Valuation of strategic options in public–private partnerships
This paper investigates the feasibility of and develops an economic valuation model for strategic options in Comprehensive Development Agreements (CDAs). A CDA is a form of public–private partnership whereby the right to price and collect revenues from toll roads is leased to a private entity for a long but finite period of time. In exchange, this provides local and state governments with a quick influx of cash and/or additional infrastructure. Uncertainty associated with such long-term leases is of substantial public concern. This paper examines five different strategic options, namely a buyout option, a conditional buyout option, a revenue-sharing option, and two types of minimum revenue guarantee options. The buyout option in particular could give the public sector additional control over the future use of leased facilities and address potential concerns regarding long-run uncertainty and possible unforeseen windfalls for the private sector. The paper’s contributions include the analysis, feasibility assessment and valuation of several strategic options, sensitivity analysis of the solutions, an economic consumer demand-based revenue model for purposes of cash flow simulation, and analysis of option price sensitivity to “moneyness”. The main conclusion is that strategic options can provide useful risk reduction, but generally have significant value relative to the lease itself. By scaling down payoffs, options could be realistically included in CDAs and other PPPs. For some parameter values, option values to the developer and public authority are offsetting, allowing for costless risk reduction.
If 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.
Volume (Year): 90 (2016)
Issue (Month): C ()
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/547/description#description|
|Order Information:|| Postal: http://www.elsevier.com/wps/find/supportfaq.cws_home/regional|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
- Boyle, Phelim & Broadie, Mark & Glasserman, Paul, 1997. "Monte Carlo methods for security pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1267-1321, June.
- Paul A. Grout, 2003.
"Public and Private Sector Discount Rates in Public-Private Partnerships,"
Royal Economic Society, vol. 113(486), pages 62-68, March.
- Paul Grout, 2002. "Public and Private Sector Discount Rates in Public-Private Partnerships," The Centre for Market and Public Organisation 02/059, Department of Economics, University of Bristol, UK.
- Trigeorgis, Lenos, 1993. "The Nature of Option Interactions and the Valuation of Investments with Multiple Real Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 1-20, March.
- Stephan Danninger, 2005. "Revenue Forecasts as Performance Targets," IMF Working Papers 05/14, International Monetary Fund.
- Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
- Tom Doan, "undated". "RATS programs to replicate CKLS(1992) estimation of interest rate models," Statistical Software Components RTZ00035, Boston College Department of Economics.
- Germà Bel & John Foote, 2007. "Comparison of Recent Toll Road Concession Transactions in the United States and France," Working Papers XREAP2007-11, Xarxa de Referència en Economia Aplicada (XREAP), revised Nov 2007.
- Takashima, Ryuta & Yagi, Kyoko & Takamori, Hiroshi, 2010. "Government guarantees and risk sharing in public-private partnerships," Review of Financial Economics, Elsevier, vol. 19(2), pages 78-83, April.
- Rose, Simon, 1998. "Valuation of Interacting Real Options in a Tollroad Infrastructure Project," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 711-723.
- Luiz Eduardo Brandao & Eduardo Saraiva, 2008. "The option value of government guarantees in infrastructure projects," Construction Management and Economics, Taylor & Francis Journals, vol. 26(11), pages 1171-1180.
- Alonso-Conde, Ana Belen & Brown, Christine & Rojo-Suarez, Javier, 2007. "Public private partnerships: Incentives, risk transfer and real options," Review of Financial Economics, Elsevier, vol. 16(4), pages 335-349.
- Gatti, Stefano, 2012. "Project Finance in Theory and Practice," Elsevier Monographs, Elsevier, edition 2, number 9780123919465.
- Luiz Brandão & James Dyer, 2005. "Decision Analysis and Real Options: A Discrete Time Approach to Real Option Valuation," Annals of Operations Research, Springer, vol. 135(1), pages 21-39, March.
- David Ford & Diane Lander & John Voyer, 2002. "A real options approach to valuing strategic flexibility in uncertain construction projects," Construction Management and Economics, Taylor & Francis Journals, vol. 20(4), pages 343-351.
- Charles Cheah & Jicai Liu, 2006. "Valuing governmental support in infrastructure projects as real options using Monte Carlo simulation," Construction Management and Economics, Taylor & Francis Journals, vol. 24(5), pages 545-554.
- Nicola Chiara & Michael Garvin, 2008. "Variance models for project financial risk analysis with applications to greenfield BOT highway projects," Construction Management and Economics, Taylor & Francis Journals, vol. 26(9), pages 925-939.
- Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
- Trigeorgis, Lenos, 1991. "A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 309-326, September. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:transa:v:90:y:2016:i:c:p:50-68. See general 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: (Dana Niculescu)
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.