Valuation of the minimum revenue guarantee and the option to abandon in BOT infrastructure projects

TLDR

The study applies a real‑option framework that models the minimum revenue guarantee as a series of European put options and the abandon option as an investment option, combining them into a compound call‑option pricing formula and testing it on the Taiwan High‑Speed Rail Project. The valuation shows that while the minimum revenue guarantee and the abandon option each generate value, their combination reduces each other’s worth, and increasing the guarantee level can ultimately eliminate the abandon option’s value.

Abstract

The real option approach is used to value the minimum revenue guarantee (MRG) and the option to abandon in Build‐Operate‐Transfer infrastructure projects. The option to abandon is formulated under an investment option held by the concessionaire at contract signing and to expire before construction commencement. MRG is formulated as a series of European style put options in a single option pricing model. When combined with the option to abandon in the pre‐construction phase, MRG is reconstructed as a series of European style call options to develop a compound option pricing formula. The Taiwan High‐Speed Rail Project is chosen as a numerical case to apply the formulas. The results show both MRG and the option to abandon can create values. When MRG and the option to abandon are combined, they will counteract each other and their values will thus be reduced. Increasing the MRG level will decrease the value of the option to abandon, and, at a certain MRG level, the option to abandon will be rendered worthless.