Evaluating Minimum-Traffic Guarantees for PPPs in Turkey by Real-Option Pricing

Ilker Ersegun Kayhan () and Glenn Jenkins ()
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Ilker Ersegun Kayhan: Chevening/Abdullah Gül Research Fellow, Oxford Center for Islamic Studies, University of Oxford

No 2016-02, Development Discussion Papers from JDI Executive Programs

Abstract: Minimum-traffic guarantees for build-operate-transfer toll-road projects are contingent liabilities that expose government to fiscal risk. Therefore, public authorities must value guarantees, thereby enabling informed decision-making about the level and type of guarantee provision. This study demonstrates the use of financial modeling and risk analysis in a toll-road project in Turkey, contributing to the narrowing of a capacity gap in the field. We present three types of guarantee, modeled as real options and evaluated by Monte Carlo simulation. We identify one criterion to determine the optimum level of guarantee for a given project, and one criterion to measure the extent to which a guarantee will reduce risk. Based on these and other complementary criteria, it is proposed that the guarantee with income ceiling is the most appropriate for the project considered here. The paper concludes with a discussion of the policy implications of the findings.

Keywords: Contingent liabilities; government guarantees; real options; cost-benefit analysis; public-private partnerships; infrastructure; Turkey. (search for similar items in EconPapers)
JEL-codes: D61 G13 H54 L33 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-02
New Economics Papers: this item is included in nep-ara, nep-cfn, nep-cwa, nep-ore, nep-ppm and nep-tre
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Persistent link: https://EconPapers.repec.org/RePEc:qed:dpaper:284

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