Concession Decision Model of BOT Projects Based on a Real Options Approach

BOT project financing is a mechanism to utilize private capital for infrastructure development. There are multiple risks encountered in project construction and operation which can be regarded as managerial options. But either the government or the private concessionaire fails to capture such flexibility value, which results in wrong concession decision-making undervaluing projects frequently. To solve this problem, three real options are suggested to be considered in concession decisions, namely the option to adjust concession price, the option to develop surrounding land, the option to expand project capacity. Four key risks, including demand risk, inflation risk, land price fluctuation risk and completion risk, are modeled as stochastic variables. A concession decision model based on the real options approach is developed to accounts for the evolution of the four key risks. A solution algorithm based on the Monte Carlo simulation is presented to find optimal solutions. A numerical example shows that the model and solution algorithm have reasonable results