Zachary Department of Civil Engineering

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Regional Workshop on Public-Private Partnership
in Highways
UNCERTAINTY AND OPTIONS IN PPP PROJECTS
Ivan Damnjanovic, Ph.D. Assistant Professor

• Zachary Department of Civil Engineering
• Texas AM University

Belgrade, June 7, 2006
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BENEFITS OF PPP PROJECTS

• GOVERNMENT
• Foreign Direct Investment, Increased Mobility,
  Fostered Development,
• CONCESSIONAIRE
• Profit
• CONTRACTOR
• Profit

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HOW ARE DECISIONS MADE?

• WHY WE NEED TO KNOW THIS?
• To provide incentives for investment
• To identify and understand the risk
• To evaluate benefits
• RISK and OPPORTUNITY
• UNCERTAINTY
• Traffic
• Performance
• Financial
• Political

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UNCERTAINTY
TRAFFIC PREDICTION
PAVEMENT PERFORMANCE PREDICTION
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IMPACT OF UNCERTAINTY ON CASH FLOW
X
95 CI
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DECISIONS TO INVEST IN PPP PROJECTS

• IRREVERSIBLE INVESTMENTS
• invest NOW
• wait-and-see
• OPPORTUNITY COST!

HIGH UNCERTAINTY HIGH OPPORTUNITY COST
wait-and-see POSITION
TO ENCOURAGE INVESTMENT - ALLOW FLEXIBILITY
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RISK MITIGATION OPTIONS - FLEXIBILITY

• TRAFFIC UNCERTAINTY
• Option to Disinvest
• Stage-based Construction
• Option to Expand
• PERFORMANCE UNCERTAINTY
• Performance-based Warranties

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OPTION TO DISINVEST

• OBJECTIVE To provide an option for investor to
  sell the facility to government (at the end of
  period T for a discount price) in case of
  unfavorable realization of traffic demand
• EFFECT Reduces irreversible sink cost of the
  investment
• EUROPEAN PUT OPTION

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STAGE-BASED CONSTRUCTION

• OBJECTIVE To provide an option for investor to
  engage in a multistage construction of the
  facility as traffic demand realizes
• EFFECT Reduces initial sink cost of the
  investment and allows for expansion in case of
  favorable realization of traffic demand (reduces
  opportunity cost)

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OPTION TO EXPAND

• OBJECTIVE To provide an option for investor to
  expand the facility (add lanes or add additional
  sections) in order to capitalize on opportunity
  when there is a favorable realization of traffic
  demand
• EFFECT Reduces of the opportunity costs

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PERFORMANCE-BASED WARRANTIES

• OBJECTIVE To provide an option for the investor
  to mitigate performance-related risks of the
  constructed facility to contractors
• EFFECT Reduces of the opportunity costs
• WARRANTY SERVICING COST
• (RISK COST)

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TYPE OF WARRANTIES

• Short-term Warranties
• Long-term Warranties
• Maintenance Warranties

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SYSTEM CHARATERIZATION
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PERFORMANCE UNCERTAINTY
DESIGN
CONSTRUCTION
MANAGEMENT
Design Equations
Material Properties Construction
Processes Construction Blunders
Utilization Natural Hazards Maintenance
Effects Rehabilitation Effects
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RiskPave QUANTIFICATION OF RISK COST
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SUMMARY

• To attract investment allow flexibility but
  understand risks.
• Adverse effects of high traffic uncertainty can
  managed using contract options.
• Adverse effects of high performance uncertainty
  can be managed using performance-based
  warranties.

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Thank you for your attention.
CONTACT INFOIvan Damnjanovic, Ph.D.Assistant
ProfessorZachary Department of Civil
EngineeringTexas AM UniversityPhone (512)
497-0709Email ddivan_at_gmail.com
ivand_at_mail.utexas.edu