A real options based traffic risk mitigation model for build-operate-transfer highway projects in India
AbstractBuild-operate-transfer (BOT) has been one of the preferred models of public--private partnership (PPP) for attracting private capital in the Indian highway sector. In BOT projects the traffic demand is considered a critical risk. Through a concession agreement called the model concession agreement (MCA) a standardized risk allocation framework has been adopted for BOT highway projects in India. If the actual traffic volume deviates from the projected traffic, the MCA suggests varying the length of the concession period (by a pre-agreed formula) to mitigate the traffic demand risk. This arrangement has the limitation of guaranteeing the concessionaire against the shortfall in traffic demand while it bestows unlimited gain otherwise. Past researchers have also examined only the possibility of revenue guarantees to protect the concessionaire from downside risks due to variation in traffic. Therefore, a traffic band is proposed: a combination of traffic floor and traffic cap—which can ensure certainty as to the revenue streams of the private investor, while preventing him from appropriating windfall gains due to higher-than-expected traffic demand through an equitable risk and revenue sharing mechanism. A traffic band being quite analogous to financial options, the paper suggests use of a ‘put’ option held by the concessionaire to determine the traffic floor, while a ‘call’ option held by the government serves as the traffic ceiling. Application of the real options analogy to a real life case study using binomial lattice method indicates enhancement to the net present value of the project.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Construction Management and Economics.
Volume (Year): 29 (2011)
Issue (Month): 8 (June)
Contact details of provider:
Web page: http://www.tandfonline.com/RCME20
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.