Economic valuation of a toll road concession with traffic guarantees and the abandonment option
Blank, Frances Fischberg; Samanez, Carlos Patricio; Baidya, Tara Keshar Nanda; Dias, Marco Antonio Guimarães
http://dx.doi.org/10.1590/0103-6513.168713
Production, vol.26, n1, p.39-53, 2015
Abstract
Governments worldwide have been encouraging private participation in transportation infrastructure. To increase the feasibility of a project, public–private partnership (PPP) may include guarantees or other support to reduce the risks for private investors. It is necessary to value these opportunities under a real options framework and thereby analyze the project’s economic feasibility and risk allocation. However, within this structure, sponsors have an implicit option to abandon the project that should be simultaneously valued. Thus, this article proposes a hypothetical toll road concession in Brazil with a minimum traffic guarantee, a maximum traffic ceiling, and an implicit abandonment option. Different combinations of the minimum and maximum levels are presented, resulting in very high or even negative value added to the net present value (NPV). The abandonment option impacts the level of guarantee to be given. Governments should calibrate an optimal level of guarantees to avoid unnecessarily high costs, protect the returns of the sponsor, and lower the probability of abandonment.
Keywords
Real options. Economic evaluation. Public–private partnership. Toll road concession. Government guarantees.
References
Alonso-Conde, A. B., Brown, C., & Rojo-Suarez, J. (2007). Public private partnerships: incentives, risk transfer and real options. Review of Financial Economics, 16(4), 335-349. http://dx.doi.org/10.1016/j.rfe.2007.03.002
Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81(3), 637-659. http://dx.doi.org/10.1086/260062
Bowe, M., & Lee, D. L. (2004). Project evaluation in the presence of multiple embedded real options: evidence from the Taiwan High-Speed Rail project. Journal of Asian Economics, 15(1), 71-98. http://dx.doi.org/10.1016/j.asieco.2003.12.001
Brandão, L. E. T., & Saraiva, E. C. G. (2008). The option value of government guarantees in infrastructure projects. Construction Management and Economics, 26(11), 1171-1180. http://dx.doi.org/10.1080/01446190802428051
Brasil. (2004, 31 de dezembro). Institui normas gerais para licitação e contratação de parceria público-privada no âmbito da administração pública (Lei no 11.079, de 30 de dezembro de 2004). Diário Oficial da República Federativa do Brasil. Retrieved from http://www.planalto.gov.br/ccivil_03/_Ato2004-2006/2004/Lei/L11079.htm http://dx.doi.org/10.1080/01446190500435572
Cheah, C. Y. J., & Liu, J. (2006). Valuing governmental support in infrastructure projects as real options using Monte Carlo simulation. Construction Management and Economics, 24(5), 545-554. http://dx.doi.org/10.1061/(ASCE)1076-0342(2007)13:2(97)
Chiara, N., Garvin, M. J., & Vecer, J. (2007). Valuing simple multiple-exercise real options in infrastructure projects. Journal of Infrastructure Systems, 13(2), 97-104.
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton: Princeton University Press.
Fishbein, G., & Babbar, S. (1996). Private financing of toll roads (RMC Discussion Paper Series 117). Washington: World Bank.
Galera, A. L. L., & Soliño, A. S. (2010). A real option approach for the valuation of highway concessions. Transportation Science, 44(3), 416-427. http://dx.doi.org/10.1287/trsc.1090.0299
Garvin, M. J., & Cheah, C. Y. J. (2004). The option value of government guarantees in infrastructure projects. Construction Management and Economics, 22(4), 373-383. http://dx.doi.org/10.1080/01446190310001649010
Grimsey, D., & Lewis, M. (2004). Public private partnerships: the worldwide revolution in infrastructure provision and project finance. Cheltenham: Edward Elgar Publishing. http://dx.doi.org/10.4337/9781845423438
Hull, J. C. (2006). Options, futures and other derivatives (6th ed.). Upper Saddle River: Pearson Prentice Hall.
Irwin, T. (2003). Public money for private infrastructure: deciding when to offer guarantees, output-based subsidies, and other fiscal support (World Bank Working Paper 10). Washington: The World Bank. http://dx.doi.org/10.1596/0-8213-5556-2
Irwin, T. (2007). Government guarantees: allocating and valuing risk in privately financed infrastructure projects. Washington: The World Bank. http://dx.doi.org/10.1596/978-0-8213-6858-9
Merton, R. (1973). Theory of rational option pricing. Bell Journal of Economics and Management Science, 4(1), 141-183. http://dx.doi.org/10.2307/3003143
Pollio, G. (1998). Project finance and international energy development. Energy Policy, 26(9), 687-697. http://dx.doi.org/10.1016/S0301-4215(98)00028-7
Rose, S. (1998). Valuation of interacting real options in a toll road infrastructure project. The Quarterly Review of Economics and Finance, 38, 711-725. http://dx.doi.org/10.1016/S1062-9769(99)80098-2
São Paulo. (2006). Edital da Concorrência Internacional no. 42325212: concessão patrocinada para exploração da operação dos serviços de transporte de passageiros da Linha 4 (Amarela) do Metrô de São Paulo, abrangendo de Luz até Taboão da Serra. Banco do Nordeste. Retrieved from http://www.bnb.gov.br/content/aplicacao/desenvolvimento_em_acao/projeto_ppp/docs/edital_linha_quatro_do_metro_sp.pdf
Trigeorgis, L. (1996). Real options: managerial flexibility and strategy in resource allocation. Cambridge: The MIT Press. Vassallo, J. M. (2006). Traffic risk mitigation in highway concession projects – the experience of Chile. Journal of Transport Economics and Policy, 40(3), 359-381.
Vassallo, J. M. (2010). The role of discount rate in tendering highways concessions under LPVR approach. Transportation Research Part A, 44(1), 806-814. http://dx.doi.org/10.1016/j.tra.2010.08.001
Wei-hua, Y., & Da-shuang, D. (2006) Concession decision model of BOT projects based on a real options approach. In International Conference on Management Science and Engineering, Lille, France.
Wibowo, A. (2004). Valuing guarantees in BOT infrastructure project. Engineering, Construction and Architectural Management, 11(6), 395-403. http://dx.doi.org/10.1108/09699980410571543
Wooldridge, S. C., Garvin, M. J., Cheah, Y. J., & Miller, J. B. (2002). Valuing flexibility in private toll road development: analysis of the Dulles Greenway. The Journal of Structured and Project Finance, 7(4), 25-36. http://dx.doi.org/10.3905/jsf.2002.320264
Yescombe, E. R. (2002). Principles of project finance. San Diego: Academic Press.
Zhao, T., Sundararajan, S. K., & Tseng, C. (2004). Highway development decision-making under uncertainty: a real options approach. Journal of Infrastructure Systems, 10(1), 23-32. http://dx.doi.org/10.1061/(ASCE)1076-0342(2004)10:1(23)
Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81(3), 637-659. http://dx.doi.org/10.1086/260062
Bowe, M., & Lee, D. L. (2004). Project evaluation in the presence of multiple embedded real options: evidence from the Taiwan High-Speed Rail project. Journal of Asian Economics, 15(1), 71-98. http://dx.doi.org/10.1016/j.asieco.2003.12.001
Brandão, L. E. T., & Saraiva, E. C. G. (2008). The option value of government guarantees in infrastructure projects. Construction Management and Economics, 26(11), 1171-1180. http://dx.doi.org/10.1080/01446190802428051
Brasil. (2004, 31 de dezembro). Institui normas gerais para licitação e contratação de parceria público-privada no âmbito da administração pública (Lei no 11.079, de 30 de dezembro de 2004). Diário Oficial da República Federativa do Brasil. Retrieved from http://www.planalto.gov.br/ccivil_03/_Ato2004-2006/2004/Lei/L11079.htm http://dx.doi.org/10.1080/01446190500435572
Cheah, C. Y. J., & Liu, J. (2006). Valuing governmental support in infrastructure projects as real options using Monte Carlo simulation. Construction Management and Economics, 24(5), 545-554. http://dx.doi.org/10.1061/(ASCE)1076-0342(2007)13:2(97)
Chiara, N., Garvin, M. J., & Vecer, J. (2007). Valuing simple multiple-exercise real options in infrastructure projects. Journal of Infrastructure Systems, 13(2), 97-104.
Dixit, A. K., & Pindyck, R. S. (1994). Investment under uncertainty. Princeton: Princeton University Press.
Fishbein, G., & Babbar, S. (1996). Private financing of toll roads (RMC Discussion Paper Series 117). Washington: World Bank.
Galera, A. L. L., & Soliño, A. S. (2010). A real option approach for the valuation of highway concessions. Transportation Science, 44(3), 416-427. http://dx.doi.org/10.1287/trsc.1090.0299
Garvin, M. J., & Cheah, C. Y. J. (2004). The option value of government guarantees in infrastructure projects. Construction Management and Economics, 22(4), 373-383. http://dx.doi.org/10.1080/01446190310001649010
Grimsey, D., & Lewis, M. (2004). Public private partnerships: the worldwide revolution in infrastructure provision and project finance. Cheltenham: Edward Elgar Publishing. http://dx.doi.org/10.4337/9781845423438
Hull, J. C. (2006). Options, futures and other derivatives (6th ed.). Upper Saddle River: Pearson Prentice Hall.
Irwin, T. (2003). Public money for private infrastructure: deciding when to offer guarantees, output-based subsidies, and other fiscal support (World Bank Working Paper 10). Washington: The World Bank. http://dx.doi.org/10.1596/0-8213-5556-2
Irwin, T. (2007). Government guarantees: allocating and valuing risk in privately financed infrastructure projects. Washington: The World Bank. http://dx.doi.org/10.1596/978-0-8213-6858-9
Merton, R. (1973). Theory of rational option pricing. Bell Journal of Economics and Management Science, 4(1), 141-183. http://dx.doi.org/10.2307/3003143
Pollio, G. (1998). Project finance and international energy development. Energy Policy, 26(9), 687-697. http://dx.doi.org/10.1016/S0301-4215(98)00028-7
Rose, S. (1998). Valuation of interacting real options in a toll road infrastructure project. The Quarterly Review of Economics and Finance, 38, 711-725. http://dx.doi.org/10.1016/S1062-9769(99)80098-2
São Paulo. (2006). Edital da Concorrência Internacional no. 42325212: concessão patrocinada para exploração da operação dos serviços de transporte de passageiros da Linha 4 (Amarela) do Metrô de São Paulo, abrangendo de Luz até Taboão da Serra. Banco do Nordeste. Retrieved from http://www.bnb.gov.br/content/aplicacao/desenvolvimento_em_acao/projeto_ppp/docs/edital_linha_quatro_do_metro_sp.pdf
Trigeorgis, L. (1996). Real options: managerial flexibility and strategy in resource allocation. Cambridge: The MIT Press. Vassallo, J. M. (2006). Traffic risk mitigation in highway concession projects – the experience of Chile. Journal of Transport Economics and Policy, 40(3), 359-381.
Vassallo, J. M. (2010). The role of discount rate in tendering highways concessions under LPVR approach. Transportation Research Part A, 44(1), 806-814. http://dx.doi.org/10.1016/j.tra.2010.08.001
Wei-hua, Y., & Da-shuang, D. (2006) Concession decision model of BOT projects based on a real options approach. In International Conference on Management Science and Engineering, Lille, France.
Wibowo, A. (2004). Valuing guarantees in BOT infrastructure project. Engineering, Construction and Architectural Management, 11(6), 395-403. http://dx.doi.org/10.1108/09699980410571543
Wooldridge, S. C., Garvin, M. J., Cheah, Y. J., & Miller, J. B. (2002). Valuing flexibility in private toll road development: analysis of the Dulles Greenway. The Journal of Structured and Project Finance, 7(4), 25-36. http://dx.doi.org/10.3905/jsf.2002.320264
Yescombe, E. R. (2002). Principles of project finance. San Diego: Academic Press.
Zhao, T., Sundararajan, S. K., & Tseng, C. (2004). Highway development decision-making under uncertainty: a real options approach. Journal of Infrastructure Systems, 10(1), 23-32. http://dx.doi.org/10.1061/(ASCE)1076-0342(2004)10:1(23)