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An option pricing-based model for evaluating the financial viability of privatized infrastructure projects

Author

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  • S. Ping Ho
  • Liang Liu

Abstract

Privatized infrastructure projects have to demonstrate their financial and technical viability before they are undertaken. Although it is relatively easy to demonstrate the technical viability of an infrastructure project, the evaluation of the financial viability of a privatized infrastructure project is complex and challenging, mainly because of the uncertainties involved due to the project's scale, long concession period and complexity. Traditional methods, such as net present value (NPV) analysis, fall short in reflecting the characteristics of privatized infrastructure projects and the risks involved. This paper presents an option pricing based model, the BOT option valuation (BOT-OV) model, for evaluating the financial viability of a privatized infrastructure project. This quantitative model considers the project characteristics explicitly and evaluates the project from the perspectives of the project promoter and of the government when the project is under bankruptcy risk. Moreover, the model can evaluate the impact of the government guarantee and the developer negotiation option on the project financial viability.

Suggested Citation

  • S. Ping Ho & Liang Liu, 2002. "An option pricing-based model for evaluating the financial viability of privatized infrastructure projects," Construction Management and Economics, Taylor & Francis Journals, vol. 20(2), pages 143-156.
  • Handle: RePEc:taf:conmgt:v:20:y:2002:i:2:p:143-156
    DOI: 10.1080/01446190110110533
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    References listed on IDEAS

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    1. Augenblick, Mark & Custer, B. Scott, 1990. "The build, operate, and transfer ("BOT") approach to infrastructure projects in developing countries," Policy Research Working Paper Series 498, The World Bank.
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    Citations

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    Cited by:

    1. João Adelino Ribeiro & Paulo Jorge Pereira & Elísio Brandão, 2013. "A Two-Factor Uncertainty Model to Determine the Optimal Contractual Penalty for a Build-Own-Transfer Project," CEF.UP Working Papers 1308, Universidade do Porto, Faculdade de Economia do Porto.
    2. Biljana Rakic & Tamara Radenovic, 2014. "Real Options Methodology In Public-Private Partnership Projects Valuation," Economic Annals, Faculty of Economics, University of Belgrade, vol. 59(200), pages 91-114, January –.
    3. repec:taf:applec:v:50:y:2018:i:1:p:51-64 is not listed on IDEAS
    4. 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.
    5. Krüger, Niclas A., 2012. "To kill a real option – Incomplete contracts, real options and PPP," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(8), pages 1359-1371.
    6. 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.
    7. Yu-Lin Huang & Chai-Chi Pi, 2009. "Valuation of multi-stage BOT projects involving dedicated asset investments: a sequential compound option approach," Construction Management and Economics, Taylor & Francis Journals, vol. 27(7), pages 653-666.
    8. Taeil Park & Changyoon Kim & Hyoungkwan Kim, 2014. "Valuation of Drainage Infrastructure Improvement Under Climate Change Using Real Options," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(2), pages 445-457, January.
    9. Taeil Park & Byungil Kim & Hyoungkwan Kim, 2012. "Impact of Deterioration and Negotiation on Sewer System O&M Contracts from the Real Option Perspective," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(10), pages 2973-2989, August.
    10. Mahdi Mattar & Charles Cheah, 2006. "Valuing large engineering projects under uncertainty: private risk effects and real options," Construction Management and Economics, Taylor & Francis Journals, vol. 24(8), pages 847-860.
    11. repec:eee:ejores:v:267:y:2018:i:1:p:368-380 is not listed on IDEAS
    12. repec:hpe:journl:y:2017:v:223:i:4:p:37-66 is not listed on IDEAS
    13. Knoope, M.M.J. & Ramírez, A. & Faaij, A.P.C., 2015. "The influence of uncertainty in the development of a CO2 infrastructure network," Applied Energy, Elsevier, vol. 158(C), pages 332-347.
    14. Lee, Hyounkyu & Park, Taeil & Kim, Byungil & Kim, Kyeongseok & Kim, Hyoungkwan, 2013. "A real option-based model for promoting sustainable energy projects under the clean development mechanism," Energy Policy, Elsevier, vol. 54(C), pages 360-368.
    15. Di Corato, Luca & Dosi, Cesare & Moretto, Michele, 2015. "Multidimensional auctions for long-term procurement contracts under the threat of early exit: the case of conservation auctions," Working Paper Series 2015:6, Swedish University of Agricultural Sciences, Department Economics.
    16. Chou, Jui-Sheng & Ping Tserng, H. & Lin, Chieh & Yeh, Chun-Pin, 2012. "Critical factors and risk allocation for PPP policy: Comparison between HSR and general infrastructure projects," Transport Policy, Elsevier, vol. 22(C), pages 36-48.

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