Public Private Partnerships: Incentives, Risk Transfer and Real Options

Posted: 26 Jun 2006

See all articles by Ana B. Alonso-Conde

Ana B. Alonso-Conde

Rey Juan Carlos University

Christine A. Brown

Department of Banking and Finance; Financial Research Network (FIRN)

Javier Rojo-Suarez

Universidad Rey Juan Carlos de Madrid

Abstract

Private financing of large-scale infrastructure projects through Public Private Partnerships (PPPs) has grown in recent decades. Together with changes in conventional construction procedures, there have been changes in the project financing model. The use of PPPs raises questions as to the role of the private sector in infrastructure provision and the conditions governing the long-term contractual relationships between the private and public sectors. In some early examples of PPPs, the government guaranteed a minimum profitability over the cash flows using a set of contractual terms which transferred some of the risk of the project from the private provider back to the government. Using a large toll road project, the Melbourne CityLink Project, as a case study we show how the imposed conditions can be treated as real options, how these options affect the incentive to invest and how the public sector may be transferring considerable value to the private sector through government guarantees.

Keywords: Public Private Partnership, infrastructure projects, deferred payments, real options, Internal Rate of Return, non-recombining binomial tree, Monte Carlo simulation

JEL Classification: G12, G13, G32, G34

Suggested Citation

Alonso-Conde, Ana B. and Brown, Christine A. and Rojo-Suarez, Javier, Public Private Partnerships: Incentives, Risk Transfer and Real Options. Review of Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=911506

Ana B. Alonso-Conde

Rey Juan Carlos University ( email )

Paseo de los Artilleros S/N
Madrid, Madrid 28032
Spain

Christine A. Brown (Contact Author)

Department of Banking and Finance ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 99031793 (Phone)
+61 3 99055475 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: www.firn.org.au

Javier Rojo-Suarez

Universidad Rey Juan Carlos de Madrid ( email )

Calle Tulipán, s/n
Madrid, Móstoles 28230
Spain

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