A game-theoretic approach to developing a concession renegotiation framework for user-pays PPPs

Abstract

In public–private partnership (PPP) contracting, a common practice for the hosting government is to fix the contractual clauses before signing a concession agreement with private investors. If there is no negotiation stage in a tendering process, the critical contractual parameters, e.g., the concession period, are usually stipulated by the government at the pre-contractual stage. However, due to the incompleteness of PPP contracts, the practice of presetting contractual parameters often leads to ex-post renegotiation or even project failure. Revenue uncertainty has become one of the most significant sources of PPP contract renegotiation, especially for user-pays PPPs such as highways and tunnels. In order to facilitate renegotiation between project parties in a user-pays PPP project, this paper develops a concession renegotiation framework targeting three critical contractual parameters, i.e., concession period, concession price and government guarantee, to control the revenue risk for project parties. Game-theoretic modelling is the approach used to determine the optimal adjustment values for the critical contractual parameters. The bargaining game model is developed to find the optimal adjustment values for the concession period and government guarantee when a renegotiation process is initiated, while the coalitional game model is employed to discuss renegotiation of the concession price. This study contributes to the theoretical foundation for understanding the renegotiation framework of user-pays PPP projects. Project JG is taken as a numerical example to validate the proposed model. The project parameters are extracted from the historical data for a local highway PPP in Yunnan, China and analysed using the econometrics software MATLAB. The renegotiation outcomes show that to control the revenue risk for private investors, the concession period needs to be extended to 34 years or the concession price adjusted to a number ranging between 4.38 and 5.13 USD. The data analysis outcomes also suggest that to control overly lucrative conditions for private investors, renegotiation of the concession price is a better choice.

Keywords:

• Concession renegotiation
• public–private partnerships
• bargaining game
• coalitional game
• revenue uncertainty

Disclosure statement

No potential conflict of interest was reported by the author(s).