Price, capacity and concession period decisions of Pareto-efficient BOT contracts with demand uncertainty

In this paper, we study the impact of demand uncertainty on the build-operate-transfer (BOT) contract design by optimizing a bi-objective problem via three critical decisions: toll, capacity and concession period. We derive the optimums and identify the public and private sector’s economic incentives. We find that the optimal length of concession period and the service quality of the infrastructure depend on the two parties’ operational costs and negotiation powers. Under mild conditions, we prove that the government will build a larger capacity but charge less than the private sector. Furthermore, the efficiency of BOT contract is improved with demand uncertainty.

► We consider random and price-sensitive demand in build-operate-transfer (BOT) contracts.
► We derive and characterize the optimal decisions of the private sector and the government.
► The optimal concession period depends on the operational costs and negotiation powers.
► The volume–capacity ratio is increasing in the private sector’s relative negotiation power.
► BOT contracts’ economic efficiency is improved with demand uncertainty.