Ho, S P and Liu, L Y (2002) An option pricing-based model for evaluating the financial viability of privatized infrastructure projects. Construction Management and Economics, 20(2), pp. 143-156. ISSN 01446193
Abstract
Privatized infrastructure projects have to demonstrate their financial and technical viability before they are undertaken. Although it is relatively easy to demonstrate the technical viability of an infrastructure project, the evaluation of the financial viability of a privatized infrastructure project is complex and challenging, mainly because of the uncertainties involved due to the project's scale, long concession period and complexity. Traditional methods, such as net present value (NPV) analysis, fall short in reflecting the characteristics of privatized infrastructure projects and the risks involved. This paper presents an option pricing based model, the BOT option valuation (BOT-OV) model, for evaluating the financial viability of a privatized infrastructure project. This quantitative model considers the project characteristics explicitly and evaluates the project from the perspectives of the project promoter and of the government when the project is under bankruptcy risk. Moreover, the model can evaluate the impact of the government guarantee and the developer negotiation option on the project financial viability.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | bot; financial decision-making; investment evaluation; option pricing theory; privatized infrastructure |
| Index terms: | financial viability, net present value, concession period, pricing, infrastructure project, bankruptcy, negotiation, option, guarantee, promoter, complexity, decision-making |
| Subjects: | business management, economic analysis, infrastructure and transport systems, systems engineering, conflict resolution, decision analysis, sociology, contract structure |
| Topics: | Risk Management, Stakeholder Management, Procurement, Business Strategy, Engineering Principles |
| Descriptive scope: | 2 PC |
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