Deferment Option

Deferment Option

Some infrastructure PPP projects are more profitable than others and sometimes the private partner needs to pay the public partner regular installments for granting a concession. However, it might happen that certain project is not as profitable as planned and for that case the public partner grants the private partner the deferment of concession payment. This deferment right presents a deferment option as one of the real options and it has it value that has to be calculated before the private partner decides to enter the public-private partnership.

This approach was used in case of The Transurban City Link Project in Melbourne, Australia. The project was auctioned to a private partner for a concession period of 37 year, whereby the construction phase took 3.5 years. The construction costs of the project amounted to $1,600,000,000 (Australian dollar) and the private partner was required to pay to the Government of Victoria a semi-annual concession fee of $95,600,000 per year for first 25 years, $45,200,000 per year for years between 26 and 34 and $1,000,000 per year for the last 3 years of the concession period. The Government of Victoria was aware that defined concession fee in the cumulative amount of $2,800,000,000 was a huge financial distress for the project and therefore granted a deferment option to a concessionaire. In accordance to mentioned option, the concessionaire had right to postpone payment of the concession fee by issuing a security called a concession note. The concession notes were non-interests bearing and were due for payment at the end of the concession period. However, the Government of Victoria could present the notes for repayment before the end of the concession period if the equity investors earn an after tax internal rate of return (IRR) of 10% or more. The deferment option of the concessionaire was not unlimited as it hinged on the project’s IRR, but nevertheless, it had and extremely significant value of approximately $797,000,000,making the project much more attractive to private partners and financiers.

REAL OPTIONS CONSULTING

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

Company

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.

Contact Us

Real Options Consulting Ltd 20-22 Wenlock Road, London, N1 7GU
United Kingdom
Website: http://www.ppp-infrastructure.com
Email: [email protected]
Phone: +44 70 2403 4340