IDEAS home Printed from https://ideas.repec.org/a/eee/trapol/v154y2024icp73-83.html
   My bibliography  Save this article

Risk mitigation in urban bus concession contracts: Overcoming uncertainties with a real options model

Author

Listed:
  • Stumpf, Gabriel
  • Marques, Rui Cunha
  • Geddes, R. Richard
  • Igrejas da Silva, Rafael

Abstract

In this paper, we analyzed a risk-sharing mechanism that can be used in urban bus public service contracts (PSC) to deal with demand uncertainty in the upcoming years. This mechanism is similar to a collar option: an MRG (Minimum Revenue Guarantee) combined with a revenue cap. We applied this mechanism to a case study, the Lisbon Metro Area bus contracts. We compared the chosen model (a gross cost contract) with a simulated scenario modeled as a collar option. To develop this scenario, we model the flexibilities applying Real options Analysis and the project uncertainty as a Geometric Brownian Motion (GBM). The calculations were performed using Monte Carlo simulation. The results show that, compared to the gross cost, the collar option model allows the private operator to benefit from a potential demand increase. In the case of a downturn, the loss is shared between the two sides, reducing the contract cost borne by the government. Furthermore, from a public policy perspective, contrary to the gross cost model, this model may incentivize the private partner to improve service quality as a strategy to increase demand and, consequently, revenues. In addition, if demand evolves in a different trend, the financial rebalance is made automatically, reducing litigation costs for both sides.

Suggested Citation

  • Stumpf, Gabriel & Marques, Rui Cunha & Geddes, R. Richard & Igrejas da Silva, Rafael, 2024. "Risk mitigation in urban bus concession contracts: Overcoming uncertainties with a real options model," Transport Policy, Elsevier, vol. 154(C), pages 73-83.
    • Handle: RePEc:eee:trapol:v:154:y:2024:i:c:p:73-83
    DOI: 10.1016/j.tranpol.2024.05.027
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0967070X24001525
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.tranpol.2024.05.027?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Balliauw, Matteo, 2021. "From theoretical real options models to pragmatic decision making: Required steps, opportunities and threats," Research in Transportation Economics, Elsevier, vol. 90(C).
    2. Faruk Buyukyoran & Selin Gundes, 2018. "Optimized real options-based approach for government guarantees in PPP toll road projects," Construction Management and Economics, Taylor & Francis Journals, vol. 36(4), pages 203-216, April.
    3. E. Brandão, Luiz & Dyer, James S. & Hahn, Warren J., 2012. "Volatility estimation for stochastic project value models," European Journal of Operational Research, Elsevier, vol. 220(3), pages 642-648.
    4. Bowe, Michael & Lee, Ding Lun, 2004. "Project evaluation in the presence of multiple embedded real options: evidence from the Taiwan High-Speed Rail Project," Journal of Asian Economics, Elsevier, vol. 15(1), pages 71-98, February.
    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. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    7. Élise Labonté-LeMoyne & Shang-Lin Chen & Constantinos K. Coursaris & Sylvain Sénécal & Pierre-Majorique Léger, 2020. "The Unintended Consequences of COVID-19 Mitigation Measures on Mass Transit and Car Use," Sustainability, MDPI, vol. 12(23), pages 1-13, November.
    8. Feng, Zhuo & Zhang, Shui-Bo & Gao, Ying, 2015. "Modeling the impact of government guarantees on toll charge, road quality and capacity for Build-Operate-Transfer (BOT) road projects," Transportation Research Part A: Policy and Practice, Elsevier, vol. 78(C), pages 54-67.
    9. Nunzia Carbonara & Nicola Costantino & Roberta Pellegrino, 2014. "Revenue guarantee in public-private partnerships: a fair risk allocation model," Construction Management and Economics, Taylor & Francis Journals, vol. 32(4), pages 403-415, April.
    10. Ferreira, Sara & Amorim, Marco & Lobo, António & Kern, Mira & Fanderl, Nora & Couto, António, 2022. "Travel mode preferences among German commuters over the course of COVID-19 pandemic," Transport Policy, Elsevier, vol. 126(C), pages 55-64.
    11. K.C. Iyer & Mohammed Sagheer, 2011. "A real options based traffic risk mitigation model for build-operate-transfer highway projects in India," Construction Management and Economics, Taylor & Francis Journals, vol. 29(8), pages 771-779, June.
    12. Thomas E. Copeland & Vladimir Antikarov, 2005. "Real Options: Meeting the Georgetown Challange," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 32-51, March.
    13. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    14. Sharpe, Steven A, 1994. "Financial Market Imperfections, Firm Leverage, and the Cyclicality of Employment," American Economic Review, American Economic Association, vol. 84(4), pages 1060-1074, September.
    15. Liang Shan & Michael Garvin & Raman Kumar, 2010. "Collar options to manage revenue risks in real toll public-private partnership transportation projects," Construction Management and Economics, Taylor & Francis Journals, vol. 28(10), pages 1057-1069.
    16. Das, Sanhita & Boruah, Alice & Banerjee, Arunabha & Raoniar, Rahul & Nama, Suresh & Maurya, Akhilesh Kumar, 2021. "Impact of COVID-19: A radical modal shift from public to private transport mode," Transport Policy, Elsevier, vol. 109(C), pages 1-11.
    17. 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.
    18. Martins, José & Marques, Rui Cunha & Cruz, Carlos Oliveira, 2014. "Maximizing the value for money of PPP arrangements through flexibility: An application to airports," Journal of Air Transport Management, Elsevier, vol. 39(C), pages 72-80.
    19. Yu-Lin Huang & Shih-Pei Chou, 2006. "Valuation of the minimum revenue guarantee and the option to abandon in BOT infrastructure projects," Construction Management and Economics, Taylor & Francis Journals, vol. 24(4), pages 379-389.
    20. Vickerman, Roger, 2021. "Will Covid-19 put the public back in public transport? A UK perspective," Transport Policy, Elsevier, vol. 103(C), pages 95-102.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carlos Andrés Zapata Quimbayo, 2020. "OPCIONES REALES Una guía teórico-práctica para la valoración de inversiones bajo incertidumbre mediante modelos en tiempo discreto y simulación de Monte Carlo," Books, Universidad Externado de Colombia, Facultad de Finanzas, Gobierno y Relaciones Internacionales, number 138.
    2. 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.
    3. Jin, Hongyu & Liu, Shijing & Sun, Jide & Liu, Chunlu, 2021. "Determining concession periods and minimum revenue guarantees in public-private-partnership agreements," European Journal of Operational Research, Elsevier, vol. 291(2), pages 512-524.
    4. 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.
    5. Ales S. Berk & Dejan Podhraski, 2018. "Superiority of Monte Carlo simulation in valuing real options within public–private partnerships," Risk Management, Palgrave Macmillan, vol. 20(1), pages 1-28, February.
    6. Adkins, Roger & Paxson, Dean & Pereira, Paulo J. & Rodrigues, Artur, 2019. "Investment decisions with finite-lived collars," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 185-204.
    7. Buso, Marco & Moretto, Michele & Zormpas, Dimitrios, 2021. "Excess returns in Public-Private Partnerships: Do governments pay too much?," Economic Modelling, Elsevier, vol. 102(C).
    8. Marzouk, Mohamed & Ali, Mohamed, 2018. "Mitigating risks in wastewater treatment plant PPPs using minimum revenue guarantee and real options," Utilities Policy, Elsevier, vol. 53(C), pages 121-133.
    9. Marco Buso & Cesare Dosi & Michele Moretto, 2021. "Do exit options increase the value for money of public–private partnerships?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 721-742, November.
    10. Engelen, Peter-Jan & Kool, Clemens & Li, Ye, 2016. "A barrier options approach to modeling project failure: The case of hydrogen fuel infrastructure," Resource and Energy Economics, Elsevier, vol. 43(C), pages 33-56.
    11. 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.
    12. Li, Shuai & Cai, Jiannan & Feng, Zhuo & Xu, Yifang & Cai, Hubo, 2019. "Government contracting with monopoly in infrastructure provision: Regulation or deregulation?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 122(C), pages 506-523.
    13. 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.
    14. Jiangang Shi & Kaifeng Duan & Guangdong Wu & Rui Zhang & Xiaowei Feng, 2020. "Comprehensive metrological and content analysis of the public–private partnerships (PPPs) research field: a new bibliometric journey," Scientometrics, Springer;Akadémiai Kiadó, vol. 124(3), pages 2145-2184, September.
    15. Carlos Contreras & Julio Angulo, 2017. "Valuing Governmental Support in Road PPPs," Hacienda Pública Española / Review of Public Economics, IEF, vol. 223(4), pages 37-66, December.
    16. Guj, Pietro & Chandra, Atul, 2019. "Comparing different real option valuation approaches as applied to a copper mine," Resources Policy, Elsevier, vol. 61(C), pages 180-189.
    17. Zhao, Yunpeng & Song, Jinbo & Feng, Zhuo & Jin, Lulu, 2023. "Incentive contracts with demand guarantee in BOT toll road projects," Research in Transportation Economics, Elsevier, vol. 98(C).
    18. Yu-Lin Huang & Tsen-Chin Lin, 2023. "Compound deferrable options for the valuation of multi-stage infrastructure investment projects," Construction Management and Economics, Taylor & Francis Journals, vol. 41(8), pages 670-686, August.
    19. Polat, Levent & Battal, Unal (Ãœnal), 2021. "Airport infrastructure investments and valuing expansion decisions using the compound real option approach," Journal of Air Transport Management, Elsevier, vol. 91(C).
    20. Ali El Zein & Adrien Beziat & Pascal Pochet & Olivier Klein & Stephanie Vincent, 2022. "What drives the changes in public transport use in the context of the COVID‐19 pandemic? Highlights from Lyon metropolitan area," Regional Science Policy & Practice, Wiley Blackwell, vol. 14(S1), pages 122-141, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:trapol:v:154:y:2024:i:c:p:73-83. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/30473/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.