A Study On Concession Period Of TOT Project

Since the 1980s, with the marketization of public utilities reform gradually,Countries begin to include concession auction in the corresponding reform measures.On one hand,it can reduce the government financial input, thus directly reduce the pressure on government finances, on the other hand,,it can also make full use of the flexibility of private capital and professional management experience to improve the operational efficiency of utility.Nowadays, public utilities concession auction also has been widely used in our country,such as BOT,TOT,etc.The main purpose of the BOT project is to alleviate the financing difficulties, at the same time to improve the operational efficiency of the project while because TOT project has nothing to do with infrastructure construction, so it is a efficiency-oriented franchising project.This paper chose to study the TOT project, because considering the situation in many industries, such as water industry, power industry and the highway industry, the construction of infrastructure has been built in advance by the government, and then to the concession of the auction. As TOT project does not involve the construction of infrastructure, it avoid a lot of the construction projects issues due to uncertain factors Besides,it can liquidize the risk of state-owned stock assets, activate the folk capital, improve the management efficiency and so on.In practice, however, the period of TOT concession operation has been the core of the concession contract parameters.If the concession period of the TOT project is too long, it can make the enterprise to produce monopoly, causing the loss of social welfare.If concession period IS too short, the enterprise cannot recover costs in a limited period, enterprises are not willing to enter the industry, leading to project failure.Therefore, we must determine a reasonable period, that not only ensure enterprise can recover the cost, and the maximum to avoid monopoly behavior which caused the loss of social welfare has become the core issue of concession auction and negotiation agreement.Based on previous study,this paper mainly use auction theory and incentive theory to study how asymmetric information influence the concession period.Due to the existence of asymmetric information problem, the government cannot identify the cost information of each enterprise, thus unable to determine to choose which company to operate so that achieve the objectives of the maximization social welfare.Therefore, in order to reduce the search costs, a good incentive mechanism is a must ensure enterprise can automatically show their real costs.As s result, concession right auction become the best choice.As long as enough enterprises competing for the concession auction, its real cost will be exposed in repeated offer-bid,thereby reducing the asymmetric information problem.If in the process of operation, enterprises and government information is symmetrical, the enterprise can’t use private information to get the information monopoly rent. in order to maximize the social welfare, prices can be made according to the marginal cost and corresponding subsidies should be provided by the government. Or make prices according to the average cost so to guarantee the enterprise make both ends meet. Due to asymmetric information, there is no business of monopoly and the government don’t need to regulate the enterprises, concession period may be extended infinitely in the whole project life.However, the asymmetric information between the government and enterprise exist objectively. Therefore, to make the social welfare maximum, the government must weigh the cost deviation caused by the enterprise monopoly behaviors and the loss caused by multiple auction fees. The reasonable concession period is such a period that Minimize the total cost.In the last part of the paper,we analyze two situation that may influence the period--incomplete contract and new investment during operating terms.In conclusion, to determine a reasonable concession period,we must design an effective and incentive mechanism to reduce the extent of asymmetric information between both sides and increase the information transparency.