Valuing Simple Multiple-Exercise Real Options in Infrastructure Projects

Chiara, Nicola; Garvin, Michael J.; Večeř, Jan

doi:10.1061/(asce)1076-0342(2007)13:2(97)

Cited by 142 publications

(78 citation statements)

References 20 publications

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“…Chiara et al (2007) assessed the value of a revenue guarantee granted by the government in a concession project. The methodology of real options has the advantage of considering a neutral environment regarding risk.…”

Section: Introductionmentioning

confidence: 99%

Default and Abandonment Option in Motorway Concessions

Colín

Soliño

Lara-Galera

2017

J. Infrastruct. Syst.

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As long as motorway concessions are subject to the variability of traffic demand, it is necessary to apply valuation methods that can take into account that uncertainty. In the past, many concession projects have faced an early termination of the contract due to lower traffic than expected. These insolvency situations raise the issue of the compensation to the concessionaire when the contract is prematurely terminated. A methodology based on the real-options approach has been developed in this paper to assess insolvency situations in motorway concessions. Under this approach, the mechanism of compensation can be modeled as an abandonment option, granted by the public administration to the concessionaire, in which the value of the option will depend on the evolution of traffic. This methodology is then applied to the case of a real concession in Spain. The results show a significant value of the abandonment option, which represents an implicit aid from the public administration to the concession. In this way, the methodology presented in this paper can contribute to gaining a better understanding of the risks of motorway concessions and enhancing the transparency in concession contracts.

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Section: Introductionmentioning

confidence: 99%

Default and Abandonment Option in Motorway Concessions

Colín

Soliño

Lara-Galera

2017

J. Infrastruct. Syst.

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“…For example, Huang and Chou (2006) valued the MRG and the option to abandon the project by the private firm, and Brandao and Saraiva (2008) also developed a model for infrastructure projects based on the consideration of a Minimum Demand Guarantee. Cheah and Liu (2006) addressed the valuation of demand and revenue guarantees, applying Monte Carlo simulation, and Chiara et al (2007) also applied the same technique to evaluate a MRG, which is only redeemable at specific moments in time. Alonso-Conde et al (2007) addressed the existing contractual conditions in PPP which guarantee a minimum profitability to the private firm.…”

Section: The Application Of the Real Options Approach To Bot Projectsmentioning

confidence: 99%

A Two-Factor Uncertainty Model to Determine the Optimal Contractual Penalty for a Build-Own-Transfer Project

2013

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Public-Private Partnerships (PPP) became one of the most common types of public procurement arrangements and Build-Own-Transfer (BOT) projects, awarded through adequate bidding competitions, have been increasingly promoted by governments. The theoretical model herein proposed is based on a contractual framework where the government grants leeway to the private entity regarding the timing for project implementation. However, the government is aware that delaying the beginning of operations will lead to the emergence of social costs, i.e., the costs that result from the corresponding loss of social welfare. This fact should motivate the government to include a contractual penalty in case the private firm does not implement the project immediately. The government also recognizes that the private entity is more efficient in constructing the project facility. The model's outcome is the optimal value for the legal penalty the government should include in the contract form. A two-factor uncertainty approach is adopted and Adkins and Paxson (2011) quasi-analytical solution is applied since homogeneity of degree one can not be invoked in all of the model's boundary conditions. Sensitivity analysis reveals that variations in the correlation coefficients have a strong impact on the optimal contractual penalty and also that there is a level for the comparative efficiency factor above which there is no need to impose a contractual penalty, for a given level of social costs. Finally, the effects of including a non-optimal penalty value in the contract form, which derives from overestimating or underestimating the selected bidder's real comparative efficiency are examined, using a numerical example. Results demonstrate that overestimating (underestimating) the selected bidder's real comparative efficiency leads to the inclusion of a below-optimal (above-optimal) value for the legal penalty in the contract and produces effects that the government would prefer to prevent. JEL Classification Codes: G31; D81.

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“…Table 1 Even if MCS is a well known approach, its use in assessing the value of flexibility given by real options embedded in some projects or engineering systems is relatively new and considered only in few fields. The MCS flexibility has fostered some authors to enhance its potentiality in real options evaluation (Wang and de Neufville, 2005;Triantis and Borison, 2001;Chiara et al, 2007), even if it is rarely applied or, in any case, applied in a way that is different from the approach developed by this research. Triantis and Borison (2001) state that the MCS is able to generate a large number of possible scenarios for the underlying project cash flows or value, based on assumed probability distributions for each uncertainty.…”

Section: Real Option Pricing With Monte Carlo Simulationmentioning

confidence: 99%