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

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.

To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

“…Our study focuses on examining the investment decision-making process at the individual level. We join the emerging and promising stream of studies that utilize experimental laboratory designs to closely investigate decision-making behavior in a real options based mechanism [12][13][14][15][16][17]. By doing so, we contribute to the managerial literature regarding micro-foundations of investment decision-making under uncertainty.…”

“…In this journal, the use of real options has been discussed a number of times in connection with economic sustainability. Focus has been on economic evaluation in the context of public private partnerships [12][13][14], technology, research, and development investments [15,16], investment in real-estate [17], and environmental investments [18,19].…”

Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective

“…Using real option theory, Liu et al (2017) studied the pricing mechanisms for early termination of a PPP project under two scenarios of excessively low or excessively high cash flows [53]. Ma et al (2018) analyzed the distribution of option value in a PPP project by utilizing game theory combined with risk sharing [54].…”

Performance Evaluation of Public-Private Partnership Projects from the Perspective of Efficiency, Economic, Effectiveness, and Equity: A Study of Residential Renovation Projects in China

“…This paper selects six indicators: the rationality of risk sharing, concession period, and charge mechanism, in addition to the satisfaction of the public, government, and social capital. 1 The rationality of risk sharing (V21) measures the rationality of risk sharing between the government and social capital in 4P2R; 2 The rationality of concession period (V22) measures the rationality of the 4P2R concession period; 3 The rationality of charge mechanism (V23) measures the rationality of charging mechanism during the concession period after completing the renovation of the old residential areas; 4 Public, government and social capital satisfaction are used to assess the satisfaction of relevant stakeholders from 4P2R. Among them, the satisfaction level of the public (V24) and government (V25) focus on measuring the overall satisfaction of government departments and community owners on the effect of old residential areas renovation.…”

“…Social capital has a significant role in PPP for the renovation of old residential areas (4P2R) through broadening the project financing channels, solving the project funding gap, and resolving the local government financial risks [4]. However, 4P2R has encountered problems such as slow progress, low public coordination, difficulty in implementing preferential policies, and low social responsibility.…”