Build-operate-transfer Contracts for a Single New Road

Private provision of public roads, typically through build-operate-transfer (BOT) contracts, has attracted fast-growing interest in recent years. Under a BOT contract, the private sector would build and operate a road at its own expense and in turn should receive the revenue from the road toll charge for a period and then transfer the road to the government. By viewing a BOT contract as a combination of the three fundamental variables of concession period, road capacity and toll charge, this paper studies the problem of how to set an optimal BOT contract to maximize social welfare, while allowing for an acceptable level of profit to the private sector. In particular, we show that, if the overall social optimal result is not profitable, the government should let the private sector operate the whole life of the road so that social welfare is maximized under the constraint of a minimum acceptable profit.