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.
Highlights
The shortage of transportation infrastructure due to the imbalance between demand and supply is a common issue in all countries
The Minimum Revenue Guarantee (MRG) served as one of the useful options for the government to attract the private investors in the private partnership (PPP) program
If the contract revenue for the MRG has been set in such a way that the government and the private investors can share the risk fairly, the MRG would be an ideal choice for the PPP program
Summary
The shortage of transportation infrastructure due to the imbalance between demand and supply is a common issue in all countries. Emerging economies that are experiencing rapid economic growth need to provide transportation infrastructure to support the growing demand. Even in countries that passed the period of rapid growth, the occurrence of traffic congestion indirectly suggests the need for building a new transportation infrastructure. Lack of financial resources is always a problem for governments that need to supply transportation infrastructure in a timely manner. PPP is defined as the contractual agreement between public agency and the private investors for delivering services or facility to the public [1]. Under the PPP agreement, private investors are not just providing the financial resources, but they have the opportunities to enhance efficiencies and profitability associated with each phase of the project development. Through the PPP, the government can expect to provide enhanced public services with better efficiency
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
