PPP offers numerous benefits to both public and private partners in delivery
of infrastructure projects. However this partnership also involves great
risks which have to be adequately managed and mitigated. Private partners are
especially sensitive to revenue risk, since they are mostly interested in the
financial viability of the project. Thus they often expect public partners to
provide some kind of risk-sharing mechanism in the form of Minimum Revenue
Guarantees or abandonment options. The objective of this paper is to
investigate whether the real option of abandoning the project increases its
value. Therefore the binominal option pricing model and risk-neutral
probability approach have been implemented to price the European and American
abandonment options for the Build-Operate-Transfer (BOT) toll road
investment. The obtained results suggest that the project value with the
American abandonment option is greater than with the European abandonment
option, hence implying that American options offer greater flexibility and
are more valuable for private partners.
Real options methodology in public-private partnership projects valuation