Real-Option Valuation of Build-Operate-Transfer Infrastructure Projects under Performance Bonding
Publication: Journal of Construction Engineering and Management
Volume 140, Issue 5
Abstract
This study assesses the effect of performance bonding on the valuation of a build-operate-transfer (BOT) project by extending the classical Black-Scholes-Merton (BSM) call option model. As common features in BOT contracts, a performance bond is a penalty imposed on concessionaires who exercise contractual rights to terminate participation in a project. In the real-option context, termination rights grant concessionaires the flexibility in managing market uncertainties that can increase the valuation of an infrastructure project, but the penalty impairs this flexibility and reduces valuations. A case study numerically illustrates the BSM model and indicates that performance bonding can destroy the flexibility and project valuations inherent in termination rights even when the penalty is moderate. Balancing performance bonds and termination rights is necessary because both are important in establishing and maintaining long-term contractual relationships in privatized BOT infrastructure projects.
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Acknowledgments
The authors wish to thank the National Science Council for research grants under contract NSC 100-2221-E-009-137. The authors also wish to thank anonymous reviewers for their invaluable comments and suggestions.
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Published In
Journal of Construction Engineering and Management
Volume 140 • Issue 5 • May 2014
Copyright
© 2013 American Society of Civil Engineers.
History
Received: Nov 30, 2012
Accepted: Nov 19, 2013
Published online: Dec 27, 2013
Published in print: May 1, 2014
Discussion open until: May 27, 2014
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