Valuing flexibility in build-operate-transfer (BOT) toll road projects : a real options approach

The goal of this thesis is to show how option valuation techniques can be used to value managerial flexibility in Build-Operate-Transfer (BOT) toll road projects. It begins by discussing the dramatic shift towards public-private partnerships and BOTs in the infrastructure industry. It then looks at how traditional capital budgeting techniques often fail to capture important sources of value created by flexibility. It discusses real options and introduces Contingent Claims Analysis (CCA) as a means of valuing flexibility which takes into account the opportunity to construct replicating portfolios in the market. It applies CCA to the real options present in each phase of a BOT toll road project. During the build phase, it looks at the option to abandon, the option to change scale/technology, and time-to-build flexibility. During the operate phase, it analyzes tollsetting flexibility, development gain options, and project financing flexibility. At the transfer phase it considers arrangements with option-like features. In conclusion, this thesis emphasizes the relevance of real option valuation techniques to BOT toll road projects and points the way to further research fusing the fields of transport economics and financial economics.Business, Sauder School ofOperations and Logistics (OPLOG), Division ofGraduat