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

It can be seen that most of BOTtoll road projects have applied charge that are nearly equal to the given ceiling prices.Nevertheless, the ceiling price at this Circular did not consider

During the period of studying to accomplish the topic of master’s thesis, there isnot only self effort but also the enthusiastic guidance of teachers, as well as theencouragement 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 JapanUniversity, who have conveyed me the precious knowledge for the duration of mylearning here Especially Professor Dr.Sci Nguyễn Đình Đức and Dr Phan Lê Bìnhwho always have stimulated me to try my best and have inspired me a lot ofmotivations for studying as well as working in the life

Besides that I am grateful to Professor Hironori Kato, the Co-Director of Master'sProgram 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 meduring the implementing this master's thesis

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

Hà Nội, Jun 2019

Đỗ Việt Hùng

i

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

by the Vietnamese government to develop new infrastructure projects They werestarted to widely carried out from 2011 and it is predicted to continuously increase inthe future The toll price of BOT road given by investor is set under the ceiling pricethat is regulated in Circular of Ministry of Transport It can be seen that most of BOTtoll 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, aswell as did not take into account of travelers’ willingness to pay to toll price Therehas 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 BOTroad 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 restraintoll price on BOT road, that leads to a negative social welfare; and (2) there mustexist price which is maximum threshold of toll price for BOT road in order that socialwelfare becomes positive; and (3) ceiling price is set to be equal to minimum of

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

ii

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

iii

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

iv

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

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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

vi

vii

CHAPTER 1 INTRODUCTION

The more rapidly the economy grows, the more greater demand forinfrastructure are In most countries, infrastructure was built from the state budget.However, there are many items which need be spent by governmental budget andprivate capital is a good fund to complement these shortages Nowadays, more andmore governments have encouraged private investor which take part in publicinvestment projects Therefore, in order to support public infrastructure, PublicPrivate 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 PPPsmake economic efficiency increasing (Zhang, 2005) and facilitates the overalldevelopment of social infrastructure (Li et al., 2016b)

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

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

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

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

1

Fig 1.1 Relationship between government, investor, travelers

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

In Vietnam, BOT projects were started to widely carried out from 2011 Althoughthere were only 18 projects in 2011, so they increased to 80 projects in 2015, and it ispredicted to continuously increase in the future (Ministry of Transport report, 2016)

(Number of projects)

Fig 1.2 Number of BOT projects in Vietnam incl estimation

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

2

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

transport infrastructureWhen choosing to travel on BOT roads, although length of road between BOTroad and non BOT road are equivalent and travelers have to pay a significant fee, sothey obtain more benefit himself, such as get higher speed, reduce travel time, savefuel consumption, feel comfortably travel as well as restrain collisions can behappened Thence, it can be raised economic efficiency for businesses andindividuals Besides that, we can obtain social benefit as decreasing congestion andemissions causing environmental pollution According to the statistics of the Ministry

of Transport, Noi Bai - Lao Cai Expressway is estimated to reduce travel time by50% and cost by 30%; Hanoi - Vinh National Highway is estimated to reduces about30% of travel time and 20% of cost; Highway No.14 through Dak Nong province isestimated to reduces about 30% of travel time and 6% of costs,

Road invested by Non-BOT project

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

3

Many studies have investigated the properties of BOT contracts and their designprocess 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 Threevariables are essential to a BOT road project They determine the social welfare forthe whole society during the whole life of the road and the profit of the private firmduring the concession period In the concession period, the private sector receives therevenue of charged tolls (Tam, 1999) Generally, service charge and capacitydecisions are critical in a typical BOT contracting process, and the private sector hasthe 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 hurtsthe social welfare and not many road users want to patronize the BOT roads(Carpintero and Gomez, 2011) Therefore the optimal BOT contract depends onwhether the optimum toll is profitable (Guo and Yang, 2009) And it is necessary forthe government to set some restraints on BOT toll price to not lead to a negativesocial welfare (Jing et al., 2008)

The carrying out of road toll in Vietnam goes through two stages, before and after theDecree 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 DecreeNo.18/2012/ND-CP took effect, all of toll station of project invested by state budget wereremoved (by Document No 2250/TTg-KTN in December 2012) So, "the fund of roadmaintenance and operation" was born to get revenue for state budget in order to operateand maintain the projects invested by state budge Meanwhile, all toll stations of BOTproject are keeping remain The toll price of BOT road given by investor is set under theceiling 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 varyacross types of vehicles and this for heavier

4

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

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

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

Table 1.2 Ceiling Prices in Expressway

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:

5

-Fig 1.5.

Toll price inBOTscheme inVietnam

r hassomeproblem.

That

is, (1)thescaleofprojecthas notbeenconsidered

Project

s withdifferentinitialinvestment,differentcapacit

y ofroad

6

pay depending on the income of travelers have not taken into account in this ceilingprice The charge price for BOT projects in Vietnam is equivalent to others countrieswhile GDP per capita is less than (World Bank) That means, if it is absolutecomparison, 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 bygovernment, which can compose a simple two-road network The BOT projectrepresents 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 tollprice of BOT contracts on perspectives from three parties, including: (1) thegovernment, whose objective is to maximize social welfare; (2) the private investors,who desire to gain maximum profit; both are expressed by criteria of financialevaluation, containing: Net present value (NPV), the internal rate of return (IRR), andthe breakeven year; and (3) the travelers, whose objective is to minimize the travelcost 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 ceilingprice in BOT road project

7

CHAPTER 2 LITERATURE REVIEW

Our research is closely related to the literature about toll and benefit under BOTcontracts which attract a lot of attention A study discussed that a toll road gettingbenefit to private investor can make welfare falling for the whole highway networksystem (Mill, 1995) A simultaneous combination of concession period, roadcapability and toll price as a three variables occurred in BOT contract allows tooptimize BOT contract in order to obtain maximum social welfare and gain anacceptable profit for private investor (Guo and Yang, 2009) In highwaytransportation network, the considering toll pricing under optimal combination ofdemand and capability of BOT road by bi-level programing formulas (Yang andMeng, 2000, 2002) Likewise, this model analyzed the influence of toll pricing toroute choice of travelers and measured investor profit or social welfare ofgovernment (Chen and Subprasom, 2007) The toll level determined by the bi-levelmodel was formulated to maximize social welfare while taking into account choicebehavior of travelers (Yang and Zhang, 2003) A heterogeneous choice of travelersinfluents private profit and social welfare under various combinations of toll priceand road capacity (Yang et al., 2002) In addition, the competition about toll andcapacity occurred among roads (Xiao et al., 2007) The price is assumed to be afunction of the travelling demand (Tan et al., 2010), considering on a simple two-roadnetwork, an equilibrium of traveling demand happened among travelers, leads to theywill choose the road had minimum travel cost (Yates, 1992) Meanwhile NationalHighways Authority of India (NHAI) has set a formula for calculation of toll feebased on wholesale price index which is “the price of a representative basket ofwholesale goods” (Government of India report, 2009)

Following those previous literatures, researchers have developed different models andalmost studies focused on optimization of toll charge to balance private profit andsocial welfare However, the existing models have not determine: (1) toll ceiling pricemodel for each BOT project, and (2) impact of "willingness to pay" of travelers totarget of perspectives mentioned above

8

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 performancesincluding private profit, social welfare and travelers’ benefit are considered in thedecision process of BOT contract Particularly,

expense from their revenue that obtain from toll charge in concession period interval,minus initial construction expense

period as well as until end of economic life of 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:

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

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

9

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 revenuefrom road toll within concession period The private sector sets up the price of tollroad 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-roadnetwork is illustrated as Figure, and some notation is give as follows:

Fig 3.1 A network model

each road

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

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

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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

function can be expressed as the Bureau of Public Roads (BPR) travel time function

which was chosen because it is so widely used:

Where:

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

11

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

Solve it, we can obtain:

y 1 y 2

y +y1

1

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:

max(Q p − I(y ) − Q M)

The first term in Eq.(7) is the revenue from toll price, the second term is initial

investment expense, and the third term is cost of maintenance and operation

y 1 y 2

Q

0y

1 2

The optimal condition of Eq.(7) is derivative of the function in Eq.(8) with p1 being

nil, can be described as follows:

Thus,

maximum his own benefit

3.2.2.2 Existing road

Likewise, the benefit of existing road is generated from toll revenue obtaining by toll

charge of BOT road, and only minus cost of maintenance and operation It can be

presented as below:

max(Q p − Q M)

The first term in Eq.(10) is the revenue from toll price, the second term is cost of

maintenance and operation

y 1 y 2

Q

0y

2

nil, can be described as follows:

1

maximum his own benefit

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

the second and third item are travel cost when users choose a route for their travel

welfare when there is only one of two road getting maximum his benefit – it is

operator of BOT road

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:

Substitute V1, V2, p1*, p2*, T (Q0, y2), T1 (Q1, y1) and T2 (Q2, y2) in Eq.(6a), (6b),

total travel cost difference in this case calculated in Appendix, and presented result asbelow:

Generally, the new road capacity is greater than that existing road, namely y1 ≥ y2

social welfare

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

is positive social welfare

Eq.(13), we can get the total travel cost difference in this case calculated in Appendix,and presented result as below:

D(p , p ) = −

16

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

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” oftravelers 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 Inwhich, 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 todetermine amplitude of “willingness to pay” of travelers

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

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

17

Frequency, Travel time acceptance level, Comfortableness level, Safe feeling level,

and Charge pricing acceptance level

The regression function is described as follows:

+ a9.Comf + a10.Safe + a11.Toll

Where:

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