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Revenue guarantee in public-private partnerships: a fair risk allocation model

Author

Listed:
  • Nunzia Carbonara
  • Nicola Costantino
  • Roberta Pellegrino

Abstract

Public-private partnerships (PPPs) are adopted throughout the world for delivering public infrastructure. Despite the attractiveness of the PPP structure, its implementation has not been without trouble due to multiple uncertainties embedded with PPP projects. Private investors often require some mitigation of these risks through government support. One of the most common forms of government support is minimum revenue guarantee (MRG). A real option-based model is developed that uses a new mechanism for setting the revenue guarantee level secured by the government, which balances the private sector's profitability needs and the public sector's fiscal management interests and uses the concept of fairness for structuring MRGs. The model uses Monte Carlo simulation to take into account the uncertainty. The model is applied to the projected 1 kilometre long 'Camionale di Bari' toll road that will link the port of Bari (located in Puglia, Southern Italy) with the existing road network without affecting the urban traffic. It was found that government support is often needed to make the project attractive to private investors and that the developed model can be, for both public and private sectors, a valid tool for defining the fair value of the minimum amount of revenue secured by the government.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:conmgt:v:32:y:2014:i:4:p:403-415
    DOI: 10.1080/01446193.2014.906638
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    Cited by:

    1. 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.
    2. Sheng, Mingyue & Sreenivasan, Ajith Viswanath & Sharp, Basil & Wilson, Douglas & Ranjitkar, Prakash, 2020. "Economic analysis of dynamic inductive power transfer roadway charging system under public-private partnership–Evidence from New Zealand," Technological Forecasting and Social Change, Elsevier, vol. 154(C).
    3. 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.
    4. Long Li & Zhongfu Li & Lei Jiang & Guangdong Wu & Daojin Cheng, 2018. "Enhanced Cooperation among Stakeholders in PPP Mega-Infrastructure Projects: A China Study," Sustainability, MDPI, vol. 10(8), pages 1-16, August.
    5. 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.
    6. 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.
    7. Antonio Di Bari, 2021. "A barrier real option approach to evaluate public–private partnership projects and prevent moral hazard," SN Business & Economics, Springer, vol. 1(3), pages 1-19, March.
    8. Acharya, Bikram & Lee, Jongsu & Moon, HyungBin, 2022. "Preference heterogeneity of local government for implementing ICT infrastructure and services through public-private partnership mechanism," Socio-Economic Planning Sciences, Elsevier, vol. 79(C).
    9. Khwaja Mateen Mazher & Albert P. C. Chan & Rafiq M. Choudhry & Hafiz Zahoor & David J. Edwards & Ahmed M. Ghaithan & Awsan Mohammed & Mubashir Aziz, 2022. "Identifying Measures of Effective Risk Management for Public–Private Partnership Infrastructure Projects in Developing Countries," Sustainability, MDPI, vol. 14(21), pages 1-19, October.

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