When Is Abandonment Not an Option? Dealing with PPP Contract and Government Interests

摘要

Pricing techniques are crucial to value embedded flexibilities in PPP projects. These flexibilities can be seen as options, which can add significant value to PPP contracts. Even when PPP contract is clearly understood by the parties, uncertainties are commonly not well measured. We developed a real option model to value the flexibility of sequential investments associated with an imbedded option to abandon the project. The capital expenditure of the PPP project is the main uncertainty of the model, which follows a geometric Brownian motion process. In intuition behind the model is based on recently unsuccessful PPP projects in Brazil, in which set the abandonment fees too high and its scare private investors away; set them too low and private investors may abandon the project more often than desired. We apply the model to a broadband infrastructure project conducted by the state government of Rio de Janeiro, Brazil, to attract private partners to the bidding process. We calculated the value of the real option to be US$9.09 million, which represents up to a 31% increase over the value of the baseline project obtained by the DCF analysis. We also simulated the probability to abandon the project as a function of the penalty fee and CAPEX volatility. The project risk perception were simulated considering the probability of project abandonment, which achieved 12.5% in the first year and it decreases substantially in the next four years of the construction phase; it is less than 0.5% in the 2~(nd) year and less than 0.7% in the 3~(rd) year. The probability to abandon the project at years 4 and 5 are virtually zero. This model can allows governmental policy-makers to design PPP projects with the most appropriate penalty fee schedule and provides a quantitative tool to disincentive the abandonment of the concessionaire in PPP projects.