USING BARGAINING-GAME THEORY FOR NEGOTIATING

CONCESSION PERIOD FOR BOT-TYPE CONTRACT

Presented by: Alaa Albesher

OUTLINE:

Objective.

Concession Period.

BOT Concession Model (BOTCcM).

Principles of Bargaining Theory.

Bargaining Process.

Critique.

OBJECTIVE:

Concession period is one of the most important decision variables in arranging a BOT-type contract.

This paper introduces a method to enable the identification of a specific concession period.

CONCESSION PERIOD

The granted period of time by government to operate the facility and generate revenue.

CONCESSION PERIOD EFFECT:

Short concession period investor rejects the contract or increase service fees. (Investor or Public Disadvantage)

Prolonged concession period government lose profit.(Government Disadvantage)

BOT CONCESSION MODEL (BOTCCM):

The span of the concession period shall protect the basic interests of both the government and the private investor.

IR ≤ NPV(Tc) ≤ NPV(Tf)

IR: expected return of investment.

NPV(Tc): net present value generated during the concession period.NPV(Tf): net present value generated during the project economic life.

(BOTCCM):

BASIC PRINCIPLES OF BARGAINING THEORY:

Bargaining is a process through which the players try to reach an agreement by making offers and counteroffers.

Principles:

1. Rational behavior.

2. Information sharing.

3. Bargaining payoff.

4. Bargaining cost.

5. Time value (discount factor)

BARGAINING PROCESS:

TC_L ≤ TC ≤ TC_U

FIRST-ROUND OFFER BY THE GOVERNMENT:

Should make a reasonable offer by analyzing the investor’s position.

This will reduce the chance of further bargaining.

Counteroffer will cause bargaining cost and time cost.

Maximum and minimum concession period values gets closer with bargaining.

FIRST-ROUND OFFER BY THE INVESTOR:

Should make a reasonable offer by analyzing the government’s position.

This will reduce the chance of further bargaining.

Counteroffer will cause bargaining cost and time cost.

Maximum and minimum concession period values gets closer with bargaining.

CRITIQUE:

Positive: There are only few studies regarding the

length of the concession period. Specific agreeable concession period can

be identified by using this method.

CRITIQUE:

Negative: Bargaining will take longer than if

concession time is specified in the tender. Calculations are not easy to follow because

of the symbols used. If the maximum value is at the last year of

the project life, this will make a very long time range.

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