An option pricing-based model for evaluating the financial viability of privatized infrastructure projects

S. Ping Ho, Liang Y. Liu

Research output: Contribution to journalArticle

Abstract

Privatized infrastructure projects have to demonstrate their financial and technical viability before they are undertaken. Although it is relatively easy to demonstrate the technical viability of an infrastructure project, the evaluation of the financial viability of a privatized infrastructure project is complex and challenging, mainly because of the uncertainties involved due to the project's scale, long concession period and complexity. Traditional methods, such as net present value (NPV) analysis, fall short in reflecting the characteristics of privatized infrastructure projects and the risks involved. This paper presents an option pricing based model, the BOT option valuation (BOT-OV) model, for evaluating the financial viability of a privatized infrastructure project. This quantitative model considers the project characteristics explicitly and evaluates the project from the perspectives of the project promoter and of the government when the project is under bankruptcy risk. Moreover, the model can evaluate the impact of the government guarantee and the developer negotiation option on the project financial viability.

Original languageEnglish (US)
Pages (from-to)143-156
Number of pages14
JournalConstruction Management and Economics
Volume20
Issue number2
DOIs
StatePublished - Mar 1 2002

Keywords

  • BOT
  • Financial decision-making
  • Investment evaluation
  • Option pricing theory
  • Privatized infrastructure

ASJC Scopus subject areas

  • Management Information Systems
  • Building and Construction
  • Industrial and Manufacturing Engineering

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