Financing for a Sustainable PPP Development: Valuation of the Contractual Rights under Exercise Conditions for an Urban Railway PPP Project in Korea

Kangsoo Kim, Hyejin Cho and Donghyung Yook
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Kangsoo Kim: Department of Public Finance and Social Policy, Korea Development Institute, Sejong-si 30149, Korea
Hyejin Cho: Highway & Transportation Research Division, Korea Institute of Civil Engineering and Building Technology, Goyang-si 10223, Korea
Donghyung Yook: National Infrastructure Research Division, Korea Research Institute for Human Settlements, Sejong-si 30147, Korea

Sustainability, 2019, vol. 11, issue 6, 1-14

Abstract: The Minimum Revenue Guarantee (MRG) was designed to mitigate the financial risk of private investors that participate in the transportation project as concessionaire under a public-private partnership (PPP) program. The MRG can pose a significant financial burden to governments especially when the contract revenue is set considerably higher than the actual revenue. This may encourage the concessionaire to inflate the traffic forecast to make the project look as if it will be profitable. In order to mitigate this problem, extra conditions for exercising the MRG can be considered. This study examines how these exercise conditions change the economic value of the MRG using the case study based on the urban railway project in the Republic of Korea. By utilizing the real options analysis, the study identified that the exercise conditions have worked to curtail the expected payment from the government, eventually leading to a reduction in the concessionaire’s expectation of revenue. The value of MRG was at a far lower level compared to the concessionaire’s investment because of the low probability of exercising the MRG when the exercise conditions apply. The findings are expected to contribute to the sustainability of the PPP program by recognizing and quantifying liabilities and risks embedded in the concession agreement in advance.

Keywords: economic value; minimum revenue guarantee; excess revenue sharing; exercise conditions; Public-Private Partnership; urban railway (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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