Sharing Risks in Toll Motorway Concessions: Subsidies as Real Options on Traffic Volume

Abstract

Public Administrations need to raise private financial resources to provide for infrastructures. These projects are, however, perceived by investors as risky, so it is necessary to look for risk-sharing mechanisms that make them attractive and fundable. The establishment of a contingent subsidy linked to the volume of traffic reduces the variance of cash flows and reduces the risk of the project. The optional nature of this type of mechanism means that the project must be assessed within the real options framework, because traditional methods of project valuation are inappropriate when they incorporate flexibility and uncertainty. This work quantifies the value of a subsidy to the project depending on the volume of traffic under two different approaches: using analytical methods and simulation. The results show that the establishment of a subsidy according to traffic levels contributes an important value to the project.