Real options and game theoretic valuation, financing and tendering for investments on build-operate-transfer projects

Privatization has been recognized as an approach to solving the problem for governments in funding public works. The major technique applied in infrastructure privatization is non-recourse project financing, including the BOT (Build-Operate-Transfer) approach, a major scheme in infrastructure privatization practice. BOT is the marriage of public and private sector interests and is a win-win solution if successfully implemented. A BOT project has to demonstrate its financial and technical viability before it is undertaken. While it is relatively easy to demonstrate a projects technical viability, to evaluate a BOT project's financial viability is complex and challenging, mainly because of the uncertainties involved due to the scale, long concession period, and complexity of a BOT project. The problem of evaluating financial viability is further complicated by the fact that different parties in a BOT project have different perspectives. The developer will focus not only on the project profitability and cost, but also on the investment's side benefit, such as construction contract profit. For a government, since it is politically costly if a BOT project fails, the government's major concern falls on the project profitability and cost only. The two different perspectives may induce complicated interactions between the developer and government during the tendering or project procurement process.; Built upon modern option pricing theory and game theory, this thesis presents a quantitative BOT model that can dynamically evaluate the value of a BOT investment from the perspectives of the developer and government, and determine the BOT investment's developing decisions. By incorporating with signaling game analysis, the BOT model examines the BOT bidding strategy, valid signals of a developer's commitments and the effectiveness of the government BOT policies. Most importantly, the model considers the characteristics of a BOT project and analyzes the BOT problems more realistically. The model may provide the potential major BOT developers/contractors and other relevant participants a new perspective in the decision making process.