Economic valuation of a toll road concession with traffic guarantees and the abandonment option

Abstract Governments worldwide have been encouraging private participation in transportation infrastructure. To increase the feasibility of a project, public-private partnership (PPP) may include guarantees or other support to reduce the risks for private investors. It is necessary to value these opportunities under a real options framework and thereby analyze the project's economic feasibility and risk allocation. However, within this structure, sponsors have an implicit option to abandon the project that should be simultaneously valued. Thus, this article proposes a hypothetical toll road concession in Brazil with a minimum traffic guarantee, a maximum traffic ceiling, and an implicit abandonment option. Different combinations of the minimum and maximum levels are presented, resulting in very high or even negative value added to the net present value (NPV). The abandonment option impacts the level of guarantee to be given. Governments should calibrate an optimal level of guarantees to avoid unnecessarily high costs, protect the returns of the sponsor, and lower the probability of abandonment