Research On Government Guarantees For Highway Public-Private Partnerships (PPP) Projects Based On Real Option Theory

With the accelerating development of the "One Belt,One Road" and the "Transportation Power" strategies,the demands for transportation infrastructure construction have increased significantly.Because PPP mode can alleviate the financial pressure of the government and improve the efficiency of projects operation,it has been widely used in the field of infrastructure construction in recent years,such as highway construction.The concession period of highway PPP projects is generally long,and there are many risk factors,which have great impact on the project and even lead to failure.In order to attract investment and ensure the smooth operation of the project,the government provides guarantees to share the project risks.Then,how should the government provide guarantees and how to determine the degree of guarantee? These problems are still the focus of theoretical research and practice.This paper focuses on the traffic demand risk,interest rate risk and inflation risk,and analyzes how the government should provide guarantees to share the project risks.First of all,from the perspective of the existing theoretical research,the policies for PPP projects and practical problems in highway PPP projects,this paper expounds that traffic demand risk,interest rate risk and inflation risk are the risks with high probability of occurrence in highway PPP projects,which have great impact on the project and need to be shared by government and private sectors.However,the current policies are not clear the specific methods and trigger conditions of guarantee,which is the reason why we choose these three risks as the research focus.After that,combined with the advantages of real option and the characteristics of highway PPP projects,it shows the applicability of real option method to study government guarantee in highway PPP projects;Then,in view of the impact of traffic demand risk on the project,this paper combines the improved binominal lattice method with Monte Carlo,takes the traffic volume as the underlying assest and the guarantee method as the option derivative,analyzes the characteristics of five guarantee modes that can alleviate the traffic demand risk,and establishes a comparison framework from two aspects: the financial impact of guarantee methods and the efficiency of resisting traffic demand risk.It is found that the guarantee with upper limit(such as revenue caps or traffic caps)is significantly better than that without.The combination of minimum traffic guarantee and traffic cap is relatively better,which can meet the financial expectations of government and private sectors,and has higher efficiency against traffic demand risk,so it is applicable to the most highway projects,especially the projects with large traffic volume fluctuation.Next,a model is proposed to optimize the risk allocation from the perspectives of a government and a private sector under the uncertainty of the total construction cost and traffic demand.The approach consists of three parts: describing the uncertainty factors associated with the project,pricing MTG and TC options,and optimizing the risk allocation by adjusting the upper and lower thresholds.Both construction cost and initial traffic are regarded as uncertainty factors during the construction period,while during the operation period the annual operating traffic is the uncertainty factor.These uncertainty factors are evaluated using a binominal pyramid and binominal tree,respectively,using Monte Carlo simulation.A riskneutral valuation is adopted to price the MTG and TC options.Finally,the importance of the risk is allocated by considering the risk tolerance of government and private sectors,so as to determine the combination of upper and lower thresholds to minimize the total risk of the project.After that,by considering the impact of interest rate risk on the cost of debt and revenue of projects,a government interest rate guarantee method is proposed to meet the interests of private sectors,government and lenders.The model aims to reduce the probability of risk occurrence and allocate the risk evenly to determine the threshold of interest rate guarantee,namely,the expected interest rate.The feasibility and rationality of this method are confirmed by case simulation analysis.It is found that this method can effectively reduce the probability of risk occurrence and the imbalance of risk allocation among the relevant parties of the project,making the probability of risk occurrence within the scope of the relevant departments,which let all parties have the motivation to participate in the project,and ensure the smooth operation of the project.Finally,analyzes the impact of inflation on project operating costs,traffic volume,real cash flow,nominal cash flow and net present value,combs the existing tariff adjustment methods used to hedge inflation risk,and points out the disadvantages of only relying on tariff adjustment to mitigate inflation risk.Based on this,puts forward the method of government’s share of inflation risk: revenue adjustment method.Considering the interests of private sectors,road users and government,establishes a scheme decision-making method of revenue adjustment proportion and tariff adjustment threshold based on Va R-TOPSIS multi-objective decision-making model.It is found that,under inflation,the NPV of the project is significantly lower than that of the project without inflation when other conditions remain unchanged,and the longer the concession period is,the greater the impact of inflation on the NPV of the project is.The government can share part of the inflation risk through revenue adjustment,which makes the net present value of the project increase significantly,and the loss of private sectors is effectively alleviated.Va R-TOPSIS multi-objective decision-making model can determine the combination scheme of revenue adjustment proportion and tariff adjustment threshold,which shows the model is feasible.This study is not only helpful for the government to use it to measure the risk of guarantee provided,and to make reasonable guarantee policies,but also helpful for the private sectors and investors to evaluate the project risks and make reasonable investment decisions.