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Optimization of Concession Payments in Stochastic Model of Public-Private Partnership

Author

Listed:
  • Arkin,V.

    (Central Economics and Mathematics Institute, Russian Academy of Sciences, Moscow, Russia)

  • Slastnikov, A.

    (Central Economics and Mathematics Institute, Russian Academy of Sciences, Moscow, Russia)

Abstract

The paper proposes a theoretical model, which allows to set and solve the problem of choosing a concession payment for the implementation of a concession project. The proposed approach is based on two-level optimization scheme that takes into account the interests of both the state and the concessionaire. At the lower level the concessionaire chooses the time of investment that maximizes his NPV from the project, and at the upper level the state, which, knowing the optimal principle of the concessionaire's behavior, sets such a payment at which the budgetary effect of the implemented project will be maximum. In the case when the profit from the project is modeled by a random process of geometric Brownian motion, we receive an explicit formula for the optimal concession payment and study its dependencies on the average growth rate and volatility of the profit from the project, on the tax burden, on the concessionaire's share in initial investments. We discuss some properties of the obtained results, and conclude that the use of the optimal concession payment not only ensures the maximum possible budget filling (from this project), but also is an incentive mechanism for attracting investments to concession projects.

Suggested Citation

  • Arkin,V. & Slastnikov, A., 2017. "Optimization of Concession Payments in Stochastic Model of Public-Private Partnership," Journal of the New Economic Association, New Economic Association, vol. 36(4), pages 31-47.
    • Handle: RePEc:nea:journl:y:2017:i:36:p:31-47
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    File URL: http://www.econorus.org/repec/journl/2017-36-31-47r.pdf
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Tatiana Malinina, 2010. "Recognition and Measurement of Tax Expenditures: International Experience and Russian Practice," Research Paper Series, Gaidar Institute for Economic Policy, issue 146P.
    3. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    4. Vadim Arkin & Alexander Slastnikov, 2007. "The effect of depreciation allowances on the timing of investment and government tax revenue," Annals of Operations Research, Springer, vol. 151(1), pages 307-323, April.
    5. Hans T.J. Smit, 2003. "Infrastructure Investment as a Real Options Game: The Case of European Airport Expansion," Financial Management, Financial Management Association, vol. 32(4), Winter.
    6. Arkin, V. & Slastnikov, A., 2016. "Optimization of Budget Subsidies on Credits for Investment Projects," Journal of the New Economic Association, New Economic Association, vol. 29(1), pages 12-26.
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    Cited by:

    1. Tatyana Ponomarenko & Ilya Gorbatyuk & Sergey Galevskiy & Evgenii Marin, 2024. "Optimizing Concession Agreement Terms and Conditions: Stakeholder Interest Alignment in the Petrochemical Sector," JRFM, MDPI, vol. 17(6), pages 1-16, June.

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    More about this item

    Keywords

    investment project; public-private partnership; concession; concession payments; budgetary effect;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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