The impact of government subsidies on build-operate-transfer contract design for charging piles in circular economy
| DOI | https://doi.org/10.1108/IMDS-01-2022-0060 |
| Published date | 19 August 2022 |
| Date | 19 August 2022 |
| Pages | 1084-1121 |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
| Author | Peiqi Ding,Weili Xia,Zhiying Zhao,Xiang Li |
The impact of government
subsidies on build-operate-transfer
contract design for charging piles
in circular economy
Peiqi Ding
School of Economics and Management, Xidian University, Xi’an, China
Weili Xia
School of Management, Northwestern Polytechnical University, Xi’an, China
Zhiying Zhao
College of Management and Economics, Tianjin University, Tianjin, China, and
Xiang Li
School of Economics and Management, Beijing University of Chemical Technology,
Beijing, China
Abstract
Purpose –Build-operate-transfer (BOT) contracts are widely used in the construction and operation of
charging piles for new energy vehicles worldwide and stipulate that governments grant charging pile
operators franchises for a certain period of time to invest in the construction and operation of the charging piles.
The charging piles are then transferred to governments when the concession expires. To encourage charging
pile operators to build and operate charging piles, governments usually provide two kinds of subsidies, namely
construction and operating subsidies.
Design/methodology/approach –The authors establish a typical game model to study the optimal BOT
contract between a government and a charging pile operator and their preferences for the two kinds of
subsidies.
Findings –First, the authors show that there are substitution and complementarity effects between the
concession period and the subsidy level. Second, the operator prefers the construction subsidy (operating
subsidy) when the additional operating cost is low (high). The government prefers the operating subsidy
(construction subsidy) when consumer sensitivity to the number of charging piles is low (high) and the
concession period is short or long (moderate). Finally, the adjusted joint subsidy can not only improve social
welfare but also that the charging pile operator can obtain the same profit as under the operating subsidy at a
lower subsidy amount.
Originality/value –This work develops the first analytical model to study two subsidies in the construction
and operation of charging piles and investigate the optimal BOT contract and subsidy preferences. The
insights are compelling not only for the charging pile operator but also for policymakers in practice from a
circular economy perspective.
Keywords Supply chain management, BOT contract, Government subsidy, Game theory
Paper type Research paper
1. Introduction
Digital technology is changing the industrial landscape and disrupting traditional business
models. New business opportunities related to industry 4.0 are emerging (Rubio et al., 2021).
Industry 4.0 is an important driver of the circular economy and has the potential to decouple
economic growth from resource consumption. No matter from the perspective of global green
development trend and strategies to cope with climate change, or from the perspective of
resource demand and utilization level, all countries must vigorously develop circular
economy, realize efficient utilization and recycling of resources and promote high-quality
IMDS
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The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 28 January 2022
Revised 30 April 2022
28 June 2022
Accepted 20 July 2022
Industrial Management & Data
Systems
Vol. 123 No. 4, 2023
pp. 1084-1121
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-01-2022-0060
economic and social development (Development and Commission, 2021). New energy vehicle
industry has become an important driving force of circular economy.
With the public’s increasing concern about circular economy and the consideration of
possible energy transformation in the field of transportation, electric vehicles have become a
global trend, leading to increased consumer demand for supporting infrastructure (Sun et al.,
2019). The electric vehicle charging infrastructure market is expected to grow by $17.64
billion between 2020 and 2024, with a compound annual growth rate of 52% over the forecast
period (Technavio, 2020). However, the high costs involved in initial investment, overhaul
and maintenance may hamper the growth of this market. Germany is estimated to need at
least 70,000 charging stations and 7,000 fast charging stations, but as of March 2020 it had
only 27,730 (Christoph and Edward, 2020). By the end of March 2021, there were only 850,590
public charging piles for electric vehicles in China, which is far from the future demand for
electric vehicles (EVCIPA, 2021). In recent years, the budgets of governments around the
world became increasingly tight, and faced with increasing demand for infrastructure, it has
become increasingly difficult for governments to act as the main source of infrastructure
investment. A major benefit of the government’s cooperation with charging pile operators is
that it can reduce public expenditure and improve the overall construction and operation
efficiency of the project (Wang et al., 2018). Governments such as Germany and China are
encouraging charging pile operators to invest in the construction and operation of charging
infrastructure to alleviat e the inconvenience caused by t he lack of charging piles
(StateCouncil, 2020;Zhang et al., 2018a). It is critical to discuss how the government can
encourage charging pile operators to build charging piles, maximize social welfare and
provide insights for charging pile operators to make decisions on the construction and
operation of charging piles.
With the advent of industry 4.0, the business model of building and operating charging
piles has undergone many changes, and enterprises and governments are facing
unprecedented challenges. Build-operate-transfer (BOT) contracts are increasingly applied
in the construction and operation of charging piles jointly by governments and charging pile
operators (Feng et al., 2018;Worldbank, 2021). Through a BOT contract signed with the
government, an enterprise obtains the monopoly right to construct and operate specific
infrastructure undertaken by the government department and is responsible for the
construction and operation of the project within the concession period. When the concession
period expires, the company must transfer the infrastructure to the government for free (Chen
et al., 2021;Wang et al., 2018). For example, Teld New Energy Co. Ltd. successfully won the
bidding for the largest new energy vehicle charging pile BOT project in China, the “Chengdu
New Energy Charging System Network Contractor”project, which is expected to invest
approximately 700 million yuan. During the eight-year concession period, Teld is responsible
for providing charging services for all vehicles. After the concession period, the ownership of
the project will be transferred to the government or its authorized agents (CNEV, 2017). The
key to the success of a BOT contract lies in whether it can solve the contradiction between the
different goals of charging pile operators and governments. On the one hand, charging pile
operators hope to reduce construction investment and construction costs to maximizing
profits during the concession period. Therefore, they want to obtain longer concession
periods and higher service charges. Operators determine their own optimal performance
level according to their profit function, but they do not optimize the social benefits (Feng
et al., 2016). On the other hand, governments hope to encourage operators to invest in
charging piles and operate at a lower service charge to improve social welfare and leave
sufficient time for governments to operate the project profitably after the concession period.
Therefore, the decisions on the number of charging piles, the service charges of both parties
and the length of the concession period in the BOT contract are crucial to achieve their
respective goals.
Government
subsidies and
contract design
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In practice, subsidy policies have been used to coordinate the construction and operation
of infrastructure to relieve the financial pressure on charging pile operators (Shi et al., 2020).
NOA charging pile testing experts point out that the introduction of subsidy policy is to
encourage and support social capital to participate in the construction and operation of
charging facilities to adopt franchise management for charging piles operators (Group, 2021).
Subsidy policies for charging piles are generally divided into construction subsidies and
operating subsidies, which have different characteristics and roles (Zhao and Chen, 2019).
The purpose of the construction subsidy is to attract investment from charging pile operators
and encourage the construction of the charging pile to improve profits and social welfare. The
purpose of the operating subsidy is to reduce the operating cost, making it possible to reduce
the service charge and attract more demand to improve profits and social welfare. However,
the two types of policies are adopted in different ways in different regions. For instance, some
provinces in China provide construction subsidies, and some other provinces in China, such
as Guizhou Province, Jiangxi Province and Hainan Province, provide operating subsidies
(Yang et al., 2020). The impacts of the two types of subsidies on operator profits and social
welfare are unclear, which prompts us to explore the different preferences of the operator and
the government for these two subsidies by establishing subsidy models for BOT contracts.
An important reality that cannot be overlooked is that consumers often have range
anxiety, which makes them very sensitive to the number of charging piles (Bonges and Lusk,
2016). Range anxiety is the psychological concern that the range of an electric car may be
insufficient to meet the driver’s needs, discouraging consumers from buying an electric car
(because the battery is usually limited to approximately 300 miles) (Guo et al., 2018). Without
a guarantee that potential buyers have convenient charging piles, they will not buy electric
vehicles, thus affecting charging demand (Zhang et al., 2018a). The construction of more
charging piles will promote the purchase of electric vehicles and thus expand the demand for
charging. According to a survey, 71.7% of respondents are more likely to buy a plug-in
hybrid if there is a charging station at their destination (Krupa et al., 2014). Some companies
and governments have invested in charging piles; for example, Tesla is building a network of
Tesla charging stations across the United States of America, and the Department of Energy is
supporting this infrastructure as part of a plan to develop a national network of charging
stations for electric vehicles to assuage the consumers’range anxiety (Tesla, 2021). As such, it
is necessary to explore the impact of consumer sensitivity to the number of charging piles on
the decision-making of the charging pile operator and the government.
Although some progress has been made in the construction and operation of charging
piles for new energy vehicles in practice and policy support, the construction and operation
system of charging piles is not sound and faces some outstanding problems in operation
management due to the objective reality of long construction and operation chain, multiple
links and multiple stakeholders involved (E-Power, 2022). In this paper, under the
background of circular economy, from the perspective of governments and charging pile
operators, we focus on the decisions of number of charging piles, service charges and the
length of the concession period, analyze the preferences of governments and charging pile
operators for construction and operating subsidies and discuss the influence of consumer
sensitivity to the number of charging piles and other factors on the decisions and subsidy
preferences. The specific research questions are as follows: (1) How does the concession
period and consumer sensitivity to the number of charging piles affect the service charges,
the number of charging piles, the amount of subsidies, the profits of all parties and social
welfare under three scenarios: no subsidies, a construction subsidy and an operating
subsidy? (2) When the concession period is exogenous or endogenous, what are the
preferences of the charging pile operator and the government regarding the construction and
operating subsidies, what factors affect subsidy preferences and under what conditions will
they prefer the same subsidy to reach equilibrium? (3) If the government can also
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