Monte Carlo simulation and a value‐at‐risk of concessionary project

Abstract

PurposeThe purpose of this paper is to propose a comprehensive approach to the valuation of an infrastructure concession right and quantitative risk management projects in the People's Republic of China.Design/methodology/approachThe paper outlines a methodology, incorporating an economic model to appraise the dynamic value and risk of concession investment in the context of the design of concession contracts.FindingsThe framework of the study simulates the present value of net cash flow and identifies probability with different parameters in concession contracts as a way to establish a correlation between parameters and net present value distribution. Moreover, the paper uses the technique of value‐at‐risk to set up an economic model to appraise the dynamic value and risk of a concession investment and analyse the key issues in the concession contracts design phase.Research limitations/implicationsIt is difficult to estimate precisely the distribution of parameters in the model. In particular, estimating shortfalls in the rate of return of the concession project, the appreciation rate of the future operating cash flow and the market rate of return all have significant impact on the results.Practical implicationsThis study frames examines the concession rights mode in a traffic infrastructure construction project and provides potential developers and potential host governments with a reasoned approach to evaluating risk and capital investment in potential concession projects.Originality/valueThe paper offers insights into the risk management, financing and valuation of infrastructure concession rights concerning the Guangshen Freeway in China.