Entry decision for unsolicited Build-Operate-Transfer (BOT) highway projects: Real options approach

Build-Operate-Transfer (BOT) delivery is becoming prevalent because governments are seeking to leverage their limited resources while the private sector is seeking to expand investment opportunities. One of the main characteristics that Build-Operate-Transfer (BOT) delivery method is different from other delivery methods is that governments allow unsolicited proposals by private sector. However, there is little fundamental research on systematic approaches to unsolicited BOT proposals. Research is critical because unsolicited proposals should be viewed from a different perspective than the traditionally solicited BOT projects. In addition, there is no published exploration into decision processes regarding the preparation of the proposal by a promoter.; This research starts with the development of a sequential decision process for an unsolicited BOT project. This sequential decision process consists of three stages: where, what, and when decisions. The where decision should consider the concession policy, environment, local capital market, and country risks. The what decision should consider project type, project content and project length. Finally, the when decision should be carefully made, especially when a promoter considers submitting a proposal to the government.; The main goal of this research is to develop and suggest timing decision models for unsolicited BOT projects, which can provide promoters flexibility to enter BOT markets. So far, research on the entry decision in the BOT area has been focused on "whether" to engage in BOT projects, or in other words, the go/no-go decision. The focus of this research is on " when," or in other words, how to incorporate timing into the decision. In the course of preparing a BOT project investment, providing flexibility in the entry decision benefits private companies. It provides proposers an opportunity to rethink about the proposal decision process and provide robust methods that will lead to a better decision.; In the case of unsolicited BOT projects, two timing decisions are needed in both pre-investment stage and construction stage. A promoter should consider appropriate entry timing when it plans to propose an unsolicited BOT proposal and also consider the investment timing when it invests its money in this project if it is designated as a potential concessionaire. The proposal or investment should be deferred if the benefit of waiting is greater than the cost of waiting, as ups and downs can give more chances to earn money in the financial market. In order to evaluate the value of these entry decisions, real options approach is applied, since the decision of when to propose/invest in an unsolicited BOT project is similar to the exercise of financial call option.; In this research, timing decision models (TDMs) by two different real options approaches are developed: (1) Black's approximation and (2) simulation. TDM by Black's approximation is a simple, closed-form technique in deciding optimal investment timing that can be applied to an infrastructure project. This approach offers sufficient insights to the purpose of the model which provides flexibility to the entry decision although it has a few deficiencies or assumptions. TDM by the simulation approach is a powerful and flexible method. This approach uses market risks as dependent variables which can be assumed to follow the risk-neutral stochastic process. In addition, this is much flexible since multiple variables can be applied at the same time and can be easily modified to accommodate different underlying stochastic processes.; The models are demonstrated through both an illustrative case study and an application to the Incheon International Airport Highway (IIAH) project. The results show that the TDM can evaluate the value of deferment option and can give a promoter an opportunity to consider an appropriate timing flexibility. Various scenarios are developed to test the consistency and robustness of the developed...