Abandonment Option

Abandonment Option

Abandonment option enables the investor to stop the project if it turns out to be loss-making.

Cancelling a PPP project would result in the degradation or termination of some public service, which is usually not acceptable for the public partner. Nevertheless, there have been examples of the abandonment option in PPP as projects have been so important and risky for the private partner that the public partner had to grant him an abandonment option before the construction phase of the project, if he wanted new infrastructure to be built.

That kind of example was the Taiwan High-Speed Rail Project, which links national capital Taipei and southern city Kaohsiung with 345 km of high-speed rail. Private partner had approximately 1 year time after the contract signing date to abandon the project. It was so called pre-construction phase, when private partner provided additional researches and gained additional information about the project and difficulties that he might expect in the course of construction and operation. The abandonment option alone was worth approximately 5% of the project’s NPV or in other words, NPV of the project was increased for 5% due to the existence of the abandonment option. As an interesting fact, let me add that when Taiwan High Speed Rail Project was finished in 2007, the impact of the new infrastructure was so huge, that domestic air traffic was almost halved until 2008.

 

REAL OPTIONS CONSULTING

At Real Options Consulting Ltd, we are merging real options and PPP.

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Real Options Consulting Ltd is a company specialized in the valuation of risks and real options in infrastructure Public-Private Partnership projects.

We bring to our clients the best of theory and practice of Real Options and Public-Private Partnership with the purpose of creating the most suitable solutions for them.

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