Options Framework and Valuation of Highway Infrastructure under Real and Financial Uncertainties

Abstract

This study builds and applies a framework that addresses the twin uncertainties of traffic flow and interest rates in build-operate-transfer (BOT) projects. Existing valuation methods address traffic flow estimations using linear models, which yield point estimates of traffic predictions regardless of traffic flow volatility. Additionally, considering traffic projections alone ignores the financial risk of these projects, which is an important variable for public–private partnership (PPP) projects. The framework is demonstrated by simulating scenarios based on the model. The model accounts for possible traffic flow pathways and paths that interest rates can take, resulting in the net present value probability distribution for the project. The outcome is the risk profile of the project under consideration. The constructed profile can be employed for analysis by both government agencies and the concessionaire and can thus promote a more efficient environment for contracting purposes. Finally, various applications of the model, including determining the operation period to be allowed for the concessionaire, setting the toll rates, and determining the impact of other policies, are discussed.