Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Public guarantees for mitigating interest rate risk in PPP projects

Public guarantees for mitigating interest rate risk in PPP projects The purpose of this paper is to deal with the maximum interest rate guarantees (MIRGs), and develop a methodology for setting the optimal value of the interest rate cap, namely the maximum interest rate above which the private investor will obtain reimbursement from the government, which balances the interests of the parties involved in the project.Design/methodology/approachThe mechanism underlying the MIRG is modeled through real options. Monte Carlo simulation is employed as the option-pricing method. The resulting real option-based model is applied to the case of the “Camionale di Bari” toll road (Southern Italy).FindingsThe application provides some insights for the policy maker called to define the proper forms of guarantees. Furthermore, the results support the negotiation process, allowing the different actors to structure the guarantee in a way that satisfies all the parties and fairly allocates risks between them according to different operational and financial conditions.Originality/valueThe novelty of the contribution is triple. First, the authors advance the state of the art on government supports by focusing on the interest rate guarantee. Second, the authors enrich the existing studies on MIRG by proposing a quantitative model to set the guarantee in compliance with the public–private win-win principle. The developed real option-based model supports the decision maker in finding the optimal value of the interest rate cap, which is able to satisfy the interests of the parties involved in the project. Third, the authors consider not only the private sponsor and the government, as traditionally made by the models developed for other guarantees, but also the lender. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Built Environment Project and Asset Management Emerald Publishing

Public guarantees for mitigating interest rate risk in PPP projects

Download PDF
14 pages

Loading next page...
 
/lp/emerald-publishing/public-guarantees-for-mitigating-interest-rate-risk-in-ppp-projects-AdtZOiJBzX
Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2044-124X
DOI
10.1108/bepam-01-2018-0012
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to deal with the maximum interest rate guarantees (MIRGs), and develop a methodology for setting the optimal value of the interest rate cap, namely the maximum interest rate above which the private investor will obtain reimbursement from the government, which balances the interests of the parties involved in the project.Design/methodology/approachThe mechanism underlying the MIRG is modeled through real options. Monte Carlo simulation is employed as the option-pricing method. The resulting real option-based model is applied to the case of the “Camionale di Bari” toll road (Southern Italy).FindingsThe application provides some insights for the policy maker called to define the proper forms of guarantees. Furthermore, the results support the negotiation process, allowing the different actors to structure the guarantee in a way that satisfies all the parties and fairly allocates risks between them according to different operational and financial conditions.Originality/valueThe novelty of the contribution is triple. First, the authors advance the state of the art on government supports by focusing on the interest rate guarantee. Second, the authors enrich the existing studies on MIRG by proposing a quantitative model to set the guarantee in compliance with the public–private win-win principle. The developed real option-based model supports the decision maker in finding the optimal value of the interest rate cap, which is able to satisfy the interests of the parties involved in the project. Third, the authors consider not only the private sponsor and the government, as traditionally made by the models developed for other guarantees, but also the lender.

Journal

Built Environment Project and Asset Management – Emerald Publishing

Published: Apr 11, 2019

Keywords: Risk mitigation; Public; private partnership; Real options; Public finance; Maximum interest rate guarantee; Public guarantees

References

  • Regulating concessions of toll motorways: an empirical study on fixed vs variable term contracts
    Albalate, D.; Bel, G.
  • The option value of government guarantees in infrastructure projects
    Brandão, L.E.; Saraiva, E.
  • Revenue guarantee in public–private partnerships: a win–win model
    Carbonara, N.; Pellegrino, R.
  • Revenue guarantee in public-private partnerships: a fair risk allocation model
    Carbonara, N.; Costantino, N.; Pellegrino, R.
  • Factors influencing the equity share of build-operate-transfer projects
    De Marco, A.; Mangano, G.; Zou, X.-Y.
  • Renegotiating PPP contracts: reinforcing the ‘P’ in partnership
    Domingues, S.; Zlatkovic, D.
  • Valuation techniques for infrastructure investment decisions
    Garvin, M.J.; Cheah, C.Y.J.
  • The renegotiation of PPP contracts: an overview of its recent evolution in Latin America
    Guasch, J.L.; Benitez, D.; Portabales, I.; Flor, L.
  • Accounting for public-private partnerships: how should governments report guarantees and longterm purchase contracts
    Irwin, T.
  • A PPP renegotiation framework: a road concession in Greece
    Nikolaidis, N.; Roumboutsos, A.
  • Review of studies on the critical success factors for public–private partnership (PPP) projects from 1990 to 2013
    Osei-Kyei, R.; Chan, A.P.
  • A real options-based model to supporting risk allocation in price cap regulation approach for public utilities
    Pellegrino, R.; Ranieri, L.; Costantino, N.; Mummolo, G.
  • Real option theory for risk mitigation in transport PPPs
    Pellegrino, R.; Vajdic, N.; Carbonara, N.
  • Sharing risk through concession contracts
    Scandizzo, P.L.; Ventura, M.
  • The AOPII cost-effectiveness study – Part III: the transport base case
  • Traffic risk mitigation in highway concession projects: the experience of Chile
    Vassallo, J.M.
  • Evaluation of the excess revenue sharing ratio in PPP projects using principal–agent models
    Wang, Y.; Liu, J.
  • Valuing guarantees in a BOT infrastructure project
    Wibowo, A.
  • Determining appropriate government guarantees for concession contract: lessons learned from 10 PPP projects in China
    Xu, Y.; Yeung, J.F.; Jiang, S.
  • Critical success factors for public–private partnerships in infrastructure development
    Zhang, X.