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Concession period for PPPs: A win–win model for a fair risk sharing

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DOI: 10.1016/j.ijproman.2014.01.007

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International Journal of Project Management 32 (2014) 1223 – 1232
www.elsevier.com/locate/ijproman

Concession period for PPPs: A win–win model for a fair

risk sharing
Nunzia Carbonara, Nicola Costantino, Roberta Pellegrino ⁎
(DMMM)Department of Mechanics Mathematics and Management, Polytechnic of Bari, Viale Japigia 182 70126, Bari, Italy

Received 22 October 2013; received in revised form 16 January 2014; accepted 21 January 2014
Available online 7 February 2014

Abstract

Public Private Partnership (PPP) is adopted throughout the world for delivering public infrastructure. Despite the worldwide experience has
shown that PPP can provide a variety of benefits to the government, to fully gain them several critical aspects related to a PPP project need to be
managed, among these the determination of the concession period.
This paper provides a methodology to calculate the concession period as the best instant of time that creates a ‘win–win’ solution for both the
concessionaire and the government and allows for a fair risk sharing between the two parties. In other words, the concession period is able to satisfy
the private and the government by guaranteeing for both parties a minimum profit, and, at the same time, to fairly allocate risks between parties. In
order to take into account the uncertainty that affects the PPP projects, the Monte Carlo simulation was used. To demonstrate the applicability of
the proposed model, a Build–Operate–Transfer (BOT) port project in Italy has been used as case study.
© 2014 Elsevier Ltd. APM and IPMA. All rights reserved.

Keywords: Concession period; Public Private Partnerships; Risk allocation; Monte Carlo simulation

1. Introduction provide a variety of benefits to the government. In particular,

In the last decades, due to public budget constraints and the
severe need for new or upgraded infrastructure, more and more
governments have fostered private sector involvement in public
investment projects. For this reason, Public Private Partnerships
(PPPs) have become a major scheme in delivering public
infrastructure (Hodge and Greve, 2007; Kwak et al., 2009).
PPPs are “agreements where public sector bodies enter into
long-term contractual agreements with private sector entities for
the construction or management of public sector infrastructure
facilities by the private sector entity, or the provision of services
by the private sector entity to the community on behalf of a public
sector entity” (Grimsey and Lewis, 2002). The idea of allowing
private firms to finance projects of public infrastructure results in
the emergence of PPPs (Li and Akintoye, 2003; Tang et al.,
2010). The worldwide experience has shown that PPPs can
⁎ Corresponding author at: Viale Japigia 182, 70126 Bari Italy. Tel.: + 39
0805962850.
E-mail addresses: ncarbonara@poliba.it (N. Carbonara),
costantino@poliba.it (N. Costantino), r.pellegrino@poliba.it (R. Pellegrino).
0263-7863/$36.00 © 2014 Elsevier Ltd. APM and IPMA. All rights reserved.
http://dx.doi.org/10.1016/j.ijproman.2014.01.007
PPPs can increase the “value for money” spent for infrastructure
services by providing more-efficient, lower-cost, and reliable
services; improve the quality and efficiency of infrastructure
services, and promote local economic growth and employment
opportunities. Furthermore, PPPs allow the public sector to
transfer risks related to construction, finance, and operation of
projects to the private sector and to keep public sector budget
deficiencies down (Kwak et al., 2009).
However, to fully gain the above listed benefits several
critical aspects related to a PPP project need to be managed.
Among these: the assessment of risks associated with the PPP
project; the identification of suitable risk allocation and mitigation
strategies; the definition of a sound financial plan; the selection of
the appropriate concessionaire; and the determination of the
concession period. Researchers have proposed several conceptual
models, tools and techniques to support the decision processes
related to these critical aspects (Garvin and Ford, 2012; Li et
al., 2005; Schaufelberger and Wipadapisutand, 2003; Zhang,
2005a, 2005b).
This paper focuses on the length of concession period,
considered one of the most important issues in the PPP contracts.
1224 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232
In the common international practice, the government usually
presets the concession period to a fixed length, requests the
concessionaire to bid for other project aspects, and guarantees the
concessionaire a certain level of internal rate of return (Zhang,
2009). This practice, however, does not generally lead to an
efficient selection of concessionaires and it also induces the
frequent failure or renegotiation of concession contracts (Gustavo
and Rus, 2004). To overcome these problems, there is a need
for the government to use a methodology that appropriately
calculates the concession period. Recently, some researchers
attempted to determine a reasonable concession period.
Most of the models proposed in the literature use the net
present value (NPV) of the project cash flow as criterion for
calculating the concession period. Some of these determine the
concession period considering only the maximization of the
concessionaire's benefits. For example, Engle et al. (2001) and
Vassallo (2006) suggest the least-present-value of revenue
(LPVR) method to determine the concession period of toll
roads. Other models adopt a win–win approach, which means that
the concession period is determined in order to maximize benefits
of both the government and the concessionaire (Shen et al., 2002;
Zhang and AbouRizk, 2006). Among these, only few models take
into account the risk exposure of both partners (Chan et al., 2011;
Hanaoka and Palapus, 2012; Shen and Wu, 2005), but none of
these allows one for a fair risk sharing between the parties.
Finally, most of the developed models determine the
concession period as a time interval within which a specific
concession period could be agreed upon by the government
and the private sector and very few of the previous methods
calculate the concession period as the instant of time within
which the concession must end.
In order to overcome the above discussed limitations, the
present paper develops a model for calculating the concession
period as the best instant of time that creates a ‘win–win’
solution for both the concessionaire and the government and
allows for a fair risk sharing between the two parties. In other
words, the concession period is able to satisfy the private and
the government by guaranteeing for both parties a minimum
profit, and, at the same time, to fairly allocate risks between
parties. In order to take into account the uncertainty that affects
PPP projects, the Monte Carlo simulation is used.
To demonstrate the applicability of the proposed model,
we apply it to a Build–Operate–Transfer (BOT) port project
launched by the Municipality of Bari (Southern Italy) to construct,
operate and maintain the “San Cataldo Port of Bari”, consisting
in a tourist port, a dock for cruise ships, and six multi-purpose
buildings.
Section 2 of this paper reviews the existing methodologies
for determining concession period. In the third section, we
present the win–win concession period model and in the next
section we apply it to a Build–Operate–Transfer (BOT) port
project in Italy. Conclusions end the paper.
2. Concession period
Concession period starts from the signing of the concession
agreement between the government and the private sector
indicating the span of time within which the private sector is
responsible for the construction phase and operation phase in
BOT projects. Concession period is a key decision variable in
the arrangement of a PPP contract. The length of concession
period is mainly related to the recovery of investment and return
required by the concessionaires. The general principle for
determining its length is that the concession period should be
long enough to allow the concessionaire to recoup investment
costs and earn reasonable profits within that period (Smith,
1995).
Generally, a longer concession period is more beneficial to
the private investor, but a prolonged concession period may
induce loss to concerned government. Alternatively, if the
concession period is too short, the investor will either reject the
contract or be forced to increase the service fees in the
operation phase. Consequently, the risk burden due to the short
concession period will be shifted to the party who uses and
pays for the facilities. Therefore, establishing an appropriate
concession period is important for the success of a PPP project
(Ng et al., 2007b; Ruizheng and Li, 2010).
Each concession has its duration, which may be fixed or
variable. The choice depends on various risk factors such as
completion time, product price and market demand. Usually,
the concession has a fixed period, in which risk factors are
managed through tariff design supplemented by other mea-
sures. Sometimes, the concession has a variable period, which
may be extended if the specified risk factors are worse than
expected or shortened if they are better than expected. For
example, in order to deal with demand risk, the concession
period can be varied according to the market demand. If the
market demand is lower than expected, the concession period will
be extended to allow the concessionaire to earn a reasonable
return, and vice versa.
Different models have been developed and proposed in the
literature to quantitatively determine the optimal value of the
concession period. Most of these models, with the due differences
and specificity, use the Net Present Value (NPV) of the project
as a basic parameter for calculating the optimal value of the
concession period. An exception is the study of Ng et al. (2007a)
that considers the internal rate of return (IRR) as criterion for
project evaluation and calculates the concession period that is less
risky to the concessionaire by fixing the minimum, expected, and
maximum IRR acceptable to the concessionaire.
Shen et al. (2002, 2007) develop an analytical deterministic
method (BOTCcM) for determining the length of the conces-
sion period to be granted to the private sector in BOT projects
that can protect the interests of both the host government and the
private investor. BOTCcM proposes an interval for a concession
period negotiation that consists of two critical points: the first
point, called the starting point of the interval, aims at protecting
the interests of the private investor; the second point, called the
endpoint of the interval, aims at protecting the interests of the host
government. Wu et al. (2012) improve BOTCcM by considering
at project's transfer time its net asset value that is usually
significantly greater than zero and represents a revenue for the
government. Hanaoka and Palapus (2012) propose a methodol-
ogy to determine a reasonable concession period that considers
 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232
the effect of risks on uncertain concession items in project
evaluation. In particular, by using Monte Carlo simulation and
bargaining game theory the methodology generates a concession
period interval within which a specific concession period could
be agreed upon by the government and the private sector. Any
point within the interval could be considered as the optimal
concession period that would be advantageous to both BOT
players. Ye and Tiong (2003) evaluate the mean net present value
(NPV), variance and NPV-at-risk of different concession period
structures through Monte Carlo simulation, so that both the
government and the concessionaire can understand their risk
exposure and rewards. Zhang (2009) proposes a win–win
concession period determination methodology, in which BOT
projects are addressed as a principal-agent maximization problem.
In this research both deterministic and simulation-based methods
are provided to determine the concession period, with detailed
step-by-step procedures.
Engel et al. (2001) suggest the least-present-value of revenue
(LPVR) method to determine the concession period of toll roads
so that the franchise length is adjusted endogenously to demand
realization.
Other researchers use the fuzzy approach to determine the
concession period appropriately. Mostafa et al. (2010) adopt a
Fuzzy-Delphi technique to calculate the length of concession
period considering uncertainties. In particular, they determine
the values of different uncertain factors affecting a BOT project
by considering the opinions of a group of experts (Delphi),
and then calculate the NPV value by taking into account the
resulted aggregated values of uncertain input parameters, finally
determine the concession period using the fuzzy approach. The
proposed methodology offers a fuzzy number for the length
of concession period. Ng et al. (2007b) develop a fuzzy multi-
objective decision model to evaluate and establish the most
satisfactory concession item options for BOT projects.
Table 1 lists the existing models developed to determine
the concession period, classified with respect to three key
aspects.
The first aspect concerns the computation of the concession
period. Respect to this, the discussed models can be classified
in two main categories: 1) models that allow the calculation of
the instant of time within which the concession must end;
Table 1
Models for concession period calculation.
Model Concession period calculation Uncertainty/risk factors Satisfied party
Instant of time Time interval
LPVR X X
Fuzzy-Delphi X X
Fuzzy multi-objective X X
Fuzzy Petri Net–genetic algorithm X X
Simulation model X X
MC-PDM X X
BOTCcM X X
CPM-MCS X X
MCS-bargaining game theory X X
BOTCcM-R X X
1225
2) models that calculate the concession period as a time interval
within which the concession contract must end.
The second aspect involves the uncertainties and risk factors
affecting PPP projects. By reviewing the literature, we found
models which do not take into account risks and uncertainties
that affect over a long period many of the input variables; and
models in which uncertainties are accounted for. In the first case a
deterministic approach is adopted to calculate the concession
period, while in the second case stochastic models have been
developed, in which each variable affected by uncertainty is
modeled by a statistical distribution and the concession period is
determined by using simulation methods.
Finally, the third aspect concerns the perspective adopted in
calculating the concession period, in terms of interest to safeguard
and party to satisfy. In this respect, some models, focusing only
on the private party perspective, require that the concession
should be long enough to allow the concessionaire to obtain a
reasonable profit. Recently, in contrast with this approach, in
order to safeguard the multiple interests of the public sector and
the profit-making interest of the private sector, some researchers
proposed a win–win approach to determine the concession period
that takes into account both the government and investor interest
perspective. Each of these studies implements the win–win
approach in different ways. For example, according to Zhang
(2009) the win–win approach is implemented by posing the
following two constraints: 1) the concession should be long
enough to allow the concessionaire to obtain a reasonable IRR
and 2) the concessionaire acts in the interest of the government,
for example, the concessionaire may be required to continuously
improve efficiency, cost effectiveness and service quality; sustain
a stable and public-affordable price regime; and transfer excessive
profits to the government. Following the win–win approach,
Hanaoka and Palapus (2012) employ the bargaining game
theory to find a reasonable concession period. Thus, the specific
concession period is considered as a bargaining process wherein
(i) the government and the private sector act as the players in
reaching a BOT agreement, (ii) the benefit to be generated within
the concession period interval within which the end of the
concession period could occur, is the conflict of interest, and (iii)
the negotiation does not end until an agreement of both BOT
players is reached.
Source
Private Public Both parties
Engle et al., 2001; Gomez-Lobo
and Hinojosa, 2000; Vassallo, 2006.
X Mostafa et al., 2010.
X Ng et al., 2007b
X Shen and Wang, 2010
X Ng et al., 2007a
Zhang and AbouRizk, 2006.
Shen et al., 2002; Wu et al., 2012.
X Zhang, 2009
X Hanaoka and Palapus, 2012
X Chan et al., 2011; Shen and Wu, 2005
1226 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232
Finally according to Wu et al. (2012), creating a win–win
situation means both assuring that the private investor not only
recoups the investment but also earns a profit during the
franchise operation period, and protecting the government in
recouping the project depreciation costs incurred during the
post-transfer operation period in a way that the cumulative cash
flow during its post-transfer operation period are greater than
the net asset value at its transfer.
Table 1 shows that there is not a model that addresses all the
three key aspects. Furthermore the methodologies adopting a win–
win approach do not deal with the concept of a fair risk sharing
between the two parties. Therefore, none of the previous models
has the capability to support the government decision-making in
the choice of a concession time that satisfies the interests of both
parties by taking into account unforeseen risks and uncertainties
and that allows a fair risk sharing between parties.
To overcome this limitation, we propose a win–win concession
period determination methodology, which calculates the conces-
sion period as the instant of time within which the concession
must end, takes into consideration risks and uncertainties, and
safeguards the interests of both parties involved in the concession
contract, the public sector and the private sector, by fairly
allocating the risk between the two parties.
3. The win–win model
In the following, we propose an innovative win–win concession
period model that addresses the following issues:
1. Taking into consideration the win–win principle, in the
sense that the estimated value of the concession period
should be able to protect the interests of the private investor
and the government simultaneously and to assure that the
interests of the two parties are satisfied in a balanced way;
2. Calculating the instant of time within which the concession
must end; and
3. Considering the effect of uncertainty.
To address these issues, we develop a methodology that
calculates the optimal instant of time in which the concession
should end (Tc) as result of the following equations:
NPVC ≥ IC
Rmin ð1Þ
Where:
- NPVC is the net present value of the of the project's
cumulative net cash flow
Xn
C Ft
t¼0 ð 1 þ r Þt
- IC is the total investor's capital investment
tX
constr
C Ft
IC ¼
t¼0 ð1 þ rÞt
- Rmin is the investor's expected minimum return rate from his
capital investment
- r is the discount rate
- tconstr. is the construction period.
Eq. (1) expresses the principle that the net present value of
the project's cumulative net cash flow should be no less than
the private investor's expected minimum return on investment.
NPVC ≤ IC
Rmax ð2Þ
Where:
- Rmax is the maximum return rate allowed by the government
to investors.
Eq. (2) expresses the condition that the net present value of
the project's cumulative net cash flow should be no higher than
a cap rate of return fixed by the government in order to avoid
lucrative conditions.
NPVG ð FÞ≥ 0 ð3Þ
Where:
- NPVG (F) is the net present value of the project's cumulative
net cash flow during the post-transfer operation;
- F is the end of the life time of the project.
Eq. (3) expresses the principle that the net present value of
the project's cumulative net cash flow during the post-transfer
operation and calculated at the end of the life time of the project
(F) should be no less than zero.
By solving Eq. (1) we obtain the minimum value of the
concession period (tmin), i.e. the instant of time before which
the project should not be transferred because it does not allow
the private investor to receive the expected minimum return on
investment.
By solving Eq. (2) the maximum value of the concession
period (tmax) is calculated. This is the instant of time after which
the granting of the project should not continue, in order to avoid
an excessive profit to the private sector.
Eq. (3) allows the calculation of tc, that is the instant of time
before which the investor should transfer the project to the
government, in order to guarantee its interests.
The time interval within which fix the concession period is
defined by tmin, tmax and tc (see Fig. 1). Three possible situations
can occur:
1. tc b tmin: in this situation it is impossible to determine a
concession period that jointly satisfies the interests of the
private investor and the host government;
2. tc ≥ tmax: in this situation the concession period of the
project can assume any value within that interval [tmin–tmax];
3. tmin ≤ tc b tmax: in this case the interval for a concession-
period negotiation is fixed between the two points tmin and tc,
 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232
therefore the concession period can assume any value within
that interval [tmin − tc].
Once the interval for a concession period negotiation has
been derived through the previous procedures, namely the time
interval that jointly satisfies the interests of the private investor
and the host government, it is possible to determine the instant
of time within which the concession must end (Tc). In order to
satisfy the win–win condition, Tc is calculated as the instant
of time that minimizing the difference between NPVC and
NPVG, by solving the objective function given by the following
equation:
Tc э′MinðNPVC −NPVG Þ ð4Þ
Eq. (4) expresses the condition that both parties, the private
investor and the host government, are equally satisfied, that is,
it assures that the interests of the two parties are satisfied in a
balanced way.
Concession period Tc is a function of a set of variables
affected by uncertainty. To take into consideration the effect of
uncertainty, we adopt the Monte Carlo simulation. In particular,
first we develop a stochastic model by assigning to each
random variable a statistical distribution, which requires the
selection of a suitable theoretical distribution function and
the estimation of its parameters. Then, by running the model at
the end of simulation we derive the statistical distribution of
the concession period (Tc).
Once the distribution of Tc is known we determine the value
of Tc that allows the difference between the risks of loss borne
by the two parties to be minimized. These risks are measured as
follow:
- risk borne by the concessionaire = Prob (NPVC b Ic ∗ Rmin);
and
- risk borne by the government = Prob (NPVG(F) b 0).
4. Case study
We applied the developed model to the case of the BOT
tourist port project launched by the Municipality of Bari,
located on the South-East coast of Italy. The port includes: a
cruise terminal, floating docks with a capacity of 447 boats,
accessible by boats up to 30 m, a parking for 577 vehicles,
office, service, and multifunctional buildings (covering an area
of about 8000 m2), a bunkering area, and 104 storage spaces. In
the operation phase the revenues mainly consist of port dues,
land rent, mooring dues, and parking space rent. The port dues
cover the use of the nautical port infrastructure (such as pilotage
and docking fees) and are paid by cruise ships. The mooring
dues consist of: long-term leases, annual leases, and transit fees.
The operation costs mainly consist of management expenses,
operations and maintenance costs, insurance, and State Govern-
ment concession fee.
The estimation of the operating revenues and costs has been
based on historical data, data collected on similar projects, and
experts' opinions.
1227
The variables used as input to the model are categorized into:
1) deterministic/certain and 2) uncertain variables. Deterministic
variables are defined in this paper as variables of which values
could be considered as stable over time. Uncertain variables, on
the other hand, are those inputs which may be subject to change
and high level of uncertainty over time since their future values
are difficult to predict.
The deterministic variables are:
- The construction period and project life time: the first is the
period from the project start-up date until the target date of
completion. While in reality construction period may change
due to some events that may occur during construction
preventing the project to be delivered on time, it is assumed
equal to 3 years. The project life time is assumed equal to
60 years.
- The investment cost and the residual value of the project: the
first includes expenditure items needed until the completion
of the project, equal to € 28.096.177. The residual value of
the project at the transfer time is € 5.6 million, equal to 20%
of the investment cost of the project.
- The maximum return rate allowed by the government to the
investor (Rmax), equal to 15% and the minimum rate of
return for the investor (Rmin), equal to 8%.
- The discount rate r, that in the case of Monte Carlo
simulation is generally a risk free rate (Brealey and Myers,
2000), since the risk is already included in the project cash
flows that depend on the randomly-chosen values of the
input parameters. The risk-free discount rate can be taken as
the interest rate on Government bonds. In particular, in this
case r is fixed at 5%, taken the average interest rate on long
term Italian Government Bonds as a proxy.
- Expenses during operation, including items such as the state
concession fee, regular annual maintenance costs, overhead
operating costs, and insurance.
- Revenues from real estate activities (rental fees for commercial
and services areas).
The uncertain variables are:
- Revenues associated on the operation period and determined
by the services management. These come from port dues,
mooring dues, and parking space rent. The port dues cover
the use of the nautical port infrastructure (such as pilotage
and docking fees) and are paid by cruise ships. The mooring
dues consist of: long-term leases, annual leases, and transit
fees. These are determined by the unitary fee to be charged
to the users of the specific services and the number of users
expected for those services. In particular, as for the mooring
services, the users are the vessel owners, for parking service
the users are both the vessel owners and port visitors. As for
the nautical port infrastructure, the users are the cruise ships.
- Costs associated on the operation period and due to the
services management. These are assumed equal to the 12%
of the operating revenues, thus their distribution over
time follows the distribution of the revenues related to the
corresponding service.
1228 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232

Table 2 Table 3
Statistical distribution of input random variables. Statistics of tmin, tmax and tc.
Input random variables Probability distribution Parameters Mean Std dev Minimum Maximum
function
tmin 39.05 1.88 0.00 55.00
Number of seasonal rented moorings Binomial distribution n = 45 tmax 54.72 13.87 0.00 6000
p = 80% tc 43.39 18.05 0.00 5400
Number of full year rented moorings Binomial distribution n = 224
p = 90%
Number of transit rented moorings Binomial distribution High season
n = 43 in the literature (Garvin and Cheah, 2004; Iyer and Sagheer,
p = 95% 2011; Pichayapan et al., 2003). The stochastic evolution of
Middle season traffic volume (Q) that follows a GBM can be modeled in
n = 43
yearly periods as a function of the value in previous period
p = 80%
Low season according to the following equation:
n = 43 μ 2  pffiffiffiffi
Q σ
p = 60%
Qtþ1 ¼ Qt e − 2 Δtþσε Δt
Traffic volume of cruise ships Geometric Brownian μQ = 1.5%
motion σ = 10%
Number of occupied parking Binomial distribution n = 162
Where:
spaces for port visitors p1 = 5% a
p2 = 10% μQ is the expected traffic growth rate;
p3 = 20% σ is the annual volatility of the variable;
p4 = 30% ε ~ N(0,1) is the standard Wiener process.
p5 = 50%
p6 = 60%
p7 = 70% This model implies that the traffic can never be negative and
p8 = 90% its evolution can be completely specified considering only its
Number of occupied parking Binomial distribution n = 415 initial value Q0, a yearly growth rate and the volatility of the
spaces for vessel owners p1 = 20% process, which we assume to be constant during the concession
p2 = 30%
period.
p3 = 50%
p4 = 60% After establishing the input data modeling, the Monte Carlo
p5 = 70% simulation approach has been used for calculation of NPV. In
p6 = 90% particular, in each computer iteration, the random values of the
a
On the basis of the historical data, we have fixed different values of p, each stochastic input variables are generated on the basis of their
corresponding at different monthly occupancy rates. statistical distributions as established in input data modeling.
Each simulation consists of 1000 computer runs.
The outcome of the simulation model, taking into account
The assumptions used for modeling the statistical distribu- the project variables above, is the distribution of the project's
tions of the uncertain variables are summarized in Table 2. In cumulative net cash flow over the life-time of the project F.
particular, the table shows for each input random variables the By solving Eqs. (1)–(3) we calculate the probability distribu-
corresponding probability distribution function and its defining tions of tmin, tmax and tc (see Table 3).
parameters, defined on the basis of the historical empirical data. The instant of time within which the concession must end
Notice that, the discrete input variables, namely the number (Tc) is contained in the interval [Tcmin–Tcmax], where:
of rented moorings and the number of occupied parking spaces,
and the related revenues, have been modeled with the binomial - Tcmin = lower bound concession interval = tmin and
distribution that is a discrete probability distribution, where the - Tcmax = upper bound concession interval = min[tc;tmax].
random variable is the number of “successes” (i.e. rented
moorings or occupied parking spaces) in n independent trials Figs. 2 and 3 show the probability distribution of Tcmin and
(i.e. available moorings or parking spaces) with a probability of Tcmax.
success constant and depending on the seasonal occupancy Tc is then determined by solving the objective function
rates. The conditions of applicability of the binomial probabil- Min(NPVC–NPVG).
ity distribution are satisfied since there is a fixed number of n Fig. 4 plots the statistical distribution of Tc derived after 1000
trials (i.e. available moorings or parking spaces); the outcome computer iterations.
of a given trial is either a “success” (rented/occupied) or “failure” The simulation returns a value of 0 in all situations/scenarios
(not rented/not occupied); the probability of success (p) remains where the conditions of the model are not satisfied, i.e. it is
constant from trial to trial (seasonal occupancy rates); and the impossible to determine a concession period that jointly
trials are independent. satisfied the interest of both parties.
Instead, we have assumed that the traffic volume of cruise Tc range within the interval [45–51] years with a probability of
ships, and the related revenues, will vary stochastically in time 80% (the 20th percentile is 45 years), with a mean 40.55 years,
following a geometric Brownian motion (GBM), as is standard mode 48.00, and median equal to 47 years.
N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232 1229

Fig. 1. Cash flow profile and time interval for the concession period determination.

Fig. 2. Probability distribution of the lower bound concession interval (Tcmin).

Fig. 3. Probability distribution of the upper bound concession interval (Tcmax).

1230 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232

Fig. 4. Probability distribution of the concession period (Tc).

In order to define the optimal value of Tc we have conducted
a risk analysis. For each values of Tc within the interval
[45–51], we have calculated the probability that the net present
value of the project's cumulative net cash flow is below the
private investor's expected minimum return on investment
(private risk) and the probability that the net present value of
the project's cumulative net cash flow during the post-transfer
operation calculated at the end of the life time of the project is
less than zero (public risk).
Fig. 5 depicts the risk borne by the two parties.
Notice that at Tc = 49 years the difference between the risks
of loss borne by the two parties is minimized, so as having the
best risk allocation between the two parties.
Fig. 6 (a and b) shows the probability distributions of NPVC
and NPVG calculated for the optimal value of the concession
period (Tc = 49 years) and indicates the value of risk borne by
the two parties.
To get a feel for the likely impact of the interest rate r on
movement of the model outcome, sensitivity analysis was carried
out, yielding the results shown in Fig. 7.
The sensitivity analysis indicates that the increase of Tc is
more than proportional to the increase of r. In this case we
found that for r = 6% it is impossible to determine a concession
period that jointly satisfies the interests of the private investor
and the host government, since the instant of time before which
the investor should transfer the project to the government, in
order to guarantee its interests (tc) is lower than the instant of
time before which the project should not be transferred because
it does not allow the private investor to receive the expected
minimum return on investment (tmin).
The results of the sensitivity analysis therefore show that the
interest rate affects on the choice of the concession period, so
much that there could not be an instant of time that jointly
satisfies the interests of the private investor and the host

100,00%

90,00%

80,00%

70,00%

60,00%

50,00%

40,00%

30,00%

20,00%

10,00%

0,00%
45 46 47 48 49 50 51
Private risk (Prob(NPVc-Ic*Rmin)<0) Public risk (Prob(NPVg<0)

Fig. 5. Risk borne by the concessionaire and the government for each value of Tc.
 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232 1231

Fig. 6. Probability distributions of NPVC and NPVG for Tc = 49 years.

government within the life time of the project. The outcome of
the sensitivity analysis can be also useful for supporting the
choice of the rate during the negotiation.
5. Conclusion
A key factor of a PPP project is the agreement on the length
of concession period. The concession period is one of the most
important decision variables for arranging a successful PPP
contract because its value decides when ownership of a project
will be transferred from the investor to the government, thereby
55
50
45
TC
demarcating the authority, responsibility, and benefits between
the private party and the government.
This paper provides a new model for calculating the
concession period as the best instant of time that creates a
‘win–win’ solution for both project promoter and the host
government and allows one for a fair risk sharing between the
two parties. In other words, the concession period is able to
satisfy the private and the government by guaranteeing for both
parties a minimum profit, and, at the same time, to fairly
allocate risks between parties. In order to take into account the
uncertainty that affects the PPP projects, the Monte Carlo
simulation technique was used, which requires establishing the
statistical distributions of the random input variables.
A case study on a BOT port project launched by the
municipality of Bari located in Southern Italy were used to
check the applicability of the proposed model for determin-
ing the reasonable length of the concession period that

40
safeguards the multiple interests of the public sector and the
35 profit-making interest of the private sector and allows for a
fair risk sharing between the public and private sectors, by
30
minimizing the difference between the risks of loss borne by
25 the two parties.
2% 3% 4% 5% 6%
r The application shows that the developed model can be a valid
tool for supporting the public authority in the decision-making
Fig. 7. Sensitivity analysis results. process about the length of the concession period.
1232 N. Carbonara et al. / International Journal of Project Management 32 (2014) 1223–1232
The application of the model requires, as usual in this kind
of problems, some assumptions on input parameters. However,
we have done a sensitivity analysis on one of the most critical
parameter of the model, namely the discount rate, and proven
that even if the concession period is affected by the selected
value of the interest rate the model keeps its usefulness for
supporting the negotiation process in choosing an appropriate
discount rate, thus avoiding costly renegotiation.
It can be observed that the validity and usefulness of the
model has been proven through a single case study. However,
it is important to observe that the structure of the model and its
equations do not change from case to case, thus assuring the
generalizability of the model. The main limitation indeed
relies on the input data modeling, which is a critical step
inherent in the simulation-based approach, affecting the
outcome. In fact it may not be easy for decision-makers to
accurately predict the uncertain parameters and their proba-
bility distributions.
Further research will be devoted to apply the proposed
methodology to other PPP projects which may have
different cash flow structure to strength its effectiveness
and prove its validity beyond the specific case analyzed by
the present study. Future works may also focus on further
refinement of the simulation model by gathering more
information on key variables to accurately assign their
probability distribution.
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