Real Options and Government Supports to Infrastructure Investments: An Empirical Study

Abstract

This paper provides evidence for the relationship between various forms of real options in infrastructure projects and the types and levels of government supports to the infrastructure investments. It analyzes the common real options and real options-based strategic investments and aligns them with the common types of public-private partnership (PPP) infrastructure projects. It then develops models to show that the real options incorporated into the different types of PPP infrastructure projects affect the level of direct government cash supports to the projects and hence the viabilities of such projects. The paper however shows that the relationship between the embedded real options and viabilities of infrastructure projects can be influenced by such factors as contract period and percentage of private sector contributions to the projects.

A Real Options Model for Evaluating Investments in the Guarulhos Airport Concession Program

“…According to the studies [3,4], if the flexibilities of a real options model are not contemplated, the evaluation may result in a negative NPV, in which case the project's execution would be considered infeasible. When utilizing the real options model, this flexibility mechanism can be observed by taking into account a dynamic process, possibly resulting in a change of NPV, and thus making the project viable.…”