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Comparison of revenue guarantee programs in build-operation-transfer projects

Kohei Asao (Department of Civil Engineering, University of Tokyo, Tokyo, Japan)
Takashi Miyamoto (Department of Civil and Environmental Engineering, University of Yamanashi, Kofu, Japan)
Hironori Kato (Department of Civil Engineering, University of Tokyo, Tokyo, Japan)
Crispin Emmanuel D. Diaz (School of Urban and Regional Planning, University of the Philippines, Quezon City, Philippines)

Built Environment Project and Asset Management

ISSN: 2044-124X

Article publication date: 18 November 2013

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Abstract

Purpose

The purpose of this study is to compare revenue guarantee programs in a build-operation-transfer project (BOT). Two types of revenue guarantee programs are formulated: a payment-based annual revenue guarantee program and a period-extension-based cumulative revenue guarantee program.

Design/methodology/approach

Monte Carlo simulation is used to model the real option approach. This method is applied to a toll road project in the Philippines wherein the expected payoffs of the government and the concessionaire are simulated over an evaluation period that includes the concession period. The condition under which the expected government return in one program is equal to that in the other program is shown. These programs are then evaluated by incorporating a project risk factor into the project return.

Findings

The results show that the cumulative revenue guarantee program is preferred to the annual revenue guarantee program. However, the optimal solution depends on the government's return-risk preference.

Research limitations/implications

The simulation was implemented with limited cases of discrete input with respect to the cost-sharing parameter, the annual guarantee rate, and the guaranteed cumulative revenue. A simulation with more input values should be performed to achieve results that are more general and sophisticated.

Practical implications

It is indicated that the simple reduction of risk does not necessarily mean that government expected payoff will increase.

Originality/value

It is expected that this method contributes to the proper decisions made by the governments with respect to the choice of a revenue guarantee mechanism in BOT projects.

Keywords

Citation

Asao, K., Miyamoto, T., Kato, H. and Emmanuel D. Diaz, C. (2013), "Comparison of revenue guarantee programs in build-operation-transfer projects", Built Environment Project and Asset Management, Vol. 3 No. 2, pp. 214-227. https://doi.org/10.1108/BEPAM-04-2012-0020

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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