Inclusion of “managing flexibility” valuations in the pricing of PPP projects: a multi-objective decision-making method

Abstract

PurposeThe Public–Private Partnership (PPP) modality plays an important role in the procurement of global infrastructure projects. Regarding PPP's complex transaction structure, pricing of a PPP project is critical to both parties where the government pursues a high value for money (VFM) and the investor strives to maximize its financial gains. Despite the straightforward win–win principle, a formidable compromise is often the case to end up with a fairly acceptable price, subject to many determinants such as the risk profile, expected return, technological innovation and capacities of both parties. Among them, this study chooses to examine the “managing flexibility” (MF) capacity of investors in pricing of a PPP project, in light of the widely recognized importance of a real-option perspective toward the long term, complex and uncertain PPP arrangement. This study addresses two major questions: (1) how is MF in PPP projects to be valued and (2) how are PPP projects to be priced when considering a project's MF value.Design/methodology/approachA binomial tree model is used to evaluate the MF value in PPP projects. Based on the developed MF pricing model, net present value (NPV) and adjusted VFM value are then calculated. Finally, a multi-objective decision-making method (MODM) was adopted to determine the optimal level of returns based on invested capital (ROIC), return on operation maintenance (ROOM) and concession period.FindingsThe applicability and functionality of the proposed model is investigated using a real project case. For a given return, extended NPV and adjusted VFM value were calculated and analyzed using sensitivity analysis. Factor influence is shown by the model to be dependent on factor impact on cash flow. Subsequently, a multi-objective decision-making (MODM) model was adopted to determine the optimal level of returns, where the solution approximates the real-world bidding price. Results confirm that the pricing model provides a reliable and practical PPP proposal pricing tool.Originality/valueThis study proposes an integrated framework for valuing MF in PPP projects and thus more accurately determine optimal pricing of PPP projects than revealed in extant research. The model offers a practical tool to aid in the valuation of PPP projects.

PPP project price mode typologies: a China-based comparative case study

“…Earlier studies determining groups of concessionary items explored PPP projects with a concession price-based mode, which is close to the UP mode defined by this study (Yuan et al ., 2019; Sharafi et al ., 2022). Other previous study provides a pricing method for RP-mode projects (Guo et al ., 2023). Of note, the RP mode may also trigger opportunistic behavior from sponsors, given that they may have considerable flexibility in RP-mode projects.…”

“…Of note, the RP mode may also trigger opportunistic behavior from sponsors, given that they may have considerable flexibility in RP-mode projects. This finding is consistent with Guo et al .’s study, as their pricing methodology included a valuation for managing flexibility (Guo et al ., 2023).…”

“…However, some price modes have been widely used in practice, especially in China, but few studies focus on these. For instance, a combination of “return rate on investing capital” and “profit rate of operation and maintenance (O&M)” items forms a price mode that differs from the concession price-based mode (Guo et al ., 2023). This difference of view arises since the scholars in question have examined different types of PPP projects with different return mechanisms.…”

Determining Concessionary Items for “Availability Payment Only” PPP Projects: A Holistic Framework Integrating Value-for-Money and Social Values

“…In fact, the bargaining model can be employed to allocate project values not only in UCO but also in APO PPP projects. As for MODM, it is a versatile method in this domain since it facilitates the identification of an optimal solution to proposed optimization models that reconcile diverse stakeholders' interests (Guo et al, 2023).…”

Optimizing Concession Agreement Terms and Conditions: Stakeholder Interest Alignment in the Petrochemical Sector

“…The real-option valuation complements economic valuation and improves them by taking into account additional factors when the project is insufficiently effective (Swanson and Sakhrani 2020). The mathematical tools of the real-option approach are mainly based on the Black-Scholes model and the binomial approach, which have methodological problems both in application and in the interpretation of results (Arnold et al 2022;Guo et al 2023).…”