IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v12y2020i3p806-d311805.html
   My bibliography  Save this article

Optimizing Risk Allocation in Public-Private Partnership Projects by Project Finance Contracts. The Case of Put-or-Pay Contract for Stranded Posidonia Disposal in the Municipality of Bari

Author

Listed:
  • Antonella Lomoro

    (Amiu Puglia spa, Bari Viale Francesco Fuzio, 70132 Bari, Italy)

  • Giorgio Mossa

    (Department of Mechanics, Mathematics and Management, Polytechnic University of Bari, Via Orabona 4, 70125 Bari, Italy)

  • Roberta Pellegrino

    (Department of Mechanics, Mathematics and Management, Polytechnic University of Bari, Via Orabona 4, 70125 Bari, Italy)

  • Luigi Ranieri

    (Department of Innovation and Engineering, Università del Salento, 73100 Lecce, Italy)

Abstract

This paper investigates the impact of the adoption of public support on the performance of public–private partnership (PPP) projects as perceived and measured by the different actors involved. In particular, the public support investigated by this study is put-or pay contracts, which are often used in PPP projects financed through project finance to optimize risk allocation. In order to quantify the benefit gained by each party with and without the put-or-pay contract, cash flows of the project have been modeled by using the concept of real option, defined as the right without the obligation to make an action if it is convenient to do so. This concept enabled us to model and quantify the inner flexibility mechanism of put-or-pay contracts. With a put-or-pay agreement signed between the municipality, a (private) owner, and operator of a disposal facility, the owner of the facility has the faculty, without any obligation, to require the payment of penalty, if the municipality fails to meet its obligations. This means that the owner of the facility holds a series of European put options that can be exercised if it is convenient for the holder. The developed model has been used for studying the effectiveness of put-or-pay contracts for financing the treatment plant of a special dispose through project finance, i.e., the plant for disposal of marine plant posidonia.

Suggested Citation

  • Antonella Lomoro & Giorgio Mossa & Roberta Pellegrino & Luigi Ranieri, 2020. "Optimizing Risk Allocation in Public-Private Partnership Projects by Project Finance Contracts. The Case of Put-or-Pay Contract for Stranded Posidonia Disposal in the Municipality of Bari," Sustainability, MDPI, vol. 12(3), pages 1-18, January.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:3:p:806-:d:311805
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/12/3/806/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/12/3/806/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Geroe, Steven, 2019. "Non-recourse project financing for concentrated solar thermal power," Utilities Policy, Elsevier, vol. 60(C), pages 1-1.
    3. Xu, Yelin & Chan, Albert P.C. & Xia, Bo & Qian, Queena K. & Liu, Yong & Peng, Yi, 2015. "Critical risk factors affecting the implementation of PPP waste-to-energy projects in China," Applied Energy, Elsevier, vol. 158(C), pages 403-411.
    4. Bonetti, Veronica & Caselli, Stefano & Gatti, Stefano, 2010. "Offtaking agreements and how they impact the cost of funding for project finance deals: A clinical case study of the Quezon Power Ltd Co," Review of Financial Economics, Elsevier, vol. 19(2), pages 60-71, April.
    5. Nuno Ferreira da Cruz & Pedro Simões & Rui Cunha Marques, 2013. "The Hurdles of Local Governments with Ppp Contracts in the Waste Sector," Environment and Planning C, , vol. 31(2), pages 292-307, April.
    6. Richard A. Brealey & Ian A. Cooper & Michel A. Habib, 1996. "Using Project Finance To Fund Infrastructure Investments," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 25-39, September.
    7. 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.
    8. Stefano Gatti & Alvaro Rigamonti & Francesco Saita & Mauro Senati, 2007. "Measuring Value‐at‐Risk in Project Finance Transactions," European Financial Management, European Financial Management Association, vol. 13(1), pages 135-158, January.
    9. Pasquale Marcello Falcone & Edgardo Sica, 2019. "Assessing the Opportunities and Challenges of Green Finance in Italy: An Analysis of the Biomass Production Sector," Sustainability, MDPI, vol. 11(2), pages 1-14, January.
    10. Nicola Costantino & Roberta Pellegrino, 2011. "Risk mitigation in take or pay and take and pay contracts in project financing: the purchaser's perspective," International Journal of Project Organisation and Management, Inderscience Enterprises Ltd, vol. 3(3/4), pages 258-272.
    11. Pollio, Gerald, 1998. "Project finance and international energy development," Energy Policy, Elsevier, vol. 26(9), pages 687-697, 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. Guillaume Leduc & Merima Nurkanovic Hot, 2020. "Joshi’s Split Tree for Option Pricing," Risks, MDPI, vol. 8(3), pages 1-26, August.
    2. Stjernström, Olof & Junker, Eivind & Thorsen, Hans Wilhelm, 2023. "The private in the public: The case of Norwegian private zoning plans," Land Use Policy, Elsevier, vol. 127(C).
    3. 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.
    4. Liu, Jiaqi & Liu, Jicai & Bu, Zehui & Zhou, Yining & He, Peifen, 2022. "Path analysis of influencing government's excessive behavior in PPP project: Based on field dynamic theory," Transportation Research Part A: Policy and Practice, Elsevier, vol. 166(C), pages 522-540.
    5. Binchao Deng & Dongjie Zhou & Jiachen Zhao & Yilin Yin & Xiaoyu Li, 2021. "Fuzzy Synthetic Evaluation of the Critical Success Factors for the Sustainability of Public Private Partnership Projects in China," Sustainability, MDPI, vol. 13(5), pages 1-23, February.
    6. Na Ta & Bo Gao, 2022. "RETRACTED ARTICLE: Applying blockchain technology in the corporate bond model for default risk assessment under the marketization principle," Operations Management Research, Springer, vol. 15(3), pages 879-890, December.
    7. Ye Li & Clemens Kool & Peter-Jan Engelen, 2020. "Analyzing the Business Case for Hydrogen-Fuel Infrastructure Investments with Endogenous Demand in The Netherlands: A Real Options Approach," Sustainability, MDPI, vol. 12(13), pages 1-22, July.
    8. Martine Van den Boomen & Sjoerd Van der Meulen & Jonathan Van Ekris & Roel Spanjers & Olle Ten Voorde & Janwim Mulder & Peter Blommaart, 2021. "Optimized Expansion Strategy for a Hydrogen Pipe Network in the Port of Rotterdam with Compound Real Options Analysis," Sustainability, MDPI, vol. 13(16), pages 1-23, August.

    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. 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.
    2. Miranda Sarmento, J. & Renneboog, L.D.R., 2014. "Public-Private Partnerships : Risk Allocation and Value for Money," Other publications TiSEM b9218010-a357-4c0a-805a-7, Tilburg University, School of Economics and Management.
    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. Barroco, Jose & Herrera, Maria, 2019. "Clearing barriers to project finance for renewable energy in developing countries: A Philippines case study," Energy Policy, Elsevier, vol. 135(C).
    5. Barroco, Jose, 2021. "Designing financeable ancillary services revenue contracts in developing economies: Learnings from the Philippines," Energy Policy, Elsevier, vol. 152(C).
    6. Dorobantu, Sinziana & Müllner, Jakob, 2019. "Debt-side governance and the geography of project finance syndicates," Journal of Corporate Finance, Elsevier, vol. 57(C), pages 161-179.
    7. Veronica Bonetti & Stefano Caselli & Stefano Gatti, 2010. "Offtaking agreements and how they impact the cost of funding for project finance deals," Review of Financial Economics, John Wiley & Sons, vol. 19(2), pages 60-71, April.
    8. Pinto, João M. & Alves, Paulo P., 2016. "Project finance in Europe: An overview and discussion of key drivers," EIB Working Papers 2016/04, European Investment Bank (EIB).
    9. João Pinto, 2014. "What is Project Finance?," Working Papers de Economia (Economics Working Papers) 01, Católica Porto Business School, Universidade Católica Portuguesa.
    10. Wikus Kruger & Anton Eberhard, 2018. "Renewable energy auctions in sub‐Saharan Africa: Comparing the South African, Ugandan, and Zambian Programs," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 7(4), July.
    11. Megginson, William L., 2010. "Introduction to the special issue on project finance," Review of Financial Economics, Elsevier, vol. 19(2), pages 47-48, April.
    12. A. Garcia-Bernabeu & F. Mayor-Vitoria & F. Mas-Verdu, 2015. "Project Finance Recent Applications and Future Trends: The State of the Art," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 14(2), pages 159-178, December.
    13. 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.
    14. Bonetti, Veronica & Caselli, Stefano & Gatti, Stefano, 2010. "Offtaking agreements and how they impact the cost of funding for project finance deals: A clinical case study of the Quezon Power Ltd Co," Review of Financial Economics, Elsevier, vol. 19(2), pages 60-71, April.
    15. William L. Megginson, 2010. "Introduction to the special issue on project finance," Review of Financial Economics, John Wiley & Sons, vol. 19(2), pages 47-48, April.
    16. Sophia Rüster, 2015. "Financing LNG Projects and the Role of Long-Term Sales-and-Purchase Agreements," Discussion Papers of DIW Berlin 1441, DIW Berlin, German Institute for Economic Research.
    17. Qadri, Hussain Mohi ud Din & Ali, Hassnian & Abideen, Zain ul & Jafar, Ahmad, 2024. "Mapping the Evolution of Green Finance Research and Development in Emerging Green Economies," Resources Policy, Elsevier, vol. 91(C).
    18. 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.
    19. Svana Helen Björnsdóttir & Pall Jensson & Saemundur E. Thorsteinsson & Ioannis M. Dokas & Helgi Thor Ingason, 2023. "Aligning Stakeholders and Actors: A New Safety and Security-Based Design Approach for Major National Infrastructures," Sustainability, MDPI, vol. 16(1), pages 1-41, December.
    20. Müllner, Jakob & Puck, Jonas, 2018. "Towards a holistic framework of MNE–state bargaining: A formal model and case-based analysis," Journal of World Business, Elsevier, vol. 53(1), pages 15-26.

    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:12:y:2020:i:3:p:806-:d:311805. 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.