Analysis of a Build–Operate–Transfer Scheme for Road Franchising

Private provision of public roads through build–operate–transfer (BOT) contracts is increasing around the world. Under a BOT contract, a private firm would build a road, charge tolls to road users for a period, and then transfer the road to the government. By viewing a BOT contract as a combination of three variables—concession period, road capacity, and toll charge—we study optimal BOT contracts that maximize social welfare and allow the private sector an acceptable profit. We also study how to reach optimal BOT contracts, either through bilateral negotiations between public and private sectors or through competitive auctions.