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A Concession Period and Price Determination Model for PPP Projects: Based on Real Options and Risk Allocation

Author

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  • Guofeng Ma

    (School of Economics & Management, Tongji University, 1239 Siping Road, YangPu District, Shanghai 200092, China)

  • Qingjuan Du

    (School of Economics & Management, Tongji University, 1239 Siping Road, YangPu District, Shanghai 200092, China)

  • Kedi Wang

    (School of Economics & Management, Tongji University, 1239 Siping Road, YangPu District, Shanghai 200092, China)

Abstract

Concession period of PPP (Public–Private Partnership) projects is the most essential feature in determining the time span of various rights, obligations and responsibilities between the government and concessionaire. Most traditional methods are based on the analysis of the future cash flow to determine the concession period, but either ignored the potential values or the risks that might emerge during the project life span, thus failing to find the proper concession period for the project. This paper builds a new model taking both recognized real option value and risk into concession period decision-making, and considering the distribution coefficient of option value, which uses game theory integrated with risk sharing, which increases the flexibility of the negotiation. Real option theory is introduced based on traditional NPV (Net Present Value); its potential value and strategic importance are further exploited. A case shows that the project concession period and the price of the sewage disposal are different when considering option value and risk sharing simultaneously and respectively, which give the two side’s references during negotiation. Allocating the option value and the risk properly between the government and concessionaire can also avoid dispute and promote cooperation.

Suggested Citation

  • Guofeng Ma & Qingjuan Du & Kedi Wang, 2018. "A Concession Period and Price Determination Model for PPP Projects: Based on Real Options and Risk Allocation," Sustainability, MDPI, vol. 10(3), pages 1-21, March.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:3:p:706-:d:134822
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    Cited by:

    1. Yanchun Zhang & Jianglin Gu & Ming Shan & Yazhi Xiao & Amos Darko, 2018. "Investigating Private Sectors’ Behavioral Intention to Participate in PPP Projects: An Empirical Examination Based on the Theory of Planned Behavior," Sustainability, MDPI, vol. 10(8), pages 1-25, August.
    2. Xuhui Cong & Li Ma, 2018. "Performance Evaluation of Public-Private Partnership Projects from the Perspective of Efficiency, Economic, Effectiveness, and Equity: A Study of Residential Renovation Projects in China," Sustainability, MDPI, vol. 10(6), pages 1-21, June.
    3. Guangbin Wang & Yingxia Xue & Mirosław Jan Skibniewski & Jiule Song & Hao Lu, 2018. "Analysis of Private Investors Conduct Strategies by Governments Supervising Public-Private Partnership Projects in the New Media Era," Sustainability, MDPI, vol. 10(12), pages 1-26, December.
    4. 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.
    5. Khrystyna Danylkiv & Khrystyna Gorbova & Nataliia Hembarska & Viktor Trynchuk & Yurii Paida & Volodymyr Havran, 2020. "Methods of Economic Evaluation of Concession Project Effectiveness," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 16(4), pages 67-84.
    6. 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).
    7. Xiaoyan Jiang & Kun Lu & Bo Xia & Yong Liu & Caiyun Cui, 2019. "Identifying Significant Risks and Analyzing Risk Relationship for Construction PPP Projects in China Using Integrated FISM-MICMAC Approach," Sustainability, MDPI, vol. 11(19), pages 1-31, September.
    8. Azzurra Morreale & Luigi Mittone & Thi-Thanh-Tam Vu & Mikael Collan, 2020. "To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice," Sustainability, MDPI, vol. 12(8), pages 1-19, April.
    9. Marek Durica & Danuse Guttenova & Ludovit Pinda & Lucia Svabova, 2018. "Sustainable Value of Investment in Real Estate: Real Options Approach," Sustainability, MDPI, vol. 10(12), pages 1-18, December.
    10. Jiangang Shi & Kaifeng Duan & Shiping Wen & Rui Zhang, 2019. "Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective," Sustainability, MDPI, vol. 11(7), pages 1-18, March.
    11. Jorge Tarifa-Fernández & Ana María Sánchez-Pérez & Salvador Cruz-Rambaud, 2019. "Internet of Things and Their Coming Perspectives: A Real Options Approach," Sustainability, MDPI, vol. 11(11), pages 1-15, June.
    12. Yu Zeng & Weidong Chen, 2019. "The Determination of Concession Period for Build-Operate-Transfer Solar Photovoltaic Power Project under Policy Incentives: A Case Study of China," Energies, MDPI, vol. 12(18), pages 1-23, September.
    13. 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.
    14. Yan Wang & Yujie Wang & Xiuyu Wu & Jiwang Li, 2020. "Exploring the Risk Factors of Infrastructure PPP Projects for Sustainable Delivery: A Social Network Perspective," Sustainability, MDPI, vol. 12(10), pages 1-26, May.

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