A Concession Period and Price Determination Model for PPP Projects: Based on Real Options and Risk Allocation

Guofeng Ma, Qingjuan Du and Kedi Wang
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Guofeng Ma: School of Economics & Management, Tongji University, 1239 Siping Road, YangPu District, Shanghai 200092, China
Qingjuan Du: School of Economics & Management, Tongji University, 1239 Siping Road, YangPu District, Shanghai 200092, China
Kedi Wang: School of Economics & Management, Tongji University, 1239 Siping Road, YangPu District, Shanghai 200092, China

Sustainability, 2018, vol. 10, issue 3, 1-21

Abstract: Concession period of PPP (Public–Private Partnership) projects is the most essential feature in determining the time span of various rights, obligations and responsibilities between the government and concessionaire. Most traditional methods are based on the analysis of the future cash flow to determine the concession period, but either ignored the potential values or the risks that might emerge during the project life span, thus failing to find the proper concession period for the project. This paper builds a new model taking both recognized real option value and risk into concession period decision-making, and considering the distribution coefficient of option value, which uses game theory integrated with risk sharing, which increases the flexibility of the negotiation. Real option theory is introduced based on traditional NPV (Net Present Value); its potential value and strategic importance are further exploited. A case shows that the project concession period and the price of the sewage disposal are different when considering option value and risk sharing simultaneously and respectively, which give the two side’s references during negotiation. Allocating the option value and the risk properly between the government and concessionaire can also avoid dispute and promote cooperation.

Keywords: Public Private Partnerships; concession period; real options; risk allocation; Monte Carlo simulation; price (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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