Valuation of Buyout Options in Comprehensive Development Agreements

Project Description

Public transportation budgets have struggled to keep up with increasing costs for highways and other infrastructure. In an innovative financing strategy called Comprehensive Development Agreements (CDAs), public agencies delegate to the private sector one or several responsibilities such as infrastructure design, construction, operation and maintenance. This project investigated the potential usefulness of strategic options, specifically a buyout option and a revenue-sharing option, in CDA contractual agreements.

The authors developed a consumer demand-based framework to model toll revenue flows, then used simulation methods to compute solutions to the strategic option values. The researchers found that both the buyout and the revenue-sharing options are, at least in the baseline case, very expensive, each being worth more than one-quarter of the value of the CDA itself.

The value of these options in a CDA is therefore not negligible. However, it may be possible to include options in a CDA at a lower cost by scaling down the option payoffs. In the case of a buyout option, this would involve increasing the buyout price such that the public sector would only buy back the CDA if toll revenues are much greater than anticipated. Likewise, the cost of a revenue-sharing option could be reduced by making the public sector's revenue share smaller, or alternatively by including revenue-sharing only for specific years, on a pre-determined basis, instead of all years in the agreement.

Link

Link: Final Report

For More Information