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Valuation of strategic options in public–private partnerships

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  • Power, Gabriel J.
  • Burris, Mark
  • Vadali, Sharada
  • Vedenov, Dmitry

Abstract

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.

Suggested Citation

  • Power, Gabriel J. & Burris, Mark & Vadali, Sharada & Vedenov, Dmitry, 2016. "Valuation of strategic options in public–private partnerships," Transportation Research Part A: Policy and Practice, Elsevier, vol. 90(C), pages 50-68.
    • Handle: RePEc:eee:transa:v:90:y:2016:i:c:p:50-68
    DOI: 10.1016/j.tra.2016.05.015
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    Cited by:

    1. Silaghi, Florina & Sarkar, Sudipto, 2021. "Agency problems in public-private partnerships investment projects," European Journal of Operational Research, Elsevier, vol. 290(3), pages 1174-1191.
    2. Shi, Shasha & An, Qingxian & Chen, Ke, 2020. "Optimal choice of capacity, toll, and subsidy for build-operate-transfer roads with a paid minimum traffic guarantee," Transportation Research Part A: Policy and Practice, Elsevier, vol. 139(C), pages 228-254.
    3. Kangsoo Kim & Hyejin Cho & Donghyung Yook, 2019. "Financing for a Sustainable PPP Development: Valuation of the Contractual Rights under Exercise Conditions for an Urban Railway PPP Project in Korea," Sustainability, MDPI, vol. 11(6), pages 1-14, March.
    4. Martine Van den Boomen & Sjoerd Van der Meulen & Jonathan Van Ekris & Roel Spanjers & Olle Ten Voorde & Janwim Mulder & Peter Blommaart, 2021. "Optimized Expansion Strategy for a Hydrogen Pipe Network in the Port of Rotterdam with Compound Real Options Analysis," Sustainability, MDPI, vol. 13(16), pages 1-23, August.
    5. Li, Shuai & Cai, Hubo, 2017. "Government incentive impacts on private investment behaviors under demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 101(C), pages 115-129.
    6. Kangsoo Kim & Jinoh Kim & Donghyung Yook, 2021. "Analysis of Features Affecting Contracted Rate of Return of Korean PPP Projects," Sustainability, MDPI, vol. 13(6), pages 1-21, March.

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