Analysis of Game-based Concession Period for PPP Projects Using Monte Carlo Simulation and Game Theory

Abstract

Public Private Partnerships (PPPs) are being employed by governments around the world as an alternative infrastructure project delivery. Under PPP arrangements, the private sector is welcomed to finance and operate the project, usually for a fixed period, on behalf of a responsible public agency. PPPs can help lessen the government's strain on fiscal budget and its increasing public borrowing. In addition, PPPs can help promote the private competition in providing the public goods and services, as well as better risk allocation between the public and private sectors. However, like in those many countries, Thailand’s PPP contracts have a fixed period, usually 25 to 30 years. Such long-term contracts certainly carry high operating risks, as a result, private concessionaires often seek contract renegotiation in case there is an event that negatively affects their operating revenues. Moreover, each PPP project has different settings, construction and O&M costs, benefits, and transferred risks. Thus, fixed period concession contracts may create opportunistic behavior of the concessionaire in seeking renegotiation when operating environment reveals not to be as expected, but retain all the windfall if the opposite happens. Therefore, this paper is to present a computational framework based on Monte Carlo simulation and Game Theory for determining concession period for a PPP project. The proposed method can also be applied, with trigger parameters such as least present value of revenues (LPVR), for contract duration readjustment by the government in the negotiation with the concessionaire.