Stochastic Revenue and Cost Model for Determining a BOT Concession Period under Multiple Project Constraints

The concession period is an important issue in the contractual arrangement of build-operate-transfer (BOT) projects, such as highways, bridges, and tunnels. In determining the concession period, it is predominantly the toll revenue and construction costs that affect how long the concessionaire needs to be in operation after the completion of the project. This paper presents a stochastic revenue and cost model to determine a concession period under multiple constraints in planning a BOT infrastructure project. In the study, the stochastic process is converted into an equivalent discrete form, and its parameters are estimated using historical data. Based on the process, a principle-agent problem is addressed as a solution to the conflict between the owner and the concessionaire. This methodology incorporates these stakeholders’ interests in terms of (1) incentive constraints, and (2) participation constraints. In a case study, a numerical simulation is carried out to assess the risk of toll revenue and construction costs when applied in practice and to demonstrate the applicability of the stochastic revenue and cost model.