Modeling the effects of government subsidy and regulation on BOT transport project contract design within contractible service quality

• Study the optimal service quality decision in both private and public operations of a BOT transport project. • Incorporate the demand-dependent subsidy scheme into the BOT contract design within service quality decision. • Explore the effects of government regulation policies on the BOT contract design with the consideration of service quality. Government subsidy and regulation are frequently employed to encourage the private sector to participate fully in Build-Operate-Transfer (BOT) transport projects. Besides service charge, the service quality of BOT transport project (i.e., maintenance quality, toll service, operational monitoring, emergency management, safety management and so on) is also an important factor affecting the choice of users. This paper studies the optimal service quality decisions in both concession period (CP) and post-CP, in which we assume that the market demand is dependent on both service price and service quality. Firstly, in the absence of subsidy scheme, we derive the related players’ optimal decisions of toll charge, contractible service quality, project capacity and length of CP in the BOT contract design process. Secondly, we investigate how to design an optimal BOT transport project contract when the government subsidizes the private sector. Thirdly, we explore the effects of government regulation policies (i.e., price cap regulation and service quality floor regulation) on the BOT contract design. Finally, we make three extensions to further examine the impacts of the demand uncertainty, the risk-aversion attitude of private sector, the asymmetric cost information and the nonlinear demand function on the BOT contract design. From our model results, some policy implications are derived regarding BOT transport project contract design when the service quality is a fundamental contractible variable.