Estimating Concession Period for Public Private Partnership (PPP)-based Infrastructure Development: Application of LCCA for Highway Projects

Abstract

Public-Private-Partnership (PPP) is a widely adopted delivery method for public infrastructure throughout the world. The factors affecting PPP and its concession period have always presented complexities to decision makers. The optimum concession period for any PPP based infrastructure project is very important and sometimes conflicting; private parties attempt at not only ensuring payback of capital amount but also getting attractive ROI (profit) thus seeking a lengthy concession period, but the public entity ensures timely transfer of the constructed facility/infrastructure all the while assuring customer satisfaction and high quality of service. To make matters worse, the concession agreements rarely take into consideration the life cycle cost of constructing, operating and maintaining the infrastructure. In order to reconcile this critical conflict of interest, the proposed research aims at improving the concession period estimation by incorporating the probabilistic LCCA as well as System Dynamics. This will help parties involved in PPP initiatives better understand the financial implications of their undertaking: the private parties may ensure substantial profit on top of capital expenditure along with the confidence of closure within planned and mutually agreed upon time. The donor agencies, which otherwise have trepidation regarding the extension of concession, causing either loss of cash flow or negatively affecting the financial viability of the constructed facility, may make critical decisions based on better estimates – following their long-term investment policies and exposing optimum levels of portfolio. The public entity, on the other hand, may figure out the optimum amount of toll/tariff to be charged from the users, as well as timely transfer of rights from concessionaire. The decision-making implications of this research deal with donor confidence at the planning phase as well as monitoring the concession period as the increased certainty of such period will encourage other funding agencies to invest in the infrastructure development. This will also impact the economic and social sector development indices of the country. This study attempts to provide a win-win-win decision making process for considering the significant factors by formulating a decision making equation. It further classifies and arranges these factors on the basis of literature review. As a result the existing research from 2005 to 2015 was classified into 6 groups and 3 areas of influence containing a total of 59 factors with the factor involved risk’s severity [in PPP projects] having maximum frequency. The practical implications of this matrix facilitate the decision makers in critical scenarios. The discussion and conclusions are expected to trigger an interesting debate over the criticality of decision making factors for estimating the concession period as reported in the literature.