Real Options in PPP

Real options in public-private partnership


Infrastructure Public-Private Partnership projects are in their essence the same as any other infrastructure project when compared in view of feasibilities and technical characteristics. However, in terms of real options infrastructure Public-Private Partnership projects have one feature that makes them substantially different from other projects. Namely, in case of Public-Private Partnership there are always two partners with their obligations and rights, the public and the private partner. The existence of mutual commitments causes that in infrastructure Public-Private Partnership projects we can find or define some real options that cannot be found in other projects, like the minimum revenue guarantee concept. The mentioned real option does not exist in any other project since an investor is on its own and has no counterparty that will grant him some minimum revenue.

In contrast, some options can be harder to find in Public-Private Partnership due to the protection of public interest. An option of that kind is the abandonment option that enables the investor to stop the project if it turns out to be loss-making. Cancelling a Public-Private Partnership project would result in the degradation or termination of some public service, which is usually not acceptable for the public partner. Nevertheless, there are examples of the abandonment option in PPP as projects are so important and risky for the private partner that the public partner has to grant him an abandonment option before the construction phase of the project, if he wants new infrastructure to be built.

Moreover, in Public-Private Partnership projects there is always a concession agreement signed between both partners where their responsibilities and future options are defined. The prolongation of the concession agreement if in 20 to 30 years it turns out that the project is not feasible enough is a real option known as expanding options. Like any other real option, expanding option also has its value and increases the value of the project.

Sometimes the public partner would like to redeem a concession from the private partner before the end of the concession period. The main question of course is how valuable the concession buyout option is or how much the public partner will have to pay the private partner in order to get back the concession and ownership over the built infrastructure. A calculation tool that gives us the answer is Real Options Analysis that is also used in the valuation of all other real options.

Some infrastructure Public-Private Partnership projects are more profitable than others and sometimes the private partner needs to pay the public partner regular instalments 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.

Here only some real options are mentioned, but since there are numerous ways to define rights and obligations between both partners, there are of course several variations of real options. They all are used to make infrastructure Public-Private Partnership projects less risky and more attractive. If we want to know exactly what the value of respective real options is and by how much the project risk is consequently reduced, they need to be calculated accurately and defined properly in contracts.


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


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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Real Options Consulting Ltd 20-22 Wenlock Road, London, N1 7GU
United Kingdom
Email: [email protected]
Phone: +44 70 2403 4340