Requirement Risk Sharing Mechanism Research On Water Supply PPP Projects Based On Real Option

Water is the source of life.Urban water supply projects are closely connected with people's livelihood.In recent years,the South-to-North Water Diversion Project was established to solve the time-space allocation of water resources and alleviate the water demand of many cities along the line.However,because of the huge cost of construction in water supply projects,the government needs to bring social invest in.The government and private department sign franchise agreements and set up the coalition project company,in order to relieve financial pressure while exerting the private department's advantages,such as the financial strength,technological innovation,service quality and operation management.Water Supply PPP projects are characterized by huge investment,long construction period,extensive coverage,complex situations and many uncertainties.Sharing the risks and profits throughout the project's lifecycle are the keys to the success of projects.In practice,in order to attract investment from society,urban water supply PPP projects often set a unilateral water supply guarantee.The government give subsidies to private department when the demand is under the guarantee.However,as the project continuing,social and economic development makes water demand growing.The excess profit of the projects should be regarded as another demand risk,which should be shared by the way of sharing the profit.This paper puts forward that a reasonable upper and lower limits of water supply should be set to determine when the government give subsidies or share the profit for the purpose of undertaking risks separately.This is called water supply bilateral guarantee mechanism.The quantity of water supply is uncertain,so that the benefit of urban water supply PPP projects have the characteristics of real options.Therefore,using the idea of real option,the subsidies and profit sharing concerned with revenue can be taken as a group of upward and downward options.The value of the options can be computed by the improved Black-Scholes real-option pricing model.Taking the dynamic drifting feature into account,the water supply bilateral guarantee risk-sharing model is set up combined with examples of analysis and discussion.This model brings the idea of real options into the risk sharing of PPP projects and provides new ideas for the cooperation and management.With the guarantee of the government's bilateral water supply,a profit-sharing model is needed to be established.A control decision model of the sum of the government's profit and the net benefit of consumers is established.Based on the reasonable profit-sharing,the optimal effort of the private department and the optimal distribution of profit are researched.Furthermore,analysis and discussion were conducted on the upper and lower limits of water supply and the reasonable range of transfer payment ratio.The research results can provide some basis for the design,implementation and renegotiation of the PPP projects' franchise contract,and provide reference for the successful approach to the projects.