Default and Abandonment Option in Motorway Concessions

Abstract

As long as motorway concessions are subject to the variability of traffic demand, it is necessary to apply valuation methods that can take into account that uncertainty. In the past, many concession projects have faced an early termination of the contract due to lower traffic than expected. These insolvency situations raise the issue of the compensation to the concessionaire when the contract is prematurely terminated. A methodology based on the real-options approach has been developed in this paper to assess insolvency situations in motorway concessions. Under this approach, the mechanism of compensation can be modeled as an abandonment option, granted by the public administration to the concessionaire, in which the value of the option will depend on the evolution of traffic. This methodology is then applied to the case of a real concession in Spain. The results show a significant value of the abandonment option, which represents an implicit aid from the public administration to the concession. In this way, the methodology presented in this paper can contribute to gaining a better understanding of the risks of motorway concessions and enhancing the transparency in concession contracts.