A Flexible Franchise Fee Scheme in a BOT Project

Yao-Min Chiang ()
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Yao-Min Chiang: Department of Finance, National Chengchi University, Taipei, Taiwan, 11605

International Real Estate Review, 2012, vol. 15, issue 1, 127-139

Abstract: The relationship between a government and a franchise firm in a build-operate-transfer (BOT) project is one that is wrought with incentive problems. It is well known that a contingent payment structure can help alleviate moral hazard problems. This paper provides a flexible franchise fee scheme from the perspective of a government which can charge a sufficient franchise fee and provide enough incentive for a private firm in a BOT project. This flexible franchise fee structure has option- like properties. A pricing model is derived in this paper to price this flexible franchise fee scheme. The closed-form pricing model that I have provided in this paper can help evaluate the effect of a flexible franchise fee on the performance of BOT projects. A numerical analysis shows that the proposed flexible franchise fee scheme is especially suitable for BOT projects with long investment horizons and revenue uncertainty.

Keywords: BOT; Franchise fee; Real options; Option pricing model (search for similar items in EconPapers)
JEL-codes: L85 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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