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Optimized real options-based approach for government guarantees in PPP toll road projects

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  • Faruk Buyukyoran
  • Selin Gundes

Abstract

The uncertainty associated with future traffic levels in Build–Operate–Transfer toll road projects lead to difficulties in obtaining finance and thus to unsuccessful bids. In order to increase the attractiveness of projects for investors, governments usually provide several types of guarantees such as Minimum Revenue Guarantees (MRGs). In many cases, challenges associated with the valuation of this uncertainty force governments to provide excessive guarantees, placing an increased burden on the public budget. Based on this problem, a real-option-based model is presented for the identification of optimum upper and lower boundaries of compound MRG and Maximum Revenue Cap (MRC) options which establish a fair risk allocation structure. The proposed model uses an optimization approach in which high levels of guarantees in initial years are compensated by the transfer of excess revenues obtained by the private investor in late years. The optimum upper and lower boundaries of compound MRG and MRC options are identified using the proposed model. Results reveal that the emerging net guarantee amount generated by using any pair values of the MRG and MRC that remain in the identified interval not only maintains the attractiveness of project for private investors but also restrains government contingent liabilities. Thus, the identified interval of MRG and MRC enables the structuring of a flexible bargaining environment for both parties.

Suggested Citation

  • Faruk Buyukyoran & Selin Gundes, 2018. "Optimized real options-based approach for government guarantees in PPP toll road projects," Construction Management and Economics, Taylor & Francis Journals, vol. 36(4), pages 203-216, April.
  • Handle: RePEc:taf:conmgt:v:36:y:2018:i:4:p:203-216
    DOI: 10.1080/01446193.2017.1347267
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    Cited by:

    1. Patricio Mansilla & José Manuel Vassallo, 2020. "Innovative Infrastructure Fund to Ensure the Financial Sustainability of PPP Projects: The Case of Chile," Sustainability, MDPI, vol. 12(23), pages 1-21, November.
    2. 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.
    3. Athena Roumboutsos & Alenka Temeljotov-Salaj & Iosif Karousos, 2020. "Indicators for Sustainable Demand Risk Allocation in Transport Infrastructure Projects," Sustainability, MDPI, vol. 12(22), pages 1-23, November.
    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. Adkins, Roger & Paxson, Dean & Pereira, Paulo J. & Rodrigues, Artur, 2019. "Investment decisions with finite-lived collars," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 185-204.
    6. 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.
    7. Fatima Anam & Mubin Sajjad & Masood Rehan, 2024. "Risk-based integrated performance assessment framework for public-private partnership infrastructure projects," Organization, Technology and Management in Construction, Sciendo, vol. 16(1), pages 251-274.
    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.
    9. Laura Garrido & José Manuel Vassallo, 2020. "Is Ex-Post Fiscal Support to PPPs Sustainable? Analysis of Government Loans Granted to Shadow-Toll Roads in Spain: A Case Study," Sustainability, MDPI, vol. 13(1), pages 1-23, December.

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