A risk-adjusted decoupled-net-present-value model to determine the optimal concession period of BOT projects

Purpose The net-present-value (NPV) method is well-known for its drawbacks. To overcome some of these NPV weaknesses this paper aims to provide a methodology to determine an optimal concession period that treats risk and time separately. The purpose of this paper is to apply the notion of risk-adjusted decoupled net present value (risk-adjusted DNPV) to determine a conception period taken into consideration synthetic insurance premiums as compensation for risks. Design/methodology/approach This paper conducts theoretical and empirical analysis and provides an integrated model for deriving concession periods of any PPP projects. The model is able to capture several contractual issues such risks costing and other contractual scenarios. Methodologically, the paper addressees both the issues of risk-based cost–benefit analysis and cash flow analysis bearing an emphasis of risk-adjusted DNPV to compute an optimum concession period. Findings The results show that using DNPV will produce a shorter concession period comparatively to NPV. The consequence of this is that the public sector will gain financially from an earlier transfer of the concession. Research limitations/implications This paper contributes to the PPP literature by combing DNPV and risk to determine the PPP concession period for the mutual benefits both the private and public sectors. The decoupling of risk from traditional NPV computation will allow for risk pricing and tradability through insurance and allocation. Originality/value The attempt to decouple time and risk in the computation of NPV is the added value to the body of knowledge.