Research On The Early-termination Compensation Of Public-private-partnership Projects Based On Real Option Theory

Recently,Public-private-partnership(PPP)is emerging and has been widely applied in various fields.It can bring social capitals from private sectors,which has a wide range of sources,into public infrastructure and services provision fields.Also,it effectively alleviates the financial pressure of government department and enhances the standard and efficiency of public services provision.Simultaneously,according to the Chinese 13 th Five-Year Plan enacted in 2016,governments at all levels are encouraged to continue the innovation in public infrastructure investment and financing system,improve and perfect the exit mechanism of private sector,and broaden the application areas of PPP in further time.However,due to the large amount of investment,long construction and operation period,complex process and strong uncertainty that generally appeared in PPP projects,many problems often occur,such as policy changes,decision-making mistakes,improper project demand and income forecasting,and so on.All these troubles can lead to conflicts among government,the private sector and public interest,and then cause the early termination of the PPP project.The compensation of early-termination PPP project is both an important issue in practice and a theoretical problem that needs to be studied before decision-making.Based on this,this study,after comparing the characteristics of different early termination PPP projects and the shortcomings of traditional NPV(Net Present Value)method in calculating the termination compensation,introduces the idea of real options and puts the option pricing on the uncertainty of earnings that caused by the uncertain future demand of the project.And then,the upper and lower limits of future income or market value of the project under the equal government guarantees related to revenues can be obtained.The compensation decision model in four different situations is constructed,and an example case is presented to validate and illustrate the applicability and effectiveness of above models.Firstly,the concept of early termination of PPP project is well defined,and the main research progress and decision-making method of compensation assessment of above projects are summarized and concluded by means of literature research.Based on the main research achievements of domestic and foreign scholars,both in the field of PPP and real options theory,particularly,this thesis also has analyzed the possibility of applying real option method in the field of PPP early termination research.Secondly,a comprehensive framework for evaluating the compensation of early-terminated PPP projects is presented.On the basis of literature analysis and multi-case study,this paper has comprehensively analyzed and clearly defined the major process,key influencing factors,the responsibility sharing and compensation contents under the different situations.Furthermore,the dominating influencing factors for the decision of early termination compensation thus are obtained,which lay the foundation for the construction of relevant models.Thirdly,real option theory is introduced.Real option pricing models are built based on the uncertainty of future product needs in the early terminated PPP project.To keep the society fair on burden-sharing,the option premium of the call option and put option under the minimum and maximum revenue government guarantees should be equivalent.And on the basis of above condition,dynamic value of future benefits or dynamic market value of the project can be calculated,although the market demand is uncertain.After that,different decision models of early-termination compensation are constructed according to four different termination situations and their corresponding compensation contents.Finally,this paper provides an example case,an early terminated toll highway PPP project which failed due to government responsibility,to validate the applicability of the corresponding compensation evaluation models it proposed.Monte Carlo Simulation method is used to model the uncertainty of traffic demand in this project.As a consequence,it finds that the models are necessary and can provide a reasonable basis for both sectors reference in calculating the amount of compensation paid to Project Company,when the project is failed and government decide to buy-back.