Appraisal of Combined Agreements in BOT Project Finance: Focused on Minimum Revenue Guarantee and Revenue Cap Agreements

• Authors: Jaebum Jun

Title variants

LT

Mišrių susitarimų dėl SVP projektų finansavimo įvertinimas: pagal minimalias pajamų garantijas ir pajamų kapitalizacijos susitarimus

Abstracts

EN

Limited public funds for infrastructures have the government consider joining the private in a BOT project finance scheme. Generally, the BOT projects entail lots of managerial flexibilities that may induce the radical change of project's cash flows, an asymmetric payoff, when facing on the uncertainties due to the BOT project finance's unique characteristics. Among various managerial flexibilities in the BOT projects, the MRG (Minimum Revenue Guarantee) and the RCP (Revenue Cap) agreements are frequently used to protect the government and the developer from the operational risk. However, the combined effect of the MRG and RCP on the project value is not understood well because the traditional capital budgeting theory, the NPV (Net Present Value) analysis, is limited to assess the contingency of these agreements. So, the purpose of this paper is to develop the numerical model to assess the combined impact of the MRG and RCP agreements on the project value based on the option pricing theory and to suggest a theoretical framework. The approach applied in this paper is justified with the hypothetical BOT toll case and some meaningful conclusions are drawn from. The results by the option pricing concept are analyzed over those by NPV analysis and, finally, the combined value of the MRG and RCP agreements appears significant relative to the project value.

LT

Dėl ribotų viešojo sektoriaus lėšų vyriausybė nusprendė sujungti privačias lėšas pagal SVP (angl. BOT) projektų finansavimo schemą. Paprastai SVP projektai yra lanksčiai valdomi, todėl gali sukelti radikalių pokyčių grynuosiuose projekto pinigų srautuose asimetrinį atsipirkimą dėl unikalių SVP projektų finansavimo savybių. Tarp įvairių lanksčių SVP projektų valdymo pavyzdžių minėtini minimalios pajamų garantijos (angl. MRG) ir pajamų kapitalizacijos (angl. RCP) susitarimai. Jie dažnai naudojami siekiant apsaugoti valdžią ir vystytoją nuo veiklos rizikos. Tačiau bendras minimalių pajamų garantijų ir pajamų kapitalizacijos susitarimų poveikis projekto vertei nesuprantamas ir dėl to, kad tradicinė kapitalo teorija, grynosios dabartinės vertės (angl. NPV) analizė yra ribotos vertinant nenumatytus šių susitarimų atvejus. Taigi šio straipsnio tikslas - plėtoti skaitmeninį modelį, įvertinti bendrą minėtų susitarimų poveikį projekto vertei, pagrįstai pasirinkto sandorio įkainojimo teorija, ir pasiūlyti teorinį pagrindimą. Šiame straipsnyje taikomas metodas pagrįstas hipotetiniais SVP rinkliavos atvejais ir kai kuriomis padarytomis išvadomis. Pasirinkto sandorio ikainojimo samprata analizuojama atliekant grynosios dabartinės vertės analizę, kol bendra minimalių pajamų garantijų ir pajamų kapitalizacijos susitarimų vertė tampa labai svarbi, palyginti su projekto verte.

Keywords

EN

BOT (Build-Operate-Transfer) project finance; Option pricing theory; MRG (Minimum Revenue Guarantee) agreement; RCP (Revenue Cap) agreement; Repeatedly-exercisable call-put compound option

• Publisher: Sciendo
• Journal: International Journal of Strategic Property Management
• Year: 2010
• Volume: 14
• Issue: 2
• Pages: 139-155

Contributors

author

Jaebum Jun

• Department of Architectural Engineering, Inha University, College of Engineering, 253 Yonghyun-dong, Nam-gu, Incheon, 402-751, Korea

References

• Aggarwal, R. (1993)Capital budgeting under uncertainty: new and advanced perspectives, Engle-wood Cliffs, NJ: Prentice Hall.
• Amram, M. and Kulatilaka, N. (1999)Real options: managing strategic investment in an uncertain world, Cambridge, MA: Harvard Business School Press.
• Beidleman, C. R., Fletcher, D. and Veshosdy, D. (1990) On allocating risk: the essence of project finance,Sloan Management Review, 31, pp. 47-55.
• Black, F. and Scholes, M. (1973) The pricing of options and corporate liabilities,Journal of Political Economy, 81(3), pp. 637-654. doi:10.1086/260062
• Brennan, M. J. and Schwartz, E. S. (1984) Optimal financial policy and firm valuation,Journal of Finance, 39(3), pp. 593-607. doi:10.2307/2327917
• Brigham, E. F. and Houston, J. F. (2004)Fundamentals of financial management (10thed.), Mason, OH: Thompson South-Western.
• Cheah, C. Y. J. and Liu, J. (2006) Valuing governmental support in infrastructure projects as real options using Monte Carlo simulation,Construction Management and Economics, 24(2), pp. 545-554. doi:10.1080/01446190500435572
• Copeland, T. E. and Antikarov, V. (2001)Real options: a practitioner's guide, New York: Texere LLC.
• Copeland, T. E. and Weston, J. F. (1988)Financial theory and corporate policy, New York: Addison-Wesley.
• Cox, J. C., Ross, S. A. and Rubinstein, M. (1979) Option pricing: a simplified approach,Journal of Financial Economics, 7(3), pp. 229-263. doi:10.1016/0304-405X(79)90015-1
• Dixit, A. K. and Pindyck, R. S. (1994)Investment under uncertainty, Princeton, NJ: Princeton University Press.
• Dixit, A. K. and Pindyck, R. S. (1995) The options approach to capital investment,Harvard Business Review, (May-June), pp. 105-115.
• Finnerty, J. D. (1996)Project financing: asset-based financial engineering, New York: John Wiley & Sons, Inc.
• Ford, D., Lander, D. and Voyer, J. (2002) A real option approach to valuing strategic flexibility in uncertain construction projects,Construction Management and Economics, 20(4), pp. 343-351. doi:10.1080/01446190210125572
• Garvin, M. J. and Cheah, Y. J. (2004) Valuation techniques for infrastructure investment decisions,Construction Management and Economics, 22(4), pp. 373-383. doi:10.1080/01446190310001649010
• Ho, S. P. and Liu, L. Y. (2002) An option pricing-based model for evaluating the financial viability of privatized infrastructure projects,Construction Management and Economics, 20(2), pp. 143-156. doi:10.1080/01446190110110533
• Hull, J. and White, A. (1990) Valuing derivative securities using the explicit finite difference method,Journal of Financial and Quantitative Analysis, 25(1), pp. 87-100. doi:10.2307/2330889
• Hull, J. (1997)Options, futures, and other derivatives (3rded.), Englewood Cliffs, NJ: Prentice Hall.
• Insley, M. C. and Wirjanto, T. S. (2006)Contrasting two approaches in real options valuation-contingent claims versus dynamic programming, Working Paper. U. S.: University of Waterloo.
• Jun, Jae Bum (2008)Valuation of governmental guarantee in BOT project finance with real option analysis.Ph.D. Texas A&M University.
• Leviäkangas, P. and Lähesmaa, J. (2002) Profitability evaluation of intelligent transport system investments,Journal of Transportation Engineering-ASCE, 128(3), pp. 276-286. doi:10.1061/(ASCE)0733-947X(2002)128:3(276)
• Luehrman, T. (1997) What's it worth? A general manager's guide to valuation,Harvard Business Review, 75(3), pp. 132-142.
• Luenberger, D. (1998)Investment science, N. Y.: Oxford University Press.
• Mason, S. P. and Merton, R. C. (1985)The role of contingent claims analysis in corporate finance. Recent advances in corporate finance, edited by Altman, E. I. and M. G. Subrahmanyam, Home-wood, IL: Richard D. Irwin Inc.
• Mello, A. S. and Pyo, U. (2003) Real options with market risks and private risks,Journal of Applied Corporate Finance, 15(2), pp. 89-101. doi:10.1111/j.1745-6622.2002.tb00699.x
• Merton, R. C. (1973) Theory of rational option pricing,Bell Journal of Economics and Management Science, 4, pp. 141-183. doi:10.2307/3003143
• Miller, L. T. and Park, C. S. (2002) Decision making under uncertainty-real options to the rescue,The Engineering Economist, 47(2), pp. 105-150. doi:10.1080/00137910208965029
• Myers, S. C. (1984) Finance theory and financial strategy,Interfaces, 14(1), pp. 126-137. doi:10.1287/inte.14.1.126
• Sharpe, W. F. (1964) Capital asset prices: a theory of market equilibrium under conditions of risk,Journal of Finance, 19(3), pp. 425-442. doi:10.2307/2977928
• Trigeorgis, L. (1999)Real options: managerial flexibility and strategy in resource allocation, Cambridge, M. A.: The MIT Press.
• Wey, L. (1993)Effects of mean-reversion on the valuation of offshore oil reserves and optimal investment rules.Unpublished Thesis, Massachusetts Institute of Technology.
• Wooldridge, S. C., Garvin, M. J., Cheah, Y. J. and Miller, J. B. (2002) Valuing flexibility in private toll road development: analysis of the Dulles greenway,Journal of Structured Finance, 7(4), pp. 25-36. doi:10.3905/jsf.2002.320264

Identifiers

DOI

10.3846/ijspm.2010.11