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.
Highlights
PPP (Public–Private Partnership) refers to a partnership between government and private investors, which cooperate during the construction period of public facilities projects, or to provide public goods and services [1]
The PPP project concession period decision needs to consider the following points: whether the price of the product or service provided by the project is acceptable and affordable; the implementation of the project must comply with laws and regulations and must not cause excessive pollution and destruction to the environment; and, in a certain period after the handover, the project should still be operational and profitable, and in a status of active development
(2) According to the set of dates in Table 3, the result of the Monte Carlo simulation with the principle that, when the simulation result is more than its capacity, its capacity should be taken as the actual amount, its full capacity is 18,250,000 m3
Summary
PPP (Public–Private Partnership) refers to a partnership between government and private investors, which cooperate during the construction period of public facilities projects, or to provide public goods and services [1]. The real options evaluation method has advantages and disadvantages over traditional NPV method in the following aspects: the strategic importance and potential value of the project can be fully considered using the real options evaluation method This kind of flexible managing decision-making method can fit with the changing projects, find new investment opportunities in changeable market environment, and create more income. To compensate for the shortcomings of the NPV method, which is not suitable for PPP projects with high risks and long payback periods, and to increase flexibility of the negotiation, this paper plans to introduce the real option value and risk sharing into the traditional concession period decision model so that the potential value of the project will be considered. More factors should be considered more reasonable results, the model built in this paper gives an idea and view to the solution in the PPP project, which has its practical importance
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