IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v11y2019i6p1573-d214102.html
   My bibliography  Save this article

Financing for a Sustainable PPP Development: Valuation of the Contractual Rights under Exercise Conditions for an Urban Railway PPP Project in Korea

Author

Listed:
  • Kangsoo Kim

    (Department of Public Finance and Social Policy, Korea Development Institute, Sejong-si 30149, Korea)

  • Hyejin Cho

    (Highway & Transportation Research Division, Korea Institute of Civil Engineering and Building Technology, Goyang-si 10223, Korea)

  • Donghyung Yook

    (National Infrastructure Research Division, Korea Research Institute for Human Settlements, Sejong-si 30147, Korea)

Abstract

The Minimum Revenue Guarantee (MRG) was designed to mitigate the financial risk of private investors that participate in the transportation project as concessionaire under a public-private partnership (PPP) program. The MRG can pose a significant financial burden to governments especially when the contract revenue is set considerably higher than the actual revenue. This may encourage the concessionaire to inflate the traffic forecast to make the project look as if it will be profitable. In order to mitigate this problem, extra conditions for exercising the MRG can be considered. This study examines how these exercise conditions change the economic value of the MRG using the case study based on the urban railway project in the Republic of Korea. By utilizing the real options analysis, the study identified that the exercise conditions have worked to curtail the expected payment from the government, eventually leading to a reduction in the concessionaire’s expectation of revenue. The value of MRG was at a far lower level compared to the concessionaire’s investment because of the low probability of exercising the MRG when the exercise conditions apply. The findings are expected to contribute to the sustainability of the PPP program by recognizing and quantifying liabilities and risks embedded in the concession agreement in advance.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:6:p:1573-:d:214102
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/11/6/1573/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/11/6/1573/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Baxter,Martin & Rennie,Andrew, 1996. "Financial Calculus," Cambridge Books, Cambridge University Press, number 9780521552899, October.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Spiess, Heinz & Florian, Michael, 1989. "Optimal strategies: A new assignment model for transit networks," Transportation Research Part B: Methodological, Elsevier, vol. 23(2), pages 83-102, April.
    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. 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.
    6. Edward H. Bowman & Gary T. Moskowitz, 2001. "Real Options Analysis and Strategic Decision Making," Organization Science, INFORMS, vol. 12(6), pages 772-777, December.
    7. 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.
    8. Pedro Miguel Pimentel & Jos� Azevedo-Pereira & Gualter Couto, 2012. "High-speed rail transport valuation," The European Journal of Finance, Taylor & Francis Journals, vol. 18(2), pages 167-183, February.
    9. Kumar, Lakshya & Jindal, Apurva & Velaga, Nagendra R., 2018. "Financial risk assessment and modelling of PPP based Indian highway infrastructure projects," Transport Policy, Elsevier, vol. 62(C), pages 2-11.
    10. Michael Garvin & Charles Cheah, 2004. "Valuation techniques for infrastructure investment decisions," Construction Management and Economics, Taylor & Francis Journals, vol. 22(4), pages 373-383.
    11. 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.
    12. 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.
    13. Power, Gabriel J. & Burris, Mark & Vadali, Sharada & Vedenov, Dmitry, 2016. "Valuation of strategic options in public–private partnerships," Transportation Research Part A: Policy and Practice, Elsevier, vol. 90(C), pages 50-68.
    14. 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.
    15. Nicola Chiara & Michael Garvin, 2008. "Variance models for project financial risk analysis with applications to greenfield BOT highway projects," Construction Management and Economics, Taylor & Francis Journals, vol. 26(9), pages 925-939.
    16. 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.
    17. Robert Bain, 2009. "Error and optimism bias in toll road traffic forecasts," Transportation, Springer, vol. 36(5), pages 469-482, September.
    18. Timothy Irwin, 2003. "Public Money for Private Infrastructure : Deciding When to Offer Guarantees, Output-based Subsidies, and Other Fiscal Support," World Bank Publications - Books, The World Bank Group, number 15117.
    19. Gualter Couto & Cláudia Nunes & Pedro Pimentel, 2015. "High-speed rail transport valuation and conjecture shocks," The European Journal of Finance, Taylor & Francis Journals, vol. 21(10-11), pages 791-805, August.
    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. Luis Aguilar & Juan David González-Ruiz & Sergio Botero, 2022. "Shareholder Option Valuation in Mezzanine Financing Applied to CO 2 Reduction in Sustainable Infrastructure Projects: Application to a Tunnel Road in Medellin, Colombia," Sustainability, MDPI, vol. 14(12), pages 1-13, June.
    2. Xinxin Liu & Xiaosheng Wang & Haiying Guo & Xiaojie An, 2021. "Benefit Allocation in Shared Water-Saving Management Contract Projects Based on Modified Expected Shapley Value," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 35(1), pages 39-62, January.
    3. Kangsoo Kim & Jinoh Kim & Donghyung Yook, 2021. "Analysis of Features Affecting Contracted Rate of Return of Korean PPP Projects," Sustainability, MDPI, vol. 13(6), pages 1-21, March.
    4. Clara Paola Camargo-Díaz & Edwin Paipa-Sanabria & Julian Andres Zapata-Cortes & Andres Mauricio Briceño-Chaves & Cristian Fernando Serna-Castaño, 2023. "Review of Financing Mechanisms to Promote Decarbonization Alternatives in Rail and Inland Waterway Transport," Sustainability, MDPI, vol. 15(2), pages 1-17, January.

    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, April.
    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. Kim, Amy M. & Li, Huanan, 2020. "Incorporating the impacts of climate change in transportation infrastructure decision models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 134(C), pages 271-287.
    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. Buso, Marco & Moretto, Michele & Zormpas, Dimitrios, 2021. "Excess returns in Public-Private Partnerships: Do governments pay too much?," Economic Modelling, Elsevier, vol. 102(C).
    6. 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.
    7. Deng, Qianli & Jiang, Xianglin & Cui, Qingbin & Zhang, Limao, 2015. "Strategic design of cost savings guarantee in energy performance contracting under uncertainty," Applied Energy, Elsevier, vol. 139(C), pages 68-80.
    8. 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.
    9. Ilker Ersegun Kayhan & Glenn P. Jenkins, 2016. "Evaluating Minimum-Traffic Guarantees for PPPs in Turkey by Real-Option Pricing," Development Discussion Papers 2016-02, JDI Executive Programs.
    10. 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.
    11. 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.
    12. 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).
    13. Oliveira, A. & Couto, G. & Pimentel, P., 2021. "Uncertainty and flexibility in infrastructure investments: Application of real options analysis to the Ponta Delgada airport expansion," Research in Transportation Economics, Elsevier, vol. 90(C).
    14. Cuypers, I.R.P., 2009. "Essays on equity joint ventures, uncertainty and experience," Other publications TiSEM 8dc79e86-c625-467f-a450-8, Tilburg University, School of Economics and Management.
    15. 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.
    16. Lo Nigro, Giovanna & Morreale, Azzurra & Enea, Gianluca, 2014. "Open innovation: A real option to restore value to the biopharmaceutical R&D," International Journal of Production Economics, Elsevier, vol. 149(C), pages 183-193.
    17. Carlos de Lamare Bastian-Pinto & Alexandre Paula Silva Ramos & Luiz de Magalhães Ozorio & Luiz Eduardo Teixeira Brandão, 2015. "Uncertainty and Flexibility in the Brazilian Beef Livestock Sector: the Value of the Confinement Option," Brazilian Business Review, Fucape Business School, vol. 12(6), pages 100-120, November.
    18. 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.
    19. Lindsey, Robin & de Palma, André, 2014. "Cost recovery from congestion tolls with long-run uncertainty," Economics of Transportation, Elsevier, vol. 3(2), pages 119-132.
    20. 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.

    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:gam:jsusta:v:11:y:2019:i:6:p:1573-:d:214102. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.