Feasibility of Flexible Term Concessions based Real Options in Indian Highway Sector

抄録

Public Private Partnerships (PPPs) are considered as effective tools for transferring risks and responsibilities to the private sector for infrastructure creation, particularly in road transport sector. The uncertainty in demand forecasts makes choice of PPP model susceptible to errors, resulting in non-performing projects and demands for renegotiations. Multiple non-performing projects have resulted in falling competitiveness in Indian Highway sector and government absorbing most risks to attract investors. This article explores the feasibility of offering Flexible Term Concessions (FTC) as a real option over two ongoing Built Operate Transfer (BOT) highway projects in India. The forecast made from actual data using Geometric Brownian Motion and the risk neutral valuation through spreadsheet analysis indicated positive values and risk reduction with the flexibility. Subsequent interviews with key stakeholders in the sector presented some of the barriers to implement flexibilities in Indian PPPs.