A simulation model for evaluating the tariff stability of concession-based PPP proposals

Abstract

Purpose – The purpose of this paper is to devise a simple but practical model to assist decision makers in evaluating the tariff stability of concession schemes.

Design/methodology/approach – To develop such a model necessitates the identification of parameters that could contribute to an increase or decline in investment return. With that a Monte‐Carlo‐based simulation model is devised to determine the probability that the tariff regime remains unchanged even when the identified risks do occur at the operational stage. Sensitivity analysis is performed to identify the most influential factors to investment return and tariff stability.

Findings – The results of the scenario indicate that the internal rate of return could be profoundly influenced by the risk factors which reaffirm the needs for a more comprehensive model for tariff stability evaluation.

Research limitations/implications – Through the simulation model, a tariff stability indicator is derived and when integrated with the results of sensitivity analysis this could generate a weighted indicator for alternative tariff regimes for use in decision support systems.

Practical implications – With the aid of simulation techniques, decision makers can predict the impact of a range of possible market conditions and/or levels of demand on the investment return and hence the stability of the tariff regime.

Originality/value – The model could be extended to other types of public‐private partnerships schemes upon suitable adjustment