IDEAS home Printed from https://ideas.repec.org/a/eee/juipol/v53y2018icp121-133.html
   My bibliography  Save this article

Mitigating risks in wastewater treatment plant PPPs using minimum revenue guarantee and real options

Author

Listed:
  • Marzouk, Mohamed
  • Ali, Mohamed

Abstract

Uncertainties associated with wastewater treatment plants inflows can lead to either undersized or oversized facilities. Such uncertainties are attributed to the deviation of actual development patterns from plans. Accordingly, a minimum-flow guarantee is a suitable risk mitigation strategy. This research proposes a guarantee evaluation algorithm, and a new stochastic model using real-options theory, in order to simulate the wastewater inflow to the wastewater treatment plant. A wastewater treatment plant in Egypt is examined as a case study. The results enable the monetary evaluation of contractual clauses relating to plant expansion and minimum-flow guarantee.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:juipol:v:53:y:2018:i:c:p:121-133
    DOI: 10.1016/j.jup.2018.06.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0957178717302552
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jup.2018.06.012?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. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    2. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, "undated". "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
    3. 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.
    4. N. Carbonara & N. Costantino & L. Gunnigan & R. Pellegrino, 2015. "Risk Management in Motorway PPP Projects: Empirical-based Guidelines," Transport Reviews, Taylor & Francis Journals, vol. 35(2), pages 162-182, March.
    5. Shrestha, Asheem & Chan, Toong-Khuan & Aibinu, Ajibade A. & Chen, Chuan, 2017. "Efficient risk transfer in PPP wastewater treatment projects," Utilities Policy, Elsevier, vol. 48(C), pages 132-140.
    6. Kenneth Button, 2016. "Public--private partnerships: a review of economic considerations with particular reference to transportation projects," Transportation Planning and Technology, Taylor & Francis Journals, vol. 39(2), pages 136-161, March.
    7. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    8. 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.
    9. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 753-777.
    10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    11. 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.
    12. Hoffman,Scott L., 2007. "The Law and Business of International Project Finance," Cambridge Books, Cambridge University Press, number 9780521708784, November.
    13. 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.
    14. Yescombe, E. R. & Yescombe, E. R., 2002. "Principles of Project Finance," Elsevier Monographs, Elsevier, edition 1, number 9780127708515.
    15. 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.
    16. Hoffman,Scott L., 2007. "The Law and Business of International Project Finance," Cambridge Books, Cambridge University Press, number 9780521882200, November.
    17. Athena Roumboutsos, 2015. "Public Private Partnerships in Transport Infrastructure: An International Review," Transport Reviews, Taylor & Francis Journals, vol. 35(2), pages 111-117, March.
    18. Michael Garvin & Charles Cheah, 2004. "Valuation techniques for infrastructure investment decisions," Construction Management and Economics, Taylor & Francis Journals, vol. 22(4), pages 373-383.
    19. 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.
    20. Athena Roumboutsos & Konstantinos Anagnostopoulos, 2008. "Public-private partnership projects in Greece: risk ranking and preferred risk allocation," Construction Management and Economics, Taylor & Francis Journals, vol. 26(7), pages 751-763.
    21. Dailami, Mansoor & Lipkovich, Ilya & Van Dyck, John, 1999. "INFRISK : a computer simulation approach to risk management in infrastructure project finance transactions," Policy Research Working Paper Series 2083, The World Bank.
    22. 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.
    23. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Xinhua & Gan, Dongmei & Wang, Yali & Liu, Yu & Ge, Jiali & Xie, Rui, 2020. "The impact of price and revenue floors on carbon emission reduction investment by coal-fired power plants," Technological Forecasting and Social Change, Elsevier, vol. 154(C).
    2. Yuanfeng Hu & Yixiang Tian & Luping Zhang, 2023. "Green Bond Pricing and Optimization Based on Carbon Emission Trading and Subsidies: From the Perspective of Externalities," Sustainability, MDPI, vol. 15(10), pages 1-20, May.
    3. Barbosa, Luciana & Rodrigues, Artur & Sardinha, Alberto, 2022. "Optimal price subsidies under uncertainty," European Journal of Operational Research, Elsevier, vol. 303(1), pages 471-479.
    4. Raisa Pérez-Vas & Félix Puime Guillén & Joaquín Enríquez-Díaz, 2021. "Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options," IJERPH, MDPI, vol. 18(10), pages 1-13, May.
    5. Hu, Yuanfeng & Tian, Yixiang, 2024. "The role of green reputation, carbon trading and government intervention in determining the green bond pricing: An externality perspective," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 46-62.
    6. Yuan, Jingfeng & Ding, Hongxing & Huang, Zeyuan & Deng, Binchao & Li, Shuai & Huang, Wei, 2021. "Influence of market structures on concession pricing in Public-Private-Partnership utilities with asymmetric information," Utilities Policy, Elsevier, vol. 69(C).
    7. 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.
    8. Yuqun Dong & Yaming Zhuang, 2023. "Research on an Investment Decision Model of Waste Incineration Power under Demand Guarantee Policies," Sustainability, MDPI, vol. 15(15), pages 1-19, July.
    9. Meishu Wang & Hui Gong, 2018. "Imbalanced Development and Economic Burden for Urban and Rural Wastewater Treatment in China—Discharge Limit Legislation," Sustainability, MDPI, vol. 10(8), pages 1-12, July.
    10. 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.

    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. 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.
    3. Babatunde, Solomon Olusola & Perera, Srinath, 2017. "Analysis of traffic revenue risk factors in BOT road projects in developing countries," Transport Policy, Elsevier, vol. 56(C), pages 41-49.
    4. Bettina Freitag & Lukas Häfner & Verena Pfeuffer & Jochen Übelhör, 2020. "Evaluating investments in flexible on-demand production capacity: a real options approach," Business Research, Springer;German Academic Association for Business Research, vol. 13(1), pages 133-161, April.
    5. Spiros H. Martzoukos & Nayia Pospori & Lenos Trigeorgis, 2024. "Corporate investment decisions with switch flexibility, constraints, and path-dependency," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1223-1250, April.
    6. Chung-Gee Lin & Yu-Shan Wang, 2012. "Evaluating natural resource projects with embedded options and limited reserves," Applied Economics, Taylor & Francis Journals, vol. 44(12), pages 1471-1482, April.
    7. repec:dau:papers:123456789/1046 is not listed on IDEAS
    8. Zhang, Mingming & Zhou, Dequn & Zhou, Peng, 2014. "A real option model for renewable energy policy evaluation with application to solar PV power generation in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 944-955.
    9. Schachter, J.A. & Mancarella, P., 2016. "A critical review of Real Options thinking for valuing investment flexibility in Smart Grids and low carbon energy systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 261-271.
    10. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    11. Pineiro-Chousa, Juan & Vizcaíno-González, Marcos, 2016. "A quantum derivation of a reputational risk premium," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 304-309.
    12. Philipp N. Baecker, 2007. "Real Options and Intellectual Property," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-48264-2, October.
    13. Hieronymi, Philipp & Schüller, David, 2015. "The Clean-Development Mechanism, stochastic permit prices and energy investments," Energy Economics, Elsevier, vol. 47(C), pages 25-36.
    14. Cheng, Cheng & Wang, Zhen & Liu, Mingming & Chen, Qiang & Gbatu, Abimelech Paye & Ren, Xiaohang, 2017. "Defer option valuation and optimal investment timing of solar photovoltaic projects under different electricity market systems and support schemes," Energy, Elsevier, vol. 127(C), pages 594-610.
    15. Weihan Li & Jin E. Zhang & Xinfeng Ruan & Pakorn Aschakulporn, 2024. "An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(7), pages 1117-1153, July.
    16. Gabriel J Power & Charli D. Tandja M. & Josée Bastien & Philippe Grégoire, 2015. "Measuring infrastructure investment option value," Journal of Risk Finance, Emerald Group Publishing, vol. 16(1), pages 49-72, January.
    17. Lars Stentoft, 2008. "American Option Pricing Using GARCH Models and the Normal Inverse Gaussian Distribution," Journal of Financial Econometrics, Oxford University Press, vol. 6(4), pages 540-582, Fall.
    18. David Laughton & Raul Guerrero & Donald Lessard, 2008. "Real Asset Valuation: A Back‐to‐basics Approach," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(2), pages 46-65, March.
    19. Lars Stentoft, 2008. "Option Pricing using Realized Volatility," CREATES Research Papers 2008-13, Department of Economics and Business Economics, Aarhus University.
    20. In oon Kim & Bong-Gyu Jang & Kyeong Tae Kim, 2013. "A simple iterative method for the valuation of American options," Quantitative Finance, Taylor & Francis Journals, vol. 13(6), pages 885-895, May.
    21. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.

    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:juipol:v:53:y:2018:i:c:p:121-133. 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: https://www.sciencedirect.com/journal/utilities-policy .

    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.