Abstract
AbstractBuild-operate-transfer (BOT) is a public-private partnership (PPP) project delivery system for the financing, development, and operations of highway projects around the world. Uncertainty about future traffic demands is one of the most important risk factors in the operations phase of a BOT project. There is a considerable amount of evidence indicating that the improper consideration of this uncertainty contributes to the financial failure of BOT projects. The inherent limitation of conventional economic analysis methods contributes to this uncertainty; most notably the net present value (NPV) approach that is typically used in the economic valuation of BOT projects. In addition, the NPV approach is insufficient to determine the correct market value of minimum revenue guarantee (MRG) options. The government offers MRG options to the concessionaire as a revenue risk-sharing strategy in BOT projects. The authors apply the real options theory from finance/decision science to explicitly price MRG opti...
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