Zhang, S; Li, J; Li, Y and Zhang, X (2021) Revenue risk allocation mechanism in public-private partnership projects: Swing option approach. Journal of Construction Engineering and Management, 147(1): 04020153, ISSN 0733-9364
Abstract
A fair revenue-risk allocation is essential for successful public-private partnership (PPP) projects. In this paper, a swing option, which can hedge the underlying risk in two directions above and below expectations, is introduced to model a revenue risk allocation contract in PPP projects. In the contract, a minimum revenue guarantee (MRG) and excess revenue sharing (ERS) are integrated. The contract is fair for the public and private partners in that it covers and balances the MRG and ERS. Moreover, the contract embeds the incentive and flexibility by granting the concessionaire swing rights. The contract is priced using a least-squares Monte Carlo simulation. Through a demonstration case of a highway in China, the contract values for different allocation parameters are obtained, providing a reference for negotiations between the government and the concessionaire; the optimal strategies for exercising the swing rights are also presented, according to which the concessionaire can decide when to exert the swing rights. The new revenue risk allocation mechanism developed by the swing option method could enrich the revenue risk allocation theory of PPP projects.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | contract mechanism; excess revenue sharing; minimum revenue guarantee; public-private partnership projects; revenue risk; swing option |
| Index terms: | partnership, guarantee, risk allocation, concessionaire, strategy, China, Monte Carlo simulation, revenue, option, negotiation |
| Subjects: | Geography, decision analysis, conflict resolution, modelling and simulation, contract type, management, economic analysis, partnership management, financial risk, contract structure |
| Topics: | Geographical Context, Cost Management, Stakeholder Management, Business Strategy, Research Practice, Risk Management, Procurement |
| Descriptive scope: | 3 PCA |
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