Infrastructure concession contracts may include clauses that allow for capacity expansion, term extensions, or even risk management strategies such as cap and floor schemes. These clauses provide project managers with the flexibility required to adapt their operational strategies as new information is revealed in time and limit investor risk. However, when contracts include combinations of these clauses, determining their overall impact on the objectives of the contract and the project is non-trivial and require the combined analysis of these effects. While the literature on the valuation of infrastructure projects tends to focus on a single type of flexibility at a time, we analyze the combined interaction between these clauses and their impact on the overall value of the project under the real options approach. Using the Salvador Light Rail Vehicle (LRV) concession project as a numerical example, our results suggest that these clause interactions can have non-intuitive results and negatively affect the stated objectives of both parties in the contract. We also show how policy makers can use this information to improve the value of the project to society and reduce the risk to the government.
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