Integrating travelers’ perceived factors in modeling the ceiling price of toll road : a case study of BOT projects in Vietnam

Some important findings of ceiling price include: 1 If government does not restrain toll price on BOT road, that leads to a negative social welfare; and 2 there must exist price which is

ACKNOWLEDGMENT

During the period of studying to accomplish the topic of master’s thesis, there

is not only self effort but also the enthusiastic guidance of teachers, as well as the encouragement of my family and friends

First of all, I would like to express my gratitude sincerely to my supervisor, Lecturer Dr Nguyễn Hoàng Tùng who instructed directly me to conduct this research

by making particular guidance

I also would like to give special thanks to whole teachers at Vietnam Japan University, who have conveyed me the precious knowledge for the duration of my learning here Especially Professor Dr.Sci Nguyễn Đình Đức and Dr Phan Lê Bình who always have stimulated me to try my best and have inspired me a lot of motivations for studying as well as working in the life

Besides that I am grateful to Professor Hironori Kato, the Co-Director of Master's Program in Infrastructure Engineering, for supporting me actively when I had a three-month Internship Program in Japan

Finally, I would like to thank my family and co-workers, who always are beside me during the implementing this master's thesis

Although there have been lots of my attempts in the research process, due to limited ability and experience of self, this master's thesis still exist some unavoidable shortcomings So I am looking forward to hear sincere feedbacks from teachers and colleagues in order to supplement and complete more this research in the future

Hà Nội, Jun 2019

Đỗ Việt Hùng

ABSTRACT

The Build-Operate-Transfer (BOT) scheme is considered as an attractive means

by the Vietnamese government to develop new infrastructure projects They were started to widely carried out from 2011 and it is predicted to continuously increase

in the future The toll price of BOT road given by investor is set under the ceiling price that is regulated in Circular of Ministry of Transport It can be seen that most

of BOT toll road projects have applied charge that are nearly equal to the given ceiling prices Nevertheless, the ceiling price at this Circular did not consider the scale of road, as well as did not take into account of travelers’ willingness to pay to toll price There has not ever researches of the topic to previous studies Therefore, this study focused on integrating “willingness to pay of travelers” to model of toll ceiling price

in BOT road project by using a bi-level programming model to formulate for a simple two-road network to optimize toll price and propose ceiling pricing for BOT projects Some important findings of ceiling price include: (1) If government does not restrain toll price on BOT road, that leads to a negative social welfare; and (2) there must exist price which is maximum threshold of toll price for BOT road in order that social welfare becomes positive; and (3) ceiling price is set to be equal to minimum of

“willingness to pay” and the threshold of toll price above

TABLE OF CONTENTS

ACKNOWLEDGMENT i

ABSTRACT ii

TABLE OF CONTENTS iii

LIST OF FIGURES v

LIST OF TABLES vi

LIST OF ABBREVIATIONS vii

CHAPTER 1 INTRODUCTION 1

CHAPTER 2 LITERATURE REVIEW 8

CHAPTER 3 METHODOLOGY 9

3.1 The model setting 9

3.2 Solution procedure 11

3.2.1 Step 1: Determining route choice of travelers 11

3.2.2 Step 2: The operators determine the toll prices to maximize their own benefit respectively 13

3.2.2.1 BOT road 13

3.2.2.2 Existing road 14

3.2.3 Step 3: Evaluation social welfare 15

3.2.3.1 Case 1: All two roads get maximum their own benefit at the same time 15

3.2.3.2 Case 2: Only BOT road get maximum his own benefit under condition that it is positive social welfare 16

3.2.4 Step 4: Integrating the factor named "willingness to pay of travelers" to guarantee users' benefit 17

3.2.5 Step 5: Determining ceiling price of toll road under condition that optimal benefit of investor and the government, which taking into account "willingness to pay" of travelers 18

3.2.5.1 Case 1: If p1’ is less than WTP (i.e p1’ ≤ WTP) 19

3.2.5.2 Case 2: If p1’ is greater than WTP (i.e p1’ ≥ WTP) 19

3.2.5.2.1 Recommendation 1: Downscale capacity of BOT road 19

3.2.5.2.2 Recommendation 2: Keep capacity of BOT road 20

CHAPTER 4 CASE STUDY 22

4.1 Introduction for case study 22

4.2 Willingness to pay of travelers choosing this road to travel 23

4.3 Determining toll ceiling price of BOT road 25

4.3.1 Case 1: Toll ceiling price for vehicle has under 12 seats 25

4.3.1.1.1 Recommendation 1: Downscale capacity of BOT road 26

4.3.1.1.2 Recommendation 2: Keep capacity of BOT road 27

4.3.2 Case 2: Toll ceiling price for vehicle has under 30 seats 29

4.3.2.1.1 Recommendation 1: Downscale capacity of BOT road 30

4.3.2.1.2 Recommendation 2: Keep capacity of BOT road 31

4.4 Estimation WTP as regression function 32

4.4.1 Case 1: Estimation WTP function of travelers have car under 12 seats 33

4.4.2 Case 2: Estimation WTP function of travelers have vehicle under 30 seats 35

CHAPTER 5 CONCLUSION 39

5.1 Conclusion 39

5.2 Limitation 39

REFERENCES 40

APPENDIX 41

LIST OF FIGURES

Page

Fig 1.1 Relationship between government, investor, travelers 2

Fig 1.2 Number of BOT projects in Vietnam incl estimation 2

Fig 1.3 Rank of Vietnam in the world about service and quality of road transport infrastructure 3

Fig 1.4 Comparison of benefit between BOT road vs non-BOT road 3

Fig 1.5 Toll price in BOT scheme in Vietnam 6

Fig 1.6 GDP per capita and Toll price of some countries 7

Fig 3.1 A network model 10

Fig 4.1 PV-CG Expressway and NH.1A 22

LIST OF TABLES

Page

Table 1.1 Ceiling Prices in National Highway 5

Table 1.2 Ceiling Prices in Expressway 5

Table 4.1 Major parameters of two roads 23

Table 4.2 Characteristic of interviewees 24

Table 4.3 Descriptive statistic about WTP of travelers for toll price 25

Table 4.4 Regression Coefficient of WTP function 33

Table 4.5 Regression Coefficient of WTP function 35

Table 4.6 Regression Coefficient of WTP function 36

Table 4.7 Regression Coefficient of WTP function 37

LIST OF ABBREVIATIONS

PV-CG Expressway Pháp Vân – Cầu Giẽ Expressway

CHAPTER 1 INTRODUCTION

The more rapidly the economy grows, the more greater demand for infrastructure are In most countries, infrastructure was built from the state budget However, there are many items which need be spent by governmental budget and private capital is a good fund to complement these shortages Nowadays, more and more governments have encouraged private investor which take part in public investment projects Therefore, in order to support public infrastructure, Public Private Partnerships (PPPs) have become a major scheme (Hodge and Greve, 2007) and reduce public sector budget shortages (Kwak et al., 2009) PPPs are widely used

to supply many infrastructure projects in the world Infrastructures invested by PPPs make economic efficiency increasing (Zhang, 2005) and facilitates the overall development of social infrastructure (Li et al., 2016b)

In Vietnam, according to Decree No 63/2018/ND-CP: “PPP” is an investment form which is carried out on the basis of a contract between the State and an investor,

in order to construction, renovation, operation, business, management of infrastructure works, provision of public services

Build-Operate-Transfer (BOT) model is a form of PPP which has extensive applications in infrastructure projects The BOT scheme is gaining popularity and booming in public infrastructure around the world (Tan, 2012) It is adopted as an innovative way to sponsor for infrastructure construction in both developing and developed countries (Subprasom, 2004) In recent years, BOT arrangements have contributed to accelerating economic growth and improve quality service delivery and operation efficiency (Akintola et al., 2003)

In Vietnam, the Build-Operate-Transfer (BOT) scheme is considered as an attractive means by the Vietnamese government to develop new infrastructure projects According to Decree No.63/2018/ND-CP, parties involving in this contract project include: the government, private investor and travelers

Fig 1.1 Relationship between government, investor, travelers

Figure 1 show the relationship whole parties involved in First, the government and private sector sign an agreement for project Then investor constructed project by his own expense After the construction was completed, the investor carries out to provide service for users and travelers pay charge this serve When end of concession period, private investor gives project back government and government manages its

In Vietnam, BOT projects were started to widely carried out from 2011 Although there were only 18 projects in 2011, so they increased to 80 projects in 2015, and it

is predicted to continuously increase in the future (Ministry of Transport report, 2016)

Fig 1.2 Number of BOT projects in Vietnam incl estimation

These projects have promoted the road traffic system in our country to develop quickly and synchronously According to the World Economic Forum (WEF), the service and quality of Vietnamese road transport infrastructure increased rapidly and ranked in the position of 92/137 countries in the word in 2017 (World Economic Forum, Global competitiveness Report, 2018)

18

?

04080120

Fig 1.3 Rank of Vietnam in the world about service and quality of road

transport infrastructure

When choosing to travel on BOT roads, although length of road between BOT road and non BOT road are equivalent and travelers have to pay a significant fee, so they obtain more benefit himself, such as get higher speed, reduce travel time, save fuel consumption, feel comfortably travel as well as restrain collisions can be happened Thence, it can be raised economic efficiency for businesses and individuals Besides that, we can obtain social benefit as decreasing congestion and emissions causing environmental pollution According to the statistics of the Ministry

of Transport, Noi Bai - Lao Cai Expressway is estimated to reduce travel time by 50% and cost by 30%; Hanoi - Vinh National Highway is estimated to reduces about 30% of travel time and 20% of cost; Highway No.14 through Dak Nong province is estimated to reduces about 30% of travel time and 6% of costs,

Fig 1.4 Comparison of benefit between BOT road vs non-BOT road

120/144 102

/148

104/144 93/140 /13889

92 /137

Road invested by BOT project Road invested by Non-BOT project

Source: World Economic Forum

Many studies have investigated the properties of BOT contracts and their design process To design a BOT contract, three critical parameters need to be considered: the length of the concession period, the infrastructure’s capacity and the toll Three variables are essential to a BOT road project They determine the social welfare for the whole society during the whole life of the road and the profit of the private firm during the concession period In the concession period, the private sector receives the revenue of charged tolls (Tam, 1999) Generally, service charge and capacity decisions are critical in a typical BOT contracting process, and the private sector has the power to determine both of them in the concession period The private sector aims

to maximize its own profit and may charge a high service fee, which eventually hurts the social welfare and not many road users want to patronize the BOT roads (Carpintero and Gomez, 2011) Therefore the optimal BOT contract depends on whether the optimum toll is profitable (Guo and Yang, 2009) And it is necessary for the government to set some restraints on BOT toll price to not lead to a negative social welfare (Jing et al., 2008)

The carrying out of road toll in Vietnam goes through two stages, before and after the Decree No 18/2012/ND-CP about "fund of road maintenance and operation" took effect in January 2013 Before the Decree No 18/2012 / ND-CP took effect, we had

2 systems of toll stations, in which one system are used to toll for project invested by state budget Another system is served for project invested by BOT contract After the Decree No.18/2012/ND-CP took effect, all of toll station of project invested by state budget were removed (by Document No 2250/TTg-KTN in December 2012)

So, "the fund of road maintenance and operation" was born to get revenue for state budget in order to operate and maintain the projects invested by state budge Meanwhile, all toll stations of BOT project are keeping remain The toll price of BOT road given by investor is set under the ceiling price that is regulated in Circular No 35/2016/TT-BGTVT and No 60/2018/TT-BGTVT, namely “Regulations for ceiling price of toll road” The ceiling prices vary across types of vehicles and this for heavier

vehicles tends to be higher Two tables of ceiling prices below are officially set for national highway and expressway and applied to any toll roads all over the nation

Table 1.1 Ceiling Prices in National Highway

Ceiling price

VND/ticket/turn

3 Vehicles has more 31 seats, trucks with capacity 4 - 10 tons 87,000

4 Trucks with capacity 10 - 18 tons, 20 feet of container truck 140,000

5 Trucks with more capacity 18 tons, 40 feet of container truck 200,000

Table 1.2 Ceiling Prices in Expressway

Ceiling price

VND/per km

1 Vehicles has less than 12 seats, trucks under 2 tons; Buses 2,100

2 Vehicles has 12 - 30 seats, trucks with capacity 2 - 4 tons 3,000

3 Vehicles has more 31 seats, trucks with capacity 4 - 10 tons 4,400

4 Trucks with capacity 10 - 18 tons, 20 feet of container truck 8,000

5 Trucks with more capacity 18 tons, 40 feet of container truck 12,000

At this time of December 2018, there were 46 road projects invested in BOT scheme are going on toll charge (Department Public Private Partnership - Ministry of Transport, 2018) Observed Prices of BOT Toll Roads, it can be seen that most of BOT toll road projects have applied charge that are nearly equal to the given ceiling prices Toll pricing observed in 46 BOT projects is presented in table as below:

Fig 1.5 Toll price in BOT scheme in Vietnam

For BOT project, the balance of benefit between: the government, private investor and travelers is most important However, the ceiling price at this Circular has some problem That is, (1) the scale of project has not been considered Projects with different initial investment, different capacity of road are all applied at this ceiling price This is not reasonable (2) The Willingness to pay of travelers and ability to

13331

152223303540455070

(2) - Vehicles

seats, truckswith capacity 2

- 4 tons

132322

223340445560657587

(3) - Vehicleshas more 31seats, truckswith capacity 4

- 10 tons

132131112

9

80120135140160170175180200

(5) - Trucks with morecapacity 18 tons, 40 feet ofcontainer truck

Number

of projects

Number

of projects

Ceiling price Ceiling price

Ceiling price

Ceiling price Ceiling price

pay depending on the income of travelers have not taken into account in this ceiling price The charge price for BOT projects in Vietnam is equivalent to others countries while GDP per capita is less than (World Bank) That means, if it is absolute comparison, the charge price in Vietnam is more expensive

Fig 1.6 GDP per capita and Toll price of some countries

In practice, a BOT road usually co-exists with existing road managed by government, which can compose a simple two-road network The BOT project represents a major capital investment for which project conducts So, it is necessary

to evaluate the financial viability and feasibility of the BOT project By viewing a toll price of BOT contracts on perspectives from three parties, including: (1) the government, whose objective is to maximize social welfare; (2) the private investors, who desire to gain maximum profit; both are expressed by criteria of financial evaluation, containing: Net present value (NPV), the internal rate of return (IRR), and the breakeven year; and (3) the travelers, whose objective is to minimize the travel cost described by "willingness to pay"

Being aware of these issues, this study will focus on the effects of "Willingness

to pay" to ceiling price of a BOT project in the context of a simple two-road network From that, we will integrate “willingness to pay of travelers” to model of toll ceiling price in BOT road project

GDP per capita, 2017 (unit: USD) Charge price (unit: VND/km)

((Source: Word Bank)

CHAPTER 2 LITERATURE REVIEW

Our research is closely related to the literature about toll and benefit under BOT contracts which attract a lot of attention A study discussed that a toll road getting benefit to private investor can make welfare falling for the whole highway network system (Mill, 1995) A simultaneous combination of concession period, road capability and toll price as a three variables occurred in BOT contract allows to optimize BOT contract in order to obtain maximum social welfare and gain an acceptable profit for private investor (Guo and Yang, 2009) In highway transportation network, the considering toll pricing under optimal combination of demand and capability of BOT road by bi-level programing formulas (Yang and Meng, 2000, 2002) Likewise, this model analyzed the influence of toll pricing to route choice of travelers and measured investor profit or social welfare of government (Chen and Subprasom, 2007) The toll level determined by the bi-level model was formulated to maximize social welfare while taking into account choice behavior of travelers (Yang and Zhang, 2003) A heterogeneous choice of travelers influents private profit and social welfare under various combinations of toll price and road capacity (Yang et al., 2002) In addition, the competition about toll and capacity occurred among roads (Xiao et al., 2007) The price is assumed to be a function of the travelling demand (Tan et al., 2010), considering on a simple two-road network,

an equilibrium of traveling demand happened among travelers, leads to they will choose the road had minimum travel cost (Yates, 1992) Meanwhile National Highways Authority of India (NHAI) has set a formula for calculation of toll fee based on wholesale price index which is “the price of a representative basket of wholesale goods” (Government of India report, 2009)

Following those previous literatures, researchers have developed different models and almost studies focused on optimization of toll charge to balance private profit and social welfare However, the existing models have not determine: (1) toll ceiling price model for each BOT project, and (2) impact of "willingness to pay" of travelers

to target of perspectives mentioned above

CHAPTER 3 METHODOLOGY

3.1 The model setting

As mentioned in Chapter 1, by the financial evaluation (i.e., NPV, IRR, breakeven year) and “Willingness to pay” of travelers, the project performances including private profit, social welfare and travelers’ benefit are considered in the decision process of BOT contract Particularly,

(1) Private investor's benefit is remaining profit after deducting initial construction expense from their revenue that obtain from toll charge in concession period interval, minus initial construction expense

(2) Government's benefit is welfare due to BOT road brings for society in concession period as well as until end of economic life of road

(3) Traveler's benefit is "willingness to pay" level to use BOT road

Subject to constraint conditions about benefit of private investor and the government, the optimal price will be found out Comparison this price with "willingness to pay"

of travelers, the ceiling price of toll road will be set up for this BOT project

The above explanations can be conveyed by the multi-equation as follows:

Investor’s benefit = function of price = f1 (price)

Government’s benefit = function of price = f1 (price)

Travelers’ benefit = Willingness to pay

Subject to: Constraint of investor’s benefit and government’s benefit

The model is set up with a two-road network providing the transportation supply between two places Assume that, the government built a road links two places and they have been operating its In the future, in order to decrease the heavy traffic on the current road, the government plans to build a new road paralleling the existed

road by a BOT scheme That is, the government will invite a private investor to build

a BOT road by own investor cost Then they will operate this road and get revenue from road toll within concession period The private sector sets up the price of toll road for BOT road according to the market competition between two this roads

The BOT road is denote by 1 and the existing road is labeled by 2 The two-road network is illustrated as Figure, and some notation is give as follows:

y1 : the BOT road capacity

p1 : the toll charge of BOT road

Q1 : the flow volume on BOT road

I (y1) : Total investment of BOT road

y2 : the existing road capacity

Fig 3.1 A network model

p2 : the toll price of existing road

Q2 : the flow volume on existing road

M (Qi) : unit of maintenance and operation cost, assume that it is fixed

Q0 : total travel demand between two places

Ti (Qi, yi), i =1, 2: the generalized price (including travel cost and travel time)

of each road

A bi-level programming model is formulated for a two-road network containing BOT road There are five steps with various issues to optimize toll charge and propose toll ceiling pricing for BOT project

Step 1: The lower-level program occurs between two road operators relating route choice behavior of travelers according to their travel cost Users' response depend on to each toll price which is set up by operators respectively

Step 2: The upper-level program represents the objective of decision makers In particular, operators determine the toll prices to maximize their own benefit respectively

Step 3: Evaluation social welfare through criteria named total travel cost difference under the scenario that there is BOT road and there is non BOT road

Step 4: Integrating the factor named "willingness to pay of travelers" to guarantee users' benefit

Step 5: Determining ceiling price of toll road under condition that optimal benefit of investor and the government, which taking into account "willingness to pay" of travelers

3.2 Solution procedure

3.2.1 Step 1: Determining route choice of travelers

The route choice of travelers when facing to each price set up by operators depends

on their objective is that minimize own travel cost Assume that the toll charge p1 is chosen by private investor and p2 is chosen by government The user travel cost function can be expressed as the Bureau of Public Roads (BPR) travel time function which was chosen because it is so widely used:

Ti Qi,yi =λ.t0.(1+α Qi

yi

β) + pi (1)

Where:

Ti (Qi, yi) is generalized price including travel cost and travel time

λ is a parameter that transfers time to fare

t0 is the free flow travel time

α, β are parameters Without less of generalization, taking: α = β = 1

So, we have travel cost function, T1 for users choosing the BOT road:

T1 Q1,y1 =λ.t0.(1+Q1

y1) + p1 (1a) Likewise, travel cost function, T2 for users choosing the existing road:

T2 Q2,y2 =λ.t0.(1+Q2

y2) + p

2 (1b)

The objective function of travelers’ road choice for a given toll price is modelled as

a standard user demand equilibrium according to the minimum travel cost, and can

be expressed as follows:

min, T1( ) + T2( ) (2) Subject to: Q0 = Q1 + Q2 (3)

The first term in Eq.(2) is total travel cost of users choosing BOT road to travel and the second term is total travel cost of users choosing existing road to travel

The Lagrange function for the problem Eq.(2) and Eq.(3) is as follows:

L(T1, T2, µ) = T1( ) + T2( ) − µ (Q0− Q1 − Q2) (4)

Where, μ is Lagrange multiplier corresponding with flow volume condition in Eq.(3)

The optimal condition of Eq.(2) and (3) is derivative of the Lagrange function with T1 and T2 being nil respectively, can be described as follows:

y1) + p1 = λ.t0.(1+Q2

y2) + p2

Q = Q + QSolve it, we can obtain:

Q1 = y1 y2

y1+y2

Q0

y2 + 1λ.t0 (p2− p1) (6a)

Q2 = y1 y2

y1+y2

Q0

y1 − 1λ.t0 (p2− p1) (6b)

We can see from Eq.(6a) and (6b) that the flow volume of roads are concern with toll price and capacity of roads in a road network

3.2.2 Step 2: The operators determine the toll prices to maximize their own benefit respectively

Based on the choice behavior of travelers, operators make decision for toll price to maximize their own benefit respectively

3.2.2.1 BOT road

The benefit of BOT road is generated from toll revenue obtaining by toll charge of BOT road, and minus amount of initial construction cost and cost of maintenance and operation So, the operator will set up toll price level to maximize their own benefit

It can be presented as below:

Q0

y2 + 1λ.t0 p2− p1 M (8)

The optimal condition of Eq.(7) is derivative of the function in Eq.(8) with p1 being nil, can be described as follows:

∂

∂ =

y1 y2

y1+y2

Q0

y2 + 1λ.t0p2− 1

λ.t0 2p1) + y1 y2

y1+y2

1λ.t0 M = 0 Thus,

Q0

y1 − 1λ.t0 p

Q0

y1 − 1λ.t0 2p2+ 1

λ.t0p1 + y1 y2

y1+y2

1λ.t0 M = 0 Thus,

3.2.3 Step 3: Evaluation social welfare

We are carrying out to evaluate social welfare by the criteria named total travel cost difference under the scenario that there is BOT road and there is non BOT road The total travel cost difference is defined that offsets of travel cost when there is only existing road for users travel, with travel cost when there are two road for user choose

a road to travel Let D(p1, p2) be a total travel cost difference, can be described as follows:

D(p ,p ) = T Q0,y2 Q

0− [T Q1,y1 Q

1+ T Q2,y Q

2] (13) Subject to Q0 = Q1 + Q2

3.2.3.1 Case 1: All two roads get maximum their own benefit at the same time

That means, Eq.(9) and Eq.(12) simultaneously occur We have multi-equation:

D(p∗, p∗) = . . ( − 2 − 2 )

Generally, the new road capacity is greater than that existing road, namely y1 ≥ y2 Consequently, D(p1*, p2*) ≤ 0, that mean the free competition leads to a negative social welfare

3.2.3.2 Case 2: Only BOT road get maximum his own benefit under condition that it

is positive social welfare

That means, there is only Eq.(9) occur Substitute V1, V2, p1, T (Q0, y2), T1 (Q1, y1) and T2 (Q2, y2) in Eq.(6a), (6b), (9), (14), (1a) and (1b) respectively into D (p1, p2) in Eq.(13), we can get the total travel cost difference in this case calculated in Appendix, and presented result as below:

D(p , p ) = − +2

Social welfare is positive when total travel cost difference in Eq.(18) is greater than zero That means,

.+2 (20) The price, p1’ is the maximum value threshold of toll price for BOT road so that social welfare become positive

3.2.4 Step 4: Integrating the factor named "willingness to pay of travelers" to guarantee users' benefit

To guarantee benefit of travelers, the condition named “Willingness to pay” of travelers is set additionally and is compared with p1’ In order to estimate the

“Willingness to pay” of travelers for toll price in BOT road, this study is conducted

by steps of Contingent Valuation Method according to survey questionnaire In which, open questions are used to interviewees so that they gave their own

“willingness to pay” pricing Then a series of bid question was given in order to determine amplitude of “willingness to pay” of travelers

Using Descriptive Statistic tool in Excel software in order to be statistic and calculate value of WTP

Using Regression tool in Excel software in order to analyze independent variables affecting WTP of travelers for toll price Variables in regression function include: Age, Gender, Education level, Marital status, Career Status, Income, Travel