Revenue Guarantees in PPPs: A Win-Win Option-Based Model

This study updates and improves the model previously developed by Carbonara et al. by developing a real option-based model that supports the decision maker in finding both the level of minimum revenue guaranteed by government and the upper level of revenue that ensures a win-win condition for both parties, in the sense that these levels should be able to protect the interests of the private investor and the government simultaneously and to assure that the interest of the two parties are satisfied in a balanced way. The model uses the Monte Carlo simulation in order to take into account the uncertainty. The model is a useful tool in supporting (a) the government's decision making process on assessing values of public subsidies needed to make the project attractive to private investors and (b) both public and private parties during the negotiation in finding the fair values of the revenue cap and ceiling.