How to deal with real options in Public-Private Partnerships: A primer for practitioners

by Carlos Contreras, Julio Angulo

PPPs are now an important mechanism for financing and managing public infrastructure and social services. In this book, the authors analyse how the introduction of options and guarantees in PPP contracts affects both governments and concessionaires. They also show how the correct design of options for these schemes of procurement can substantially improve risk management. The book, which is intended as a guide to the application of real options theory in PPPs, is divided into two parts. The first part addresses issues such as the scope of PPPs and the management of the risks involved. It also introduces the theory of real options and discusses a methodology for applying it to the case of PPPs. The second part of the book provides examples of how to price minimum revenue guarantees, minimum return on investment guarantees or debt guarantees. It also provides a methodology for pricing the early termination option for concessions, as well as the option to extend the concession period. In both cases it is assumed that it is the concessionaire who has the right to exercise the options. Finally, the authors offer a method for pricing an option in favour of the grantor government to adjust its payments downwards under certain circumstances. These examples are developed for motorway, bridge, hospital and school projects.

314 pages, Paperback

Published July 20, 2023