Study On The Water Price Of PPP Project Based On Real Option Theory

Water is the source of life. It is vital to the existence of mankind, as well as the development of the city. While, water supply is also finite, which means that rational water pricing is of great importance. Nowadays, public hearings for setting water tariff are endless all over the country. This, however, reflects the irrationality existed in our water pricing process at present. For instance, water price can hardly show the value of water resource, which gives rise to serious water waste; even the water supply enterprises could barely earn reasonable returns. Besides, the specific quality of water industry, being a Quasi-Public Product, contributes greatly to the development of PPP project in the industry. All this makes PPP project of significance in the studies of water pricing.PPP (Public-Private-Partnership), a new pattern of project financing, could ease the financial difficulties on government, and encourage private capital to move to infrastructure projects. PPP was much used in public utility fields. Yet, it has won increasing popularity among government and private investors in recent years. Basing on the Real Option Theory, this paper gives detailed analysis and evaluation on the uncertainty existed in the investment, construction and operation process of PPP project; this paper also tries to strike a balance between water supply enterprises looking for their own development and the public looking for obtaining high quality water with as little cost as possible, and to set up reasonable water price system.Specifically, this paper highlights the following aspects:firstly, detailed introduction to related theories on PPP and Real Option; secondly summary study on the setting and adjustment of concession price; thirdly, studies on the application of real option theory in large concessionary infrastructure projects, which, however, always shows the advantages of real option theory in large, complex projects with lots of uncertainties; last but not the least, an introduction to all relevant theories, and analysis on the rationality of the subject matter.Based on all of the above analysis, this paper demonstrates the construction of model; in the first place, it is the initialization of pricing model by analyzing all the influential factors, locating all the uncertainties, and then exploring the real option theory based on the uncertain factors; the next is to put forward the writer’s own fundamental theory, establish option pricing model, and the finalized the water pricing adjustment model; then by verification with cases, adding of real option to adjust concession prices, the model built is proved to be beneficial to the government, companies and franchising products users as a whole. The model, comparing to previous models, can indeed get better concession price range.