Decision-making Of Concession Period For PPP Pojects Of Water Supply Based On Real Option

In recent years, Public-Private Partnership (PPP) based on the agreement offranchise operation, which can effectively alleviate the shortage of funds of thegovernment, has become one of the most popular forms of project financing ofinfrastructure. The concession period of projects is the most important parameter inthe PPP mode, being that it is time dimension that can divide the interests both of thegovernment and investors. The reasonable of concession period directly concerns thesuccess of projects.Seeing that the traditional decision method of concession period based on NPVor game theory have more or less defects, in this paper, we use real optional theory tobuild the decision-making model of concession period for PPP projects of watersupply. Its main content is as follows:Above all, we have introduced the background and theories of concession periodresearch at home and abroad. Through the available results, we can summarize themain influence factors of the concession period in PPP projects of water supply. Weanalyze all kinds of existing risks, identify the real option types further, discuss thenegotiate section of concession period between the government and investors, andfinally build the decision-making model of concession period in PPP projects of watersupply based on real options in the general sense.On the basis of theories above, taking a PPP project of water supply around Hcity as a case, we analyze its uncertainties, and identify the real options. Consideringthe project company has the right of invest in extension which can be regarded as aexpand option, we build the decision-making model of concession period based onthe expand option. Then, cash flow statements of each year are made according to theoriginal data and the related parameter. Using Monte Carlo simulation method tocalculate the expand option value of the project. Compared the amount of Net AnnualValue with Expected Annual Income, we get the length of the concession period ofthe project under common conditions, and the one considering the expand optionvalue. The results show that, considering the value of expand option, the actual valueof the project has increased obviously, therefor, investors of the project can receive the prospective earnings in a relatively short.Through identification and analysis of the real option characteristics andnegotiate section of concession period in the water supply PPP projects, we build thedecision-making model of concession period of water supply based on real option.There are few researches of application of real option to water supply PPP projects atpresent. Our research can be a theoretical reference for the negotiations betweengovernment and investors on concession period. Meanwhile, real option theories areresearched and applied in the new ground of water supply industry.