System Dynamics Models for the Valuation of Real Options in P3 Concession Project Agreements

Abstract

Public-private partnerships (P3) are increasingly being pursued for infrastructure procurement because of their ability to alleviate pressure on government budgets, promote innovation, and implement new technologies. These types of contracts tend to be long term and often need to account for future yet-to-be-seen variables that potentially impact the feasibility of this procurement method. This is especially true when the P3 exists within a portfolio of competing assets across transportation infrastructure systems. The current research presents a system dynamics model that is used to analyze the complexity of a transportation infrastructure asset procured through a P3 within such a portfolio. An illustrative case demonstrates how discrete and continuous events potentially impact the successful procurement of infrastructure within a portfolio of competing assets comprising a regional transportation system. This paper contributes to the existing body of knowledge by demonstrating how a system dynamics model can simulate the real-world causal relationships that impact the procurement of infrastructure through P3s. The system dynamics model is used for the valuation of real options in order to promote public initiatives, encourage private participation and enhance the economic sustainability of P3s.