Valuing Governmental Support in Road PPPs

  1. Carlos Contreras 1
  2. Julio Angulo 2
  1. 1 Universidad Complutense de Madrid
    info

    Universidad Complutense de Madrid

    Madrid, España

    ROR 02p0gd045

  2. 2 International Center for Infrastructure Solutions
Revista:
Hacienda Pública Española / Review of Public Economics

ISSN: 0210-1173

Año de publicación: 2017

Número: 223

Páginas: 37-66

Tipo: Artículo

DOI: 10.7866/HPE-RPE.17.4.2 DIALNET GOOGLE SCHOLAR lock_openAcceso abierto editor

Otras publicaciones en: Hacienda Pública Española / Review of Public Economics

Resumen

Every year more transport infrastructures are built under long-term contracts with private partners. When using public-private partnerships (PPPs), the amounts invested in the construction of such infrastructures may not be counted as public debt if certain conditions are met. But in PPPs, host governments often make payments and provide financial support, through various channels, generating direct and/or contingent financial liabilities. By using an option pricing-based model, this paper offers a method to quantify those liabilities for various forms of road PPPs. In particular, we focus on valuing debt guarantees, equity guarantees, and minimum revenue guarantees. Our method takes into account that in road infrastructures, the governmental payments are typically a function of the evolution of both inflation and traffic. We use an illustrative case for showing the magnitude of the contingent debt implied in such guarantees.

Referencias bibliográficas

  • Alonso-Conde, A. B., Brown, C. and Rojo-Suarez, J. (2007), "Public private partnerships: Incentives, risk transfer and real options", Review of Financial Economics, 16(4): 335-349
  • Arrow, K. J. and Kruz, M. (2013), Public investment, the rate of return, and optimal fiscal policy (Vol.1). Routledge
  • Arrow, K. J. and Lind, R. C. (2014), "Uncertainty and the evaluation of public investment decisions", Journal of Natural Resources Policy Research, 6(1): 29-44
  • Blanc-Brude, F., Goldsmith, H. and Valila, T. (2007), "Public-private partnerships in Europe: An up-date", European Investment Bank Economic & Financial Report, 03
  • Brandao, L. E. and Saraiva, E. C. (2007), "Valuing government guarantees in toll road projects", mimeo, Rio de Janeiro
  • Brandao, L. E. and Saraiva, E. (2008), "The option value of government guarantees in infrastructure projects", Construction Management and Economics, 26(11): 1171-1180
  • Brixi, H. P. and Schick, A. (Eds.) (2002), Government at risk: contingent liabilities and fiscal risk. World Bank Publications, Washington, D.C
  • Brixi, H. P. and Irwin, T. (2004), Fiscal support for infrastructure: Toward a more effective and trans-parent approach, World Bank Publication, Washington, D.C
  • Budina, N., Brixi, H. P. and Irwin, T. (2007), Public-private partnerships in the new EU member states: managing fiscal risks, World Bank Publications, Washington, D.C
  • Cheah, C. Y. and Liu, J. (2006), "Valuing governmental support in infrastructure projects as real options using Monte Carlo simulation", Construction Management and Economics, 24(5): 545-554
  • Chiara, N., Garvin, M. J. and Vecer, J. (2007), "Valuing simple multiple-exercise real options in infra-structure projects", Journal of Infrastructure Systems, 13(2): 97-104
  • Chiara, N. and Kokkaew, N. (2013), "Alternative to Government revenue guarantees: Dynamic revenue insurance contracts", Journal of Infrastructure Systems, 19(3): 287-296
  • Chung, D., Hensher, D. and Rose, J. (2010), "Toward the betterment of risk allocation: Investigating risk perceptions of Australian stakeholder groups to public-private-partnership toll road projects", Research in Transportation Economics, 30(1): 43-58
  • Contreras, C. (2014), "Value for money: To what extent does discount rate matter?", Revista de Economia Aplicada, 22(66): 93-112
  • Dailami, M. and Klein, M. (1997), "Government support to private infrastructure projects in emerging markets" in Dealing with public risk in private infrastructure, 17322: 21-42
  • Delmon, J. (2009), Private sector investment in infrastructure: Project finance, PPP projects and risks, Kluwer Law International
  • Dey, P. and Ogunlana, S. (2004), "Selection and application of risk management tools and techniques for build-operate-transfer projects", Industrial Management & Data Systems, 104(4): 334-346
  • Easterly, W. and Serven, L. (Eds.) (2003), The limits of stabilization: infrastructure, public deficits and growth in Latin America, World Bank Publications, Washington D.C
  • Effah Ameyaw, E. and Chan, A. (2013), "Identifying public-private partnership (PPP) risks in manag-ing water supply projects in Ghana", Journal of Facilities Management, 10
  • Esty, B. C. (2003), "The economic motivations for using project finance", Harvard Business School, 28
  • Eurostat (2016a), Manual on Government Deficit and Debt-Implementation of ESA 2010, Luxemburg
  • Eurostat (2016b), Guide to the Statistical Treatment of PPPs. September, Luxemburg
  • Fahad Al-Azemi, K., Bhamra, R. and Salman, A. (2014), "Risk management framework for build, operate and transfer (BOT) projects in Kuwait", Journal of Civil Engineering and Management, 20(3): 415-433
  • Fisher, G. and Babbar, S. (1996), "Private financing of toll roads", RMC Discussion Paper Series. 117. Project Finance and Guarantees Group of the World Bank
  • Ford, D. N., Lander, D. M. and Voyer, J. J. (2002), "A real options approach to valuing strategic flex-ibility in uncertain construction projects", Construction Management & Economics, 20(4): 343-351
  • Funke, K., Irwin, T. and Rial, I. (2013), "Budgeting and reporting for public-private partnerships", OECD Publishing, 2013/7
  • Garvin, M. J. and Cheah, C. Y. (2004), "Valuation techniques for infrastructure investment decisions", Construction Management and Economics, 22(4): 373-383
  • Gray, P. and Irwin, T. (2003), "Allocating Exchange Rate Risk in Private Infrastructure Projects", The World Bank, Public Policy for the Private Sector, 54118
  • Grimsey, D. and Lewis, M. (2007), Public private partnerships: The worldwide revolution in infra-structure provision and project finance. Edward Elgar Publishing
  • Grout, P. A. (2003), "Public and private sector discount rates in public-private partnerships", The Eco-nomic Journal, 113(486): C62-C68
  • Ho, S. P. and Liu, L. Y. (2002), "An option pricing-based model for evaluating the financial viability of privatized infrastructure projects", Construction Management & Economics, 20(2): 143-156
  • Huang, Y. L. and Chou, S. P. (2006), "Valuation of the minimum revenue guarantee and the option to aban-don in BOT infrastructure projects", Construction Management and Economics, 24(4), 379-389
  • Irwin, T., Klein, M., Perry, G.E. and Thobani, M. (Ed.) (1997), Dealing with public risk in private in-frastructure, World Bank Publications, Washington D.C
  • Irwin, T., Klein, M., Perry, G. E. and Thobani, M. (1999), "Managing government exposure to private infrastructure risks", The World Bank Research Observer, 14(2): 229-245
  • Irwin, T. (2003), Public money for private infrastructure: deciding when to offer guarantees, output-based subsidies, and other fiscal support, World Bank Publications, Washington D.C
  • Irwin, T., (2007), Government guarantees: Allocating and valuing risk in privately financed infrastruc-ture projects, World Bank Publications, Washington D.C
  • Irwin, T. (2012a), Accounting devices and fiscal illusions. International Monetary Fund, Washington DC
  • Irwin, T. (2012b), "Some algebra of fiscal transparency: How accounting devices work and how to reveal them", International Monetary Fund Publications, 12/228
  • Jin, X. (2009), "Determinants of Efficient Risk Allocation in Privately Financed Public Infrastructure Projects in Australia", Journal of Construction Engineering and Management, 136(2)
  • Jin, X. (2010), "Neurofuzzy Decision Support System for Efficient Risk Allocation in Public-Private Partnership Infrastructure Projects", Journal of Computing in Civil Engineering, 24(6)
  • Jin, X. (2011), "Model for Efficient Risk Allocation in Privately Financed Public Infrastructure Pro-jects Using Neuro-Fuzzy Techniques", Journal of Construction Engineering and Management, 10
  • Jin, X. and Zhang, G. (2011), "Modelling optimal risk allocation in PPP projects using artificial neural networks", International Journal of Project Management, 29(5): 591-603
  • Jun, J. (2010), "Appraisal of combined agreements in BOT project finance: focused on minimum rev-enue guarantee and revenue cap agreements", International Journal of Strategic Property Manage-ment, (2): 139-55
  • Kang, C. and Feng, C. (2009), "Risk measurement and risk identification for BOT projects: A multi-attribute utility approach", Mathematical and Computer Modelling, 49(9): 1802-1815
  • Kappeler, A. and Nemoz, M. (2010), "Public-private partnerships in Europe-before and during the recent financial crisis", Economic and Financial Report, 4: 7-12
  • Klein, M. W. (1996), Risk, taxpayers, and the role of government in project finance, World Bank Pub-lications, Washington D.C
  • Klein, M. U. (1997), Managing guarantee programs in support of infrastructure investment (Vol. 1812). World Bank Publications, Washington D.C
  • Kokkaew, N., Chiara, N., Sunkpho, J. and Dong, F. (2011), "Valuing Expansion Opportunities in BOT Highway Projects: A Branching and Folding Back (BFB) Method", Journal of the Eastern Asia Society for Transportation Studies, 9: 66-81
  • Kokkaew, N. and Chiara, N. (2013), "A modeling government revenue guarantees in privately built transportation projects: a risk-adjusted approach", Transport, 28(2): 186-192
  • Kwak, Y. H., Chih, Y. and Ibbs, C. W. (2009), "Towards a comprehensive understanding of public private partnerships for infrastructure development", California Management Review, 51(2): 51-78
  • Lewis, C.M. and Mody, A. (1997), "The management of contingent liabilities: A risk management framework for national governments", The World Bank Group Finance, Private Sector, and Infra-structure Network, Note 149
  • Liu, J. and Cheah, C. Y. (2009), "Real option application in PPP/PFI project negotiation", Construction Management and Economics, 27(4): 331-342
  • Mirzadeh, I. and Birgisson, B. (2015), "Evaluation of Highway Projects under Government Support Mechanisms Based on an Option-Pricing Framework", Journal of Construction Engineering and Management, 141
  • Mody, A. and Patro, D. (1995), "Methods of loan guarantee valuation and accounting", World Bank CSF Discussion Paper, 116
  • Ng, F. P., Bjornsson, H. C. and Chiu, S. S. (2004), "Valuing a price cap contract for material procure-ment as a real option", Construction Management and Economics, 22(2): 141-150
  • Savas. E. S (2000), Privatization and Public-Private Partnerships Review, Chatham House, New York
  • Shan, L., Garvin, M. J. and Kumar, R. (2010), "Collar options to manage revenue risks in real toll public-private partnership transportation projects", Construction Management and Economics, 28(10): 1057-1069
  • Tiong, R. L. (1995), "Risks and guarantees in BOT tender", Journal o f Construction Engineering and Management, 121(2), 183-188
  • Towe, C. M. (1993), "Government contingent liabilities and measurement of fiscal impact" in. M.I. Blejer and A. Cheasty (eds.), How to measure the fiscal deficit, International Monetary Fund
  • Tserng, H., Ho, S., Chou, J. and Lin, C. (2014), "Proactive measures of governmental debt guarantees to facilitate Public-Private Partnerships project", Journal o f Civil Engineering and Management, 20(4): 548-560
  • Tyson, J., Karpowicz, I. and Coelho, M. D. (2009), "The effects of the financial crisis on public-private partnerships": 2009-2144, International Monetary Fund, Washington, DC
  • Ye, S. and Tiong, R. (2000), "Government support and risk-return trade-off in China's BOT power projects", Engineering, Construction and Architectural Management, 7(4): 412-422
  • Wibowo, A. (2004), "Valuing guarantees in a BOT infrastructure project", Engineering, Construction and Architectural Management, 11(6): 395-403
  • Wibowo, A. (2006), "CAPM-Based Valuation of Financial Government Supports to Infeasible and Risky Private Infrastructure Projects", Journal o f Construction Engineering and Management, 132(3): 239-248
  • Zhao, T., Sundararajan, S. K. and Tseng, C. L. (2004), "Highway development decision-making under uncertainty: A real options approach", Journal o f infrastructure systems: 10(1): 23-32
Fuente de los datos: Dialnet