2019 CSCE Annual Conference - Laval (Greater Montreal) Conference
Dr. Baabak Ashuri, Georgia Tech
Uncertainties about total construction cost and operational revenues are two major risk factors in transportation P3 projects. These uncertainties put projects at risk of being unable to fulfill annual debt repayment obligations. When a project generates insufficient cash flow to service the debt in a certain year, it normally has to go for short-term financing by borrowing short-term loans. With the help of revenue risk-sharing mechanisms (RRSMs), supported projects may be able to get rid of unexpected interest disbursement. The objective of this paper is to critically examine and compare the option value of Contingent Finance Support (CFS) and Minimum Revenue Guarantee (MRG) in terms of saving refinancing cost for debt repayment. An integrated real options valuation model is created that utilizes a decision analysis method for pricing the technical project risk and a risk-neutral option pricing method for pricing the market risk. The integrated model quantifies the construction risk using the subjective probability distribution. The model prices the option value of RRSMs on saving project refinancing cost with consideration of market risk premium for uncertain traffic volume. The proposed model helps stakeholders better understand and measure the burden of assuring annual debt repayment under uncertain cash flow. The private sector can use the proposed model to evaluate the value of the RRSMs provided by the government in terms of reducing refinancing cost.