An Evaluation of Real Options Approach in Public-Private Partnerships

Public-private partnerships (PPPs) projects often face complex decisions with incomplete information, due to long contractual duration and involvement of multiple parties having conflict interests. Real options analysis (ROA), as an effective tool for strategic risk management, has potential to promote better PPPs realization. Although real options (ROs) have been used in PPPs projects to model incentives such as subsides and guarantees, forms of PPPs are diverse. Each form has a unique contractual process, a different degree of private sector involvement, and sources of uncertainty. No RO model is universally effective for all forms of PPPs. This paper assesses the contractual features and risks of major PPP forms and accordingly, proposes a general framework of selecting incentive-type RO models for PPPs projects.