Computational Framework for the Determination of Duration and Revenue Sharing Rates in PPP Concession Renewal: A Monte Carlo and Risk Premium Approach

Abstract

Public Private Partnership (PPP) has been extensively used as an innovative and integrated form of project delivery, especially for large-scale infrastructure projects. When a PPP concession is about to expire, the PPP law may require a study to compare benefits and risks as part of the decision to renew or end the contract. The study, based on expected value analysis, will be used by the contracting authority for negotiating with the incumbent over terms such as contract duration and revenue sharing rate. However, a major flaw of expected value analysis is the inability to provide a possible risk profile of the contracting agency or concessionaire. Accordingly, this paper presents a computational framework for determination of the contract duration and the revenue sharing rate using Monte Carlo simulation and a risk premium approach. The proposed framework can be used to depict the risk profile of the concessionaire under different contract durations and revenue sharing rates. To illustrate how the proposed model can be applied in practice, a PPP toll road project is adopted as the case study. The results of the study suggest that the revenue sharing rate is the key to the negotiation of the contract to be renewed. The proposed method may be used by governments for negotiation with an incumbent concessionaire or to achieve a fair price when a competitive retendering process is considered.