Huang, Y L and Pi, C C (2014) Real-option valuation of build-operate-transfer infrastructure projects under performance bonding. Journal of Construction Engineering and Management, 140(5): 04013068, ISSN 0733-9364
Abstract
This study assesses the effect of performance bonding on the valuation of a build-operate-transfer (BOT) project by extending the classical Black-Scholes-Merton (BSM) call option model. As common features in BOT contracts, a performance bond is a penalty imposed on concessionaires who exercise contractual rights to terminate participation in a project. In the real-option context, termination rights grant concessionaires the flexibility in managing market uncertainties that can increase the valuation of an infrastructure project, but the penalty impairs this flexibility and reduces valuations. A case study numerically illustrates the BSM model and indicates that performance bonding can destroy the flexibility and project valuations inherent in termination rights even when the penalty is moderate. Balancing performance bonds and termination rights is necessary because both are important in establishing and maintaining long-term contractual relationships in privatized BOT infrastructure projects.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | build-operate-transfer; concession contract; infrastructure privatization; performance bond; real option; valuation |
| Index terms: | exercise, concessionaire, real option, privatization, build-operate-transfer, performance bond, penalty, contractual relationship, concession contract, option, infrastructure project, case study |
| Subjects: | health behaviours and lifestyles, contractual arrangements, infrastructure and transport systems, payment, decision analysis, economic analysis, contract type, regulatory law, contractual relationship, data collection methods |
| Topics: | Contract Administration, Procurement, Engineering Principles, Research Practice, Risk Management, Health and Safety, Business Strategy, Legal Issues |
| Descriptive scope: | 3 PCE |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here