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A Real Options Model for the Financial Valuation of Infrastructure Systems Under Uncertainty

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A Real Options Model for the Financial Valuation of Infrastructure Systems Under Uncertainty A REAL OPTIONS MODEL FOR THE FINANCIAL VALUATION OF INFRASTRUCTURE SYSTEMS UNDER UNCERTAINTY A Dissertation Presented to The Academic Faculty by Hamed Haj Kazem Kashani In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the School of Building Construction Georgia Institute of Technology May 2012 A REAL OPTIONS MODEL FOR THE FINANCIAL VALUATION OF INFRASTRUCTURE SYSTEMS UNDER UNCERTAINTY Approved by: Dr. Baabak Ashuri, Advisor Dr. Keith R. Molenaar School of Building Construction Department of Civil, Environmental and Georgia Institute of Technology Architectural Engineering University of Colorado at Boulder Dr. Daniel Castro-Lacouture Dr. Adjo A. Amekudzi School of Building Construction School of Civil and Environmental Georgia Institute of Technology Engineering Georgia Institute of Technology Professor Kathy O. Roper Mr. Darryl VanMeter, P.E. School of Building Construction Office of Innovative Program Delivery Georgia Institute of Technology Georgia Department of Transportation Date Approved: March 14, 2012 Dedicated To My Mother Nahid and My Father Ahmad ACKNOWLEDGEMENTS I would like to express my gratitude to my advisor, Dr. Baabak Ashuri, for his insightful guidance, encouragement, dedication and patience throughout my graduate studies. Working with him has been an invaluable lifetime experience for me. His technical and editorial advice was essential to the completion of this dissertation and has taught me innumerable lessons and insights on the workings of academic research in general. I would like to thank the members of my doctoral examination committee, Dr. Daniel Castro-Lacouture, Professor Kathy Roper, Dr. Keith Molenaar, Dr. Adjo Amekudzi and Mr. Darryl VanMeter. They provided many valuable comments that helped me improve the contents and presentation of this dissertation. The friendship of Jian Lu, Mohsen Shahandashti and Kia Mostaan is much appreciated and has led to many interesting and good-spirited discussions relating to this research. Thanks are also extended to all the faculty members at the School of Building Construction. Thanks are also due to Lorie Wooten, Jacquelyn Strickland and Brenda Morris for their administrative support. Finally, I would like to thank my parents, Nahid and Ahamd, for all their love and encouragement. They raised me, taught me, loved me and supported me in all my pursuits. They receive my deepest gratitude and love. iv TABLE OF CONTENTS ACKNOWLEDGEMENTS .......................................................................................................................... iv LIST OF TABLES ..................................................................................................................................... viii LIST OF FIGURES ...................................................................................................................................... ix GLOSSARY OF KEY TERMS .................................................................................................................... xi SUMMARY .................................................................................................................................................. xii CHAPTER 1 INTRODUCTION ..................................................................................... 1 Research Background ....................................................................................................................................... 1 State of Knowledge .......................................................................................................................................... 8 Gaps in Knowledge .......................................................................................................................................... 9 Estimation of the Project Volatility for Real Options Analysis ................................................................... 9 Finding the Market Value of Real Options in Transportation Project ....................................................... 10 Characterizing the Concessionaire’s Risk Profile under UUncertainty ........................................................ 11 Research Objectives ....................................................................................................................................... 11 Organization of Dissertation .......................................................................................................................... 12 CHAPTER 2 LITERATURE REVIEW ....................................................................... 13 Public-Private Partnership (PPP) .................................................................................................................... 14 Concept of Public-Private Partnership....................................................................................................... 14 Potential Benefits of Public-Private Partnerships ...................................................................................... 17 Concerns Related to the Utilization of Public-Private Partnerships .......................................................... 21 Sources of Financing in Public-Private Partnership Projects .................................................................... 24 General Patterns of Financing Public-Private Partnership Projects ........................................................... 29 Miller’s Quadrant Framework ................................................................................................................... 31 Types of PPP Contracts ............................................................................................................................. 34 v BOT Transportation Projects ..................................................................................................................... 39 Risks in BOT Projects ............................................................................................................................... 42 Traffic Demand Uncertainty and Revenue Risk in BOT Transportation Projects .................................... 45 Traffic Revenue Risk Allocation in BOT Highway Projects ..................................................................... 49 Pricing Minimum Revenue Guarantee and Traffic Revenue Cap Options .................................................... 53 Net Present Value Analysis ....................................................................................................................... 55 Real Options .............................................................................................................................................. 58 Gaps in Knowledge ................................................................................................................................... 73 Research Objectives .................................................................................................................................. 75 CHAPTER 3 REAL OPTIONS MODEL FOR THE FINANCIAL VALUATION OF INFRASTRUCTURE SYSTEMS UNDER UNCERTAINTY ............................. 77 Establish Information Requirements .............................................................................................................. 82 Model Uncertainty about Long-term Traffic Demand ................................................................................... 85 Generate Random Traffic Demand Paths .................................................................................................. 90 Conduct Lifecycle Cost and Revenue Analysis under Traffic Demand Uncertainty without Real Options . 93 Price Minimum Revenue Guarantee and Traffic Revenue Cap Options ........................................................ 94 Estimate Project Volatility for Real Options Analysis .............................................................................. 96 Find the Market Value of Real Options in BOT Transportation Projects .............................................. 102 CHAPTER 4 ILLUSTRATIVE EXAMPLE .............................................................. 110 Incheon International Airport Highway (IIAH) ........................................................................................... 110 Background ............................................................................................................................................. 110 Traffic Demand Projections..................................................................................................................... 111 Project Financing ..................................................................................................................................... 112 Minimum Revenue Guarantee and Traffic Revenue Cap ........................................................................ 114 Summary of Results ..................................................................................................................................... 115 CHAPTER 5 LIMITATIONS OF THE PROPOSED REAL OPTIONS MODEL, IMPLEMENTATION BARRIERS AND RECOMMENDATIONS FOR FURTHER vi RESEARCH .................................................................................................................. 133 Limitations of the Proposed Real Options Model ........................................................................................ 134 Single Source of Uncertainty ................................................................................................................... 134 Estimation of Input Parameters
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