A Real Options Approach for the Valuation of Highway Concessions

Abstract

The theory of real options offers an approach for the valuation of investments in real assets, based on the methodology developed for financial options. This approach is especially appropriate in the context of strategic decision making under conditions of uncertainty. This is the case for the valuation of highway concessions, where real options arise from certain clauses of the contracts, for example, a minimum traffic guarantee. The possible exercise of these kinds of rights means an added value for the project that cannot be easily captured using traditional procedures for investment valuation. In this paper, we develop a methodology to value these clauses of highway concessions and, for that purpose, we consider the traffic on the highway as the underlying asset in an option contract, taking into account that, when a nonfinancial asset is used, some adjustments have to be made to the options approach. This methodology is applied to the case of an already operating highway concession, using real data, and the authors obtain an estimate of the value of a minimum traffic guarantee, which depends on several parameters that are analyzed. The authors conclude that this methodology is an appropriate tool for the valuation of highway concessions that have operational flexibility.