Optimizing the concession period of PPP projects for fair allocation of financial risk

2019 ◽  
Vol 26 (10) ◽  
pp. 2347-2363 ◽  
Author(s):  
Hongyu Jin ◽  
Shijing Liu ◽  
Chunlu Liu ◽  
Nilupa Udawatta
Keyword(s):  
Financial Risk ◽  
The Body ◽  
Government Support ◽  
Risk Allocation ◽  
Fair Allocation ◽  
Optimal Length ◽  
Content Type ◽  
Determination Process ◽  
Concession Period ◽  
Private Investors

Purpose Targeting public–private partnership (PPP) projects, the purpose of this paper is to help decision makers fairly allocate financial risk between governments and private investors through a properly designed length of concession period. Design/methodology/approach On the one hand, the length of the concession period should be long enough to help private investors to achieve their expected profits. On the other hand, the length of a concession period cannot be decided without agreeing on an upper limit, since an overlong concession period takes too much time for governments to recover their investment and leads to an overly lucrative condition for private investors. Following this logic, the concession period decision range is decided, which defines the lower and upper limits for the length of the concession period. The net present values (NPVs) for governments and private investors are estimated via Monte Carlo simulation to better reflect the uncertainties. To further decide on the optimal length of the concession period, the principle of fair risk allocation between governments and private investors is adopted. The concession period, as an important project parameter, should help to minimize the financial risk gap between governments and private investors. Findings The developed concession period determination process is validated using a numerical example of a PPP transportation project. The analysis outcomes show that the proposed methodology is capable of determining the length of the concession period so as to control private investors’ profit within a reasonable range while achieving a fair allocation of financial risk between governments and private investors. The outcomes also indicate that, before determining the optimal length for the concession period, governments may need to make a choice between better financial risk allocation or stringent profit control for private investors. Research limitations/implications The determination process developed here may be inapplicable to social infrastructure PPPs where the income stream is less predictable. In addition, the data analysis targets a highway project with a capital subsidy provided by the government. To strengthen the effectiveness of the proposed determination process, further research should apply the model to PPPs with other kinds of government support. Originality/value The concession period for a PPP project is an important parameter and it is a common practice for governments to predetermine the length of the concession period before inviting tenders. The existing models for determining the concession period focus too much on the simulation of NPVs for project parties and neglect the importance of risk allocation in signing and maintaining a long-term contract. There is also a lack of research to evaluate the influence of governments’ preferences on the length of the concession period. To overcome the limitations of the existing models and enrich the methodology for concession period determination, this paper contributes to the body of knowledge by developing a concession period determination process which can help governments to make better decisions. The financial risk is expected to be more evenly shared between governments and private investors with the concession period derived from the proposed process. This determination process is also capable of evaluating the influence of governments’ preferences on the length of the concession period.

Determination of government guarantee and revenue cap in public–private partnership contracts

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hongyu Jin ◽  
Shijing Liu ◽  
Jun Li ◽  
Chunlu Liu
Keyword(s):  
Financial Risk ◽  
Public Private Partnership ◽  
Risk Allocation ◽  
Financial Risks ◽  
Private Partnership ◽  
Content Type ◽  
Government Guarantee ◽  
Determination Process ◽  
The Government ◽  
Private Investors

PurposeConsidering there is a lack of research in determining the optimal levels of government guarantee and revenue cap, the objective of this research is to determine their optimal levels to achieve a reasonable financial risk allocation between governments and private investors while avoiding overly lucrative conditions for private investors.Design/methodology/approachExpanded net present value (NPV) analysis and bargaining game theory are employed to construct the core of the determination process. The risk gap between governments and private investors is assessed via an expanded NPV analysis to see if the financial risk has been shared reasonably, based on which the range of the government guarantee is decided. A bargaining model is then created to help locate the optimal level of the government guarantee. Finally, a revenue cap, often combined with the government guarantee in public–private partnership (PPP) agreements, will be determined if overly lucrative conditions for private investors are observed or governments suffer a risk spillover.FindingsReferring to a real PPP project in Australia, Project BA is created to validate the applicability of the proposed determination process. The outcome shows that the proposed determination process in this paper is capable of determining the optimal levels of government guarantee and revenue cap. The government preferences towards risk allocation will influence the values of the optimal levels. Governments may also consider to alleviate the control over investors' net profits to mobilise private investors into PPP projects.Research limitations/implicationsThere is a potential possibility that the revenue cap fails to control the financial risk for governments or the overly lucrative condition for private investors. In other words, even though the revenue cap is set at the minimal level, the financial risk for governments still beyond their tolerance range or the overly lucrative condition for private investors still occurs. Future research may focus on other financial protective schemes which help to better control the financial risks for governments and profits for private investors.Originality/valueGovernment guarantees are frequently used as an investment incentive to reduce the probabilities of suffering loss for private investors. Nevertheless, the financial risks for governments may increase after providing guarantees and, as a result, revenue cap is required by governments to avoid placing themselves in an unprotected situation. By recognising the importance of the two contractual parameters, many scholars dig into their option values. However, there are very rare research works focussing on the method of determining the specific levels of government guarantee and revenue cap. To overcome the limitations of existing models and enrich the methodology for government guarantee and revenue cap determination, this paper contributes to the body of knowledge by developing a government guarantee and revenue cap determination process which contributes to a reasonable allocation of financial risks between governments and private investors.

scholarly journals CONCESSION PERIOD DETERMINATION FOR PPP RETIREMENT VILLAGE

2018 ◽  
Vol 22 (5) ◽  
pp. 424-435 ◽  
Author(s):  
Shijing Liu ◽  
Hongyu Jin ◽  
Benzheng Xie ◽  
Chunlu Liu ◽  
Anthony Mills
Keyword(s):  
Independent Living ◽  
Decision Variable ◽  
Ageing Population ◽  
Funding Sources ◽  
Retirement Village ◽  
Determination Process ◽  
High Investment ◽  
Concession Period ◽  
The Government ◽  
Private Investors

Demand for the construction of retirement villages is increasing with the worldwide growth in ageing populations. However, the development of retirement villages can be impeded by many factors, such as limited available land and high investment costs. Public–private partnership (PPP) as an alternative financing mechanism has been widely applied in the construction of public infrastructure projects and may provide new funding sources for building retirement villages. By applying PPP to the construction of retirement villages, the independent living requirements of seniors can be met and the financial difficulty of the construction of retirement villages can be resolved. Similar to other PPP projects, when retirement villages are constructed under a PPP process, the concession period is a key decision variable in relation to the success of the project. The concession period is stated in the project contract between the government and private investors, and stipulates the date when the project ownership and operation are transferred from the private investor back to the government. The government should take detailed information into consideration at the initial project stage when determining the concession period. This paper proposes PPP as a new procurement method to be applied to the construction of rental retirement villages and develops a concession period determination process for PPP retirement village projects with consideration of real options, focusing on the option to defer. An empirical example with alternative scales, which is developed from an existing retirement village in Geelong, Australia, is used to numerically verify the process and the impacts of key variables on the concession period. The determination process provides an alternative tool for governments to design the concession period before the tendering stage and will benefit the development of industries associated with services for the ageing population. This process can also be applied to the construction of other financially non-viable PPP projects such as social housing.

Determining a reasonable concession period for risky transportation BOT projects with government subsidies based on cumulative prospect theory

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jian Guo ◽  
Junlin Chen ◽  
Yujie Xie
Keyword(s):  
Decision Making ◽  
Traffic Volume ◽  
Decision Makers ◽  
Government Subsidy ◽  
Contingency Analysis ◽  
Content Type ◽  
Government Subsidies ◽  
Concession Period ◽  
Private Investors ◽  
The Impact

PurposeThis paper explores the impact of both government subsidies and decision makers' loss-averse behavior on the determination of transportation build-operate-transfer (BOT) concession periods based on cumulative prospect theory (CPT). The prospect value of a transportation project under traffic risk can be formulated according to the value function for gains and losses and the decision weight for gains and losses. As an extra income for investors, government subsidy is designed for highly risky aspects of BOT transportation projects: uncertain initial traffic volumes and fluctuating growth rates.Design/methodology/approachA decision-making model determining the concession period of a transportation BOT project is proposed by using the Monte-Carlo simulation method based on CPT, and the effects of risky behaviors of private investors on concession period decision making are analyzed. A subsidy method related to the internal rate-of-return (IRR) corresponding to a specific initial traffic volume and growth rate is proposed. The case of an actual BOT highway project is examined to illustrate how the method proposed can be used to determine the concession period of a transportation BOT project considering decision makers' loss-averse behavior and government subsidy. Contingency analysis is discussed to cope with possible misestimating of key factors such as initial traffic volume and cost coefficients. Sensitivity analysis is employed to investigate the impact of CPT parameters on the concession period decisions. An actual BOT case which failed to attract private capital is introduced to show the practical application. The results are then interpreted to conclude this paper.FindingsBased on comparisons drawn between a concession period decision-making model considering the psychological behaviors of decision makers and a model not considering them, the authors conclude that the concession period based on CPT is distinctly different from that of the loss-neutral model. The concession period based on CPT is longer than the loss-neutral concession period. That is, loss-averse private investors tend to ask for long concession periods to make up for losses they will face in the future. Government subsidies serve as extra income for investors, allowing appointed profits to be secured sooner. For the benefit side of contingency variables, the normal state of initial traffic volume, average annual traffic growth rate and bias degree and the government subsidy need to be paid close attention during the project life span. For the cost side of contingency variables, the annual operating cost variable has a significant impact on the length of predicted concession period, while the large-scale cost variable has minor impact.Originality/valueWith an actual BOT highway project, the determination of transportation BOT concession periods based on the psychological behaviors of decision makers is analyzed in this paper. As the psychological behaviors of decision makers heavily impact the decision-making process, the authors analyze their impacts on concession period decision making. Government subsidy is specifically designed for various states of initial traffic volume and fluctuating growth rates to cope with corresponding high risks and mitigate private investors' loss-averse behaviors. Contingency analysis and sensitivity analysis are discussed as the estimated values of parameters may not be authentic in actual situations.

Transaction costs incurred by construction owners

2014 ◽  
Vol 21 (4) ◽  
pp. 444-458 ◽  
Author(s):  
Huimin Li ◽  
David Arditi ◽  
Zhuofu Wang
Keyword(s):  
Transaction Costs ◽  
Transaction Cost ◽  
Transaction Cost Economics ◽  
Empirical Studies ◽  
Construction Project ◽  
The Body ◽  
Unit Price ◽  
Project Delivery ◽  
Risk Allocation ◽  
Content Type

Purpose – Transaction costs arise from economic exchange rather than production activities. However, the term “transaction cost” is not consistently defined in the construction industry because the concept of transaction cost is not universally accepted by all stakeholders in construction projects. As a result, empirical studies are few and conflicting because accessing data on transaction costs is problematic, and the interpretation of the data is difficult. The purpose of this paper is to analyze the transaction costs borne by the owner in a construction project from the perspective of transaction cost economics and construction project characteristics. Design/methodology/approach – A questionnaire survey was administered to construction owners. The factors that impact transaction costs were analyzed in the context of human-related issues (the owner's and the contractor's positions in the transaction), and environment-related issues (the transaction environment, and project management efficiency). Statistical analyses were conducted to compare the transaction costs incurred in the pre- vs post-contract phases of a project relative to the private vs public sector, different project delivery systems, different procurement methods, and different types of contracts. Findings – The owners surveyed believe that transaction costs may be reduced if the owner and the contractor follow some basic guidelines (e.g. experience in similar projects, prompt payment, good relationship with project participants, no irregularities in bidding, and only few material substitutions and claims), if the project is well-run (e.g. technical competency, strong leadership, prompt decision-making, effective communication, and fair/speedy conflict management), and if the transaction environment is favorable (e.g. fair risk allocation, early contractor involvement, and complete design documents). The findings of the survey also indicate that post-contract transaction costs are much higher than pre-contract transaction costs expressed as percent of project value and that transaction costs are affected by the owner (public vs private), the procurement method, the project delivery system, and the type of contract. Originality/value – The primary contribution that this research makes to the body of knowledge is a better understanding of transaction costs incurred by construction owners in the USA. The highest transaction costs are to be expected in the post-contract phase of public projects awarded on a unit price basis, but can be reduced, hence reducing overall project cost.

A risk-adjusted decoupled-net-present-value model to determine the optimal concession period of BOT projects

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nhat Nguyen ◽  
Khalid Almarri ◽  
Halim Boussabaine
Keyword(s):  
Net Present Value ◽  
Cost Benefit Analysis ◽  
Flow Analysis ◽  
Cost Benefit ◽  
The Body ◽  
Added Value ◽  
Present Value ◽  
Content Type ◽  
Private And Public ◽  
Concession Period

PurposeThe net-present-value (NPV) method is well-known for its drawbacks. To overcome some of these NPV weaknesses this paper aims to provide a methodology to determine an optimal concession period that treats risk and time separately. The purpose of this paper is to apply the notion of risk-adjusted decoupled net present value (risk-adjusted DNPV) to determine a conception period taken into consideration synthetic insurance premiums as compensation for risks.Design/methodology/approachThis paper conducts theoretical and empirical analysis and provides an integrated model for deriving concession periods of any PPP projects. The model is able to capture several contractual issues such risks costing and other contractual scenarios. Methodologically, the paper addressees both the issues of risk-based cost–benefit analysis and cash flow analysis bearing an emphasis of risk-adjusted DNPV to compute an optimum concession period.FindingsThe results show that using DNPV will produce a shorter concession period comparatively to NPV. The consequence of this is that the public sector will gain financially from an earlier transfer of the concession.Research limitations/implicationsThis paper contributes to the PPP literature by combing DNPV and risk to determine the PPP concession period for the mutual benefits both the private and public sectors. The decoupling of risk from traditional NPV computation will allow for risk pricing and tradability through insurance and allocation.Originality/valueThe attempt to decouple time and risk in the computation of NPV is the added value to the body of knowledge.

Risk analysis and mitigation for the city gas distribution projects

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Atul Rawat ◽  
Sumeet Gupta ◽  
T. Joji Rao
Keyword(s):  
Risk Factors ◽  
Financial Risk ◽  
Mitigation Strategies ◽  
Government Support ◽  
Financial Risks ◽  
Gas Distribution ◽  
Content Type ◽  
City Gas ◽  
And Performance ◽  
The City

Purpose This study aims to identify the operational and financial risks associated with the city gas distribution project in India and suggest appropriate strategies to mitigate them. Design/methodology/approach This study aims to identify the operational and financial risks associated with the city gas distribution project in India and suggest appropriate strategies to mitigate them. The survey data is evaluated using factor analysis to understand the latent structure of the critical risk factors. Second, the author uses Situation, Actor and Process–Learning, Action and Performance framework to suggest the mitigation strategies for the identified operational and financial risk factors. Findings The research identified five critical risk factors and suggested 39 mitigation strategies to address operational and risk factors impacting CGD projects. The findings of this research will enable the CGD companies to formulate long-term strategies for their business and adopt proactive measures to mitigate the operational and financial risks causing delay and increasing project costs. This study also highlights the importance of government support in developing a conducive environment for CGD industry to thrive. Originality/value The CGD projects are critical for natural gas growth in India’s energy mix. The project delay leads to a rise in the total cost involved and increases the payback period for the CGD companies. To the best of authors’ knowledge, this research is first of its kind that identifies the critical operational and financial risks affecting CGD projects in India and suggests the mitigating strategies for them.

Understanding the risks in China's PPP projects: ranking of their probability and consequence

2011 ◽  
Vol 18 (5) ◽  
pp. 481-496 ◽  
Author(s):  
Yongjian Ke ◽  
ShouQing Wang ◽  
Albert P.C. Chan ◽  
Esther Cheung
Keyword(s):  
Financial Risk ◽  
Subjective Evaluation ◽  
Index Score ◽  
Chinese Government ◽  
Market Demand ◽  
Investment Environment ◽  
Content Type ◽  
Potential Risks ◽  
Interest Rate Change ◽  
Private Investors

PurposeBased on the Chinese government's increased public‐private partnership (PPP) experience in the last decade, they have made a lot of efforts to improve the investment environment. This paper hence aims to conduct a more up‐to‐date evaluation of the potential risks in China's PPP projects.Design/methodology/approachAs part of a comprehensive research looking at implementing PPP, a two‐round Delphi survey was conducted with experienced practitioners to identify the key risks that could be encountered in China's PPP projects. The probability of occurrence and severity of the consequence for the selected risks were derived from the surveys and used to calculate their relative risk significance index score.FindingsThe results showed that the top ten risks identified according to their risk significance index score are: government's intervention; poor political decision making; financial risk; government's reliability; market demand change; corruption; subjective evaluation; interest rate change; immature juristic system; and inflation. Further analysis was conducted on these risks so that the possible consequence, the most impacted parties, and the preferred allocation are discussed. Recommendations on commercial principles or contract terms between the Chinese government and private consortium are also provided.Originality/valueThese up‐to‐date findings concerning the probability and consequence of key risks would provide a valuable reference for private investors who are planning to invest in infrastructure projects in China.

Trust and risk-taking in a pension investment setting

2014 ◽  
Vol 32 (5) ◽  
pp. 408-428 ◽  
Author(s):  
Jeanette Carlsson Hauff
Keyword(s):  
Risk Taking ◽  
Financial Risk ◽  
Pension System ◽  
The Body ◽  
Financial Knowledge ◽  
Risk Level ◽  
Financial Industry ◽  
Content Type ◽  
Influential Variable ◽  
The Individual

Purpose – The purpose of this paper is to examine the effect of trust on financial risk-taking in a pension investment setting. Further: to delineate the effects of varying levels of individuals’ financial knowledge and involvement on risk-taking, and on the trust-risk-taking relation. Design/methodology/approach – Questionnaire to a subsample of Swedish bank customers, thereafter statistical analysis using multiple moderated regression. Findings – Support the notion of trust being an influential variable in explaining risk-taking, and show that highly knowledgeable and highly involved individuals take on more risk. That individuals defined by knowledge and involvement have a different trust-risk-taking relation, however, not verified. Research limitations/implications – Adds to the body of research emphasising the importance of “soft”, emotionally tilted input to consumers’ decision making, even concerning financial tasks such as risk-taking. Narrowly defined pension system environment may hamper generalisations since many constructs tested are situation specific. Practical implications – From a practical perspective, individual investment behaviour is of increasing importance for the individual as retirement saver and for the financial industry in its attempt to tailor-make financial products to its customers. From a legislators’ perspective, the dimensions of knowledge and involvement describe the type of consumer supposedly most vulnerable: the uninterested individual with low levels of financial knowledge. Originality/value – Tests the importance of trust on choice of risk level in a pension setting and is able to expand previous results into the area of consumer behaviour regarding pensions. The paper further manages to assess the specificities as regards the relation between trust and risk-taking for individuals with varying levels of knowledge and involvement.

scholarly journals User-driven efforts in creating knowledge graph information system

2020 ◽  
Vol 36 (2) ◽  
pp. 97-111
Author(s):  
Stanislava Gardasevic
Keyword(s):  
Information System ◽  
Information Seeking ◽  
Information Needs ◽  
Resource Discovery ◽  
The Body ◽  
Knowledge Graph ◽  
Structured Interviews ◽  
Community Members ◽  
Study Objective ◽  
Content Type

Purpose This paper presents the results of a qualitative study that involved students of an interdisciplinary PhD program. The study objective was to gather requirements to create a knowledge graph information system. The purpose of this study was to determine information-seeking practices and information needs of this community, to inform the functionalities of a proposed system, intended to help students with relevant resource discovery and decision-making. Design/methodology/approach The study design included semi-structured interviews with eight members of the community, followed by a website usability study with the same student participants. Findings Two main information-seeking styles are recognized and reported through user personas of international and domestic (USA) students. The findings show that the useful information resides within the community and not so much on the program website. Students rely on peer communication, although they report lack of opportunities to connect. Students’ information needs and information seeking are dependent on their progress through the program, as well as their motivation and the projected timeline. Practical implications Considering the current information needs and practices, a knowledge graph hosting both information on social networks and the knowledge produced by the activities of the community members would be useful. By recording data on their activities (for example, collaboration with professors and coursework), students would reveal further useful system functionalities and facilitate transfer of tacit knowledge. Originality/value Aside from the practical value of this research that is directly influencing the design of a system, it contributes to the body of knowledge on interdisciplinary PhD programs.

Using the private finance initiative for energy efficiency projects at the urban scale

2016 ◽  
Vol 10 (1) ◽  
pp. 99-117 ◽  
Author(s):  
Alberto De Marco ◽  
Giulio Mangano ◽  
Fania Valeria Michelucci ◽  
Giovanni Zenezini
Keyword(s):  
Energy Efficiency ◽  
Urban Areas ◽  
Light Emitting Diode ◽  
Project Finance ◽  
Private Finance Initiative ◽  
Content Type ◽  
Light Emitting ◽  
Alternate Forms ◽  
Private Investors

Purpose – The purpose of this paper is to suggest the usage of the project finance (PF) scheme as a suitable mechanism to fund energy efficiency projects at the urban scale and present its advantages and adoption barriers. Design/methodology/approach – A case study is developed to renew the traffic lighting system of an Italian town via replacement of the old lamps with new light-emitting diode (LED) technology. Several partners are involved in the case project to construct a viable PF arrangement. Findings – The case study presents the viability of the proposed PF scheme that provides for acceptable financial returns and bankability. However, it also shows that the need for short concession periods may call for a public contribution to the initial funding to make the project more attractive to private investors. Practical implications – This case study is a useful guideline for governments and promoters to using the PF arrangement to fund energy efficiency investments in urban settings. It helps designing an appropriate PF scheme and understanding the advantages of PF to reduce risk and, consequently, increase the debt leverage and profitability of energy efficiency projects. Originality/value – This paper contributes to bridging the gap about the lack of works addressing the implementation of the PF mechanism in the energy efficiency sector in urban areas. The importance of this paper is also associated with the shortage of traditional public finance faced by many cities that forces to seek for alternate forms of financing.

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