Assessing financial feasibility of a build-operate-transfer project under uncertain demand

The financial feasibility of the build-operate-transfer (BOT) approach, which is being used increasingly by governments in their drive to privatize major public transportation projects, is discussed. A simulation-optimization framework is developed as an assessment tool to evaluate the financial feasibility of BOT projects. It embeds an efficient network optimization solver in a stochastic simulation framework to assess the investment risk of BOT projects under uncertain traffic forecasts. The network optimization solver determines the traffic volumes that will patronize both the BOT links and free links, and the stochastic simulation creates the uncertain traffic forecasts. The simulation-optimization procedure is used to conduct an experiment to estimate the expected profit and its associated probability of making a certain desired profit. These profit forecasts and their probability will help the authorities or the private sector to properly and systematically evaluate BOT investment projects. A case study of the superhighway project of the Pearl River delta in China is used to illustrate the application of the assessment tool developed.