Real Option Approach to Sharing Privatization Risk in Underground Infrastructures

Park, Taeil; Kim, Byungil; Kim, Hyoungkwan

doi:10.1061/(asce)co.1943-7862.0000636

Cited by 31 publications

(20 citation statements)

References 18 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…For the period between 1999 and 2015, we found that this method has been applied to many cases and in many different fields, from the evaluation of construction projects (Barton & Lawryshyn, 2011;Ford et al, 2002;Garg & Kumar, 2014;Jiao et al, 2007;Oppenheimer, 2002;Parthasarathy & Madhumathi, 2010;Sewalk & Dai, 2014); investments in R&D (Kumaraswamy, 1996;Ming-Cheng & Yen, 2007), in particular those by pharmaceutical companies (Gunther McGrath and Nerkar, 2004;Hartmann & Assan, 2006); the evaluation of IT (information technology) projects (Benaroch, 2002;Fichman, 2004); insurance portfolio strategies; customer relationship management (Maklan et al, 2005); the management and evaluation of intagible assets (Bhattacharya & Wright, 2005, Faiferlick et al 2004, Park et al, 2013; and the assessment of bonds and derivatives (Driffill et al, 2013;Ericsson & Reneby, 2005;Fabozzi et al, 2012, Pyo, 2008Ren-Raw et al, 2002;Singh, 2014, Tompkins, 2001). …”

Section: Resultsmentioning

confidence: 99%

Defining the Black and Scholes approach: a first systematic literature review

2015

View full text Add to dashboard Cite

Purpose: The aim of the paper is to investigate the Black and Scholes model by providing an updated framework of the international literature on the topic, within the field of real option. The purpose of the research is to identify the relevant literature between 1999 and 2015, together with the most important perspectives on the Black and Scholes model as analysed by scholars, in order to provide a useful support to the academic community in their studies. The investigation was carried out only for its economic and corporate insights, with the objective of establishing the strong and weak points highlighted in the defined framework. Methodology: The method used for the research was based on qualitative approach. International literature on the topic was examined through a research protocol. The research was developed by the identification of four keywords (Real Options Valuation, Real Options Assessment, Black and Scholes, Real Options Pricing) and searching them in two databases, with the purpose of obtaining a wide range of scientific contribution for the analysis. Originality/value: The paper presents an accurate review of the scientific contribution on the topic of the Black and Scholes model; it defines the fields of application, opportunities offered and issues relating to its application, in order to clarify the strong and weak points of the model. Practical implications: The Black and Scholes model of the 1970s is acknowledged to be the most widely used model for evaluating options. Our study shows that this method has been adopted by decision-makers not only for evaluating options but also in other fields.

show abstract

Section: Resultsmentioning

confidence: 99%

Defining the Black and Scholes approach: a first systematic literature review

2015

View full text Add to dashboard Cite

show abstract

“…In order to deal with excessive demand risks in infrastructure, managers can embody an option to expand in a contract and exercise it in the future when demand risk is low. Another problem is the evaluation of government guarantees in PPP projects (Alonso-Conde et al 2007;Ashuri et al 2012;Brandao and Saraiva 2008;Chiara et al 2007;Cui et al 2008;Galera and Soliño 2010;Liu et al 2013;Park et al 2013;Wibowo et al 2012). In these studies, guarantees were normally regarded as call or put options, in which the owner of the option has the right, but not the obligation, to buy or sell a particular underlying asset at a specific price in the future.…”

Section: Real Option Analysis In Ppp Projectsmentioning

confidence: 99%

“…The guaranteed values, e.g., minimum revenues, are designed based on ex ante cognition, such as financial viability analysis. The normal guarantees include minimum rate of return guarantee, minimum revenue guarantee (Ashuri et al 2012;Chiara et al 2007), maximum expense limit (Park et al 2013), minimum traffic guarantee (Brandao and Saraiva 2008;Galera and Soliño 2010), land-capping guarantee, full toll guarantee (Wibowo et al 2012), restrictive competition guarantee (Liu et al 2013), and so on. Using these guarantees and types of compensation, the government shares excessive risks with the private party so as to increase the participation of private investors in high-risk PPP projects.…”

Section: Introductionmentioning

confidence: 99%

“…For example, Wibowo et al (2012) used real option models to assess the value of land-capping guarantees, full toll guarantees, and nationalization, which are most widely used government guarantees in Indonesian PPP projects. Park et al (2013) applied real option analysis to study the value of maximum expense limits in the privatization of a water and sewer system since these kinds of projects have stable demand but volatile operation and maintenance costs. Chiara et al (2007) regarded a minimum revenue guarantee as a simple multiple-exercise real option and evaluated the fair value of this variety of real option in PPP projects.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

The Real Option Value of Renegotiation in Public–Private Partnerships

Xiong

Zhang

2016

J. Constr. Eng. Manage.

View full text Add to dashboard Cite

Public-private partnerships (PPP) are contracts with a long-lasting period, huge relationship-specific investment, and great uncertainties. In many PPP projects, it is difficult or even impossible to write a complete contract that specifies all contingencies, so a renegotiation-allowed contract could be better than a renegotiation-proof one. Under a renegotiation-allowed PPP agreement, renegotiations can significantly influence the interests of both the private party and the government, so they have to evaluate the benefit and cost of renegotiations ex ante and consider them in the tender price. This study considers renegotiations as real options that are embodied to provide flexibilities for PPP contracts, and develops a model to capture the value of renegotiation based on real option theory. The model is proposed in three steps, including modeling underlying risk, bargaining renegotiation payoffs, and determining real option value. An illustration case is presented to demonstrate the applicability of the model. The case study shows that if a renegotiation-allowed contract is used, then (1) contractor-led renegotiation is very likely to occur, especially at the early stage of concession while government-led renegotiation is less likely to occur, and if any, it should occur at the middle stage of concession; (2) one party could use opportunistic renegotiation to hold the other party up and ask for excessive compensation, so renegotiations must be regulated; and (3) renegotiation in a PPP project may have a huge real option value, and the higher the uncertainty, the higher the renegotiation value. individual papers. This paper is part of the Journal of Construction Engineering and Management, © ASCE, ISSN 0733-9364. © ASCE 04016021-1 J. Constr. Eng. Manage. J. Constr. Eng. Manage., 04016021 Downloaded from ascelibrary.org by Li. Co.Sa 8181901/mi/155985 on 05/03/16. Copyright ASCE. For personal use only; all rights reserved. © ASCE 04016021-2 J. Constr. Eng. Manage. J. Constr. Eng. Manage., 04016021 Downloaded from ascelibrary.org by Li. Co.Sa 8181901/mi/155985 on 05/03/16. Copyright ASCE. For personal use only; all rights reserved. © ASCE 04016021-5 J. Constr. Eng. Manage. J. Constr. Eng. Manage., 04016021 Downloaded from ascelibrary.org by Li. Co.Sa 8181901/mi/155985 on 05/03/16. Copyright ASCE. For personal use only; all rights reserved. © ASCE 04016021-8 J. Constr. Eng. Manage. J. Constr. Eng. Manage., 04016021 Downloaded from ascelibrary.org by Li. Co.Sa 8181901/mi/155985 on 05/03/16. Copyright ASCE. For personal use only; all rights reserved. © ASCE 04016021-9 J. Constr. Eng. Manage. J. Constr. Eng. Manage., 04016021 Downloaded from ascelibrary.org by Li. Co.Sa 8181901/mi/155985 on 05/03/16. Copyright ASCE. For personal use only; all rights reserved. © ASCE 04016021-11 J. Constr. Eng. Manage. J. Constr. Eng. Manage., 04016021 Downloaded from ascelibrary.org by Li. Co.Sa 8181901/mi/155985 on 05/03/16.

show abstract

“…In recent years, some scholars use Monte Carlo method and real options combined for developing the risk sharing mechanism and decision making in the public-private projects. Park et al (2012) used Monte Carlo method to analyse risk sharing measures and presented a real option-based contract model to make agreement on the value of the project. Zhao et al (2004) proposed a real options model to achieve decisionmaking optimality, which used the Monte Carlo simulation method to analysis the uncertainty.…”

Section: Introductionmentioning

confidence: 99%

Minimum revenue guarantee and toll revenue cap optimization for PPP highways: Pareto optimal state approach

Wang

Li²,

Gao

2015

The Baltic Journal of Road and Bridge Engineering

View full text Add to dashboard Cite

In the Public-Private Partnership highway projects the Minimum Revenue Guarantee and Toll Revenue Cap policies are effective measures for risk and benefit sharing between the government and the private sector. However, if the Minimum Revenue Guarantee and Toll Revenue Cap values are unreasonable, it may lead one part of the investors to take too much risk and financial burden. This paper mainly establishes six objectives from the return and risk perspectives of the government, the concessionaire and the overall situation respectively. Because the traditional Discount Cash Flow method does not consider the risk factors, this paper proposes to use Monte Carlo simulation and scatter search algorithm to calculate the optimal values of the Minimum Revenue Guarantee and Toll Revenue Cap under different objectives. Compared with the statistics of the Net Present Value under different cases, it was summarized that when the objective is minimizing the variance of the total Net Present Value, the investors will realize the Pareto optimal state between the return and risk. In addition, it was found that the government is more sensitive to the Minimum Revenue Guarantee and Toll Revenue Cap marginal values according to the sensitive analysis. Therefore, the model has an effect on improving the fairness of the risk sharing measures, reducing the financial burden of the investors especially the government, and increasing the investment attraction of the private sectors.

show abstract

Real Option Approach to Sharing Privatization Risk in Underground Infrastructures

Cited by 31 publications

References 18 publications

Defining the Black and Scholes approach: a first systematic literature review

Defining the Black and Scholes approach: a first systematic literature review

The Real Option Value of Renegotiation in Public–Private Partnerships

Minimum revenue guarantee and toll revenue cap optimization for PPP highways: Pareto optimal state approach

Contact Info

Product

Resources

About