Guo, Y; Su, Y; Chen, C and Martek, I (2024) Inclusion of "managing flexibility" valuations in the pricing of PPP projects: A multi-objective decision-making method. Engineering, Construction and Architectural Management, 31(11), pp. 4562-4584. ISSN 0969-9988
Abstract
Purpose: The Public–Private Partnership (PPP) modality plays an important role in the procurement of global infrastructure projects. Regarding PPP's complex transaction structure, pricing of a PPP project is critical to both parties where the government pursues a high value for money (VFM) and the investor strives to maximize its financial gains. Despite the straightforward win–win principle, a formidable compromise is often the case to end up with a fairly acceptable price, subject to many determinants such as the risk profile, expected return, technological innovation and capacities of both parties. Among them, this study chooses to examine the "managing flexibility" (MF) capacity of investors in pricing of a PPP project, in light of the widely recognized importance of a real-option perspective toward the long term, complex and uncertain PPP arrangement. This study addresses two major questions: (1) how is MF in PPP projects to be valued and (2) how are PPP projects to be priced when considering a project's MF value. Design/methodology/approach: A binomial tree model is used to evaluate the MF value in PPP projects. Based on the developed MF pricing model, net present value (NPV) and adjusted VFM value are then calculated. Finally, a multi-objective decision-making method (MODM) was adopted to determine the optimal level of returns based on invested capital (ROIC), return on operation maintenance (ROOM) and concession period. Findings: The applicability and functionality of the proposed model is investigated using a real project case. For a given return, extended NPV and adjusted VFM value were calculated and analyzed using sensitivity analysis. Factor influence is shown by the model to be dependent on factor impact on cash flow. Subsequently, a multi-objective decision-making (MODM) model was adopted to determine the optimal level of returns, where the solution approximates the real-world bidding price. Results confirm that the pricing model provides a reliable and practical PPP proposal pricing tool. Originality/value: This study proposes an integrated framework for valuing MF in PPP projects and thus more accurately determine optimal pricing of PPP projects than revealed in extant research. The model offers a practical tool to aid in the valuation of PPP projects.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | construction management; managing flexibility; multi-objective decision-making; PPP; PPP project pricing; real option method |
| Index terms: | net present value, partnership, concession period, pricing, investor, option, infrastructure project, real option, determinant, technological innovation, functionality, high-value, sensitivity analysis, cash flow, proposal, bidding, expected return, methodology, decision-making |
| Subjects: | research methods, environmental hazards, economic analysis, innovation and technology management, bidding, project planning, design features, financial management, contract structure, infrastructure and transport systems, decision analysis, sociology, partnership management, risk assessment |
| Topics: | Research Practice, Cost Management, Business Strategy, Stakeholder Management, Design Practice, Project Management, Engineering Principles, Procurement, Sustainability, Risk Management |
| Descriptive scope: | 3 PCT |
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