BOT contract of high-speed rail project design considering uncertain economic spillover

Abstract

The rapid development of high-speed rail (HSR) has had a significant impact on economic development, but it requires substantial investment and places a burden on public funds. The COVID-19 pandemic has further strained government budgets, making alternative funding models attractive. The build-operate-transfer (BOT) model, commonly used in highway projects, involves private companies building and operating infrastructure in exchange for toll revenues. This study explores the use of flexible and fixed BOT contracts for HSR projects and analyzes their impact on private sector investment share and social welfare in HSR projects. Our analytical and numerical simulation findings suggest that under the flexible BOT contract, the private sector investment share increases with the expectation and uncertainty of the economic spillover effect. It decreases with a short HSR infrastructure lifecycle but remains unaffected by a sufficiently long lifecycle. In contrast, a fixed BOT contract raises private sector investment share regardless of the uncertainty of economic spillover. A longer HSR lifecycle amplifies the effect of economic spillover under both types of contracts. Expected social welfare rises with the HSR infrastructure's lifecycle under the fixed BOT contract, but for the flexible BOT contract, it initially increases and then exhibits a jump-down discontinuity at the threshold lifecycle of the HSR infrastructure. The flexible BOT contract outperforms the fixed BOT contract with a shorter lifecycle or higher spillover uncertainty, while the fixed BOT contract yields more welfare improvements for a longer lifecycle.