders, sophisticated technical difficulty, plenty risks. From the side of the government and the private sector, objectives of them are distinct greatly. The government wishes to undertake a maximum social welfare, while the private sector aims to maximize its profit during the concession period. The distinction causes a certain degree of contradiction and confliction when they negotiate the contract.Based on the above, considering the practical problems existing in the BOT roads in our country, this article undertakes targeted research of BOT road contracts to the optimize decisions of core contract variables, namely capacity, concession period and pricing. So the respective interests of the government and the private sector can be well coordinated, which may leads to solutions to faced problems. A Dual-objective planning model was proposed based on three decision variables of a BOT contract. Firstly, this article introduces a pareto-efficient contract of BOT road project, which is under the condition of complete information, regardless of the operating costs and the discount rate. However, operating costs is an important factor that affects the decision-making process, which should be taken into consideration. Because when BOT roads come into service, the operating costs is the main cost with a large capital demand. Therefore, secondly, we introduce operating costs into a BOT road contracts with considering its sustainability and variability and establish a new dual-objective planning model, named pareto-efficient contract of BOT road project with operating costs. Additionally the influence on contract decision making and the quality of service made by the discount rate and negotiation ability is also studied.By developing an example analysis and discussing the characteristics of the contract, it’s proved that the contract model we construct is feasible and accurate.