Comparison of revenue guarantee programs in build-operation-transfer projects

Purpose: The purpose of this study is to compare revenue guarantee programs in a build-operation-transfer project (BOT). Two types of revenue guarantee programs are formulated: a payment-based annual revenue guarantee program and a period-extension-based cumulative revenue guarantee program. Design/methodology/approach: Monte Carlo simulation is used to model the real option approach. This method is applied to a toll road project in the Philippines wherein the expected payoffs of the government and the concessionaire are simulated over an evaluation period that includes the concession period. The condition under which the expected government return in one program is equal to that in the other program is shown. These programs are then evaluated by incorporating a project risk factor into the project return. Findings: The results show that the cumulative revenue guarantee program is preferred to the annual revenue guarantee program. However, the optimal solution depends on the government's return-risk preference. Research limitations/implications: The simulation was implemented with limited cases of discrete input with respect to the cost-sharing parameter, the annual guarantee rate, and the guaranteed cumulative revenue. A simulation with more input values should be performed to achieve results that are more general and sophisticated. Practical implications: It is indicated that the simple reduction of risk does not necessarily mean that government expected payoff will increase. Originality/value: It is expected that this method contributes to the proper decisions made by the governments with respect to the choice of a revenue guarantee mechanism in BOT projects.