Optimizing Risk Allocation in Public-Private Partnership Projects by Project Finance Contracts. The Case of Put-or-Pay Contract for Stranded Posidonia Disposal in the Municipality of Bari

Antonella Lomoro, Giorgio Mossa, Roberta Pellegrino and Luigi Ranieri
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Antonella Lomoro: Amiu Puglia spa, Bari Viale Francesco Fuzio, 70132 Bari, Italy
Giorgio Mossa: Department of Mechanics, Mathematics and Management, Polytechnic University of Bari, Via Orabona 4, 70125 Bari, Italy
Roberta Pellegrino: Department of Mechanics, Mathematics and Management, Polytechnic University of Bari, Via Orabona 4, 70125 Bari, Italy
Luigi Ranieri: Department of Innovation and Engineering, Università del Salento, 73100 Lecce, Italy

Sustainability, 2020, vol. 12, issue 3, 1-18

Abstract: This paper investigates the impact of the adoption of public support on the performance of public–private partnership (PPP) projects as perceived and measured by the different actors involved. In particular, the public support investigated by this study is put-or pay contracts, which are often used in PPP projects financed through project finance to optimize risk allocation. In order to quantify the benefit gained by each party with and without the put-or-pay contract, cash flows of the project have been modeled by using the concept of real option, defined as the right without the obligation to make an action if it is convenient to do so. This concept enabled us to model and quantify the inner flexibility mechanism of put-or-pay contracts. With a put-or-pay agreement signed between the municipality, a (private) owner, and operator of a disposal facility, the owner of the facility has the faculty, without any obligation, to require the payment of penalty, if the municipality fails to meet its obligations. This means that the owner of the facility holds a series of European put options that can be exercised if it is convenient for the holder. The developed model has been used for studying the effectiveness of put-or-pay contracts for financing the treatment plant of a special dispose through project finance, i.e., the plant for disposal of marine plant posidonia.

Keywords: waste management; public private partnership; project finance; risk allocation; real option theory (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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