On dynamic Minimum Revenue Guarantees in Public Private Partnerships with flexible durations

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Public Private Partnerships have been gaining momentum during the last decades as an effective tool for public service delivery. The inefficiency in accurately forecasting the demand and the high incidence of renegotiation are still a matter of concern which undermines the model success. The Least present value auction mechanism can be a solution to neutralize the incidence of the demand risk and renegotiation. The duration of the contract is left flexible and the contract ends once the private operator gets an initially agreed upon value of discounted revenue. This scheme does not, however, provide an efficient mitigation against the potential financial downsides that the project can encounter. This work investigates the incorporation of a minimum revenue guarantee under a Least Present Value Auction mechanism which should improve its hedging power. The guarantee is presented as a multiple exercise Bermudan real option with a variable finite bounded maturity.

Author(s):

Abderrahim Ben Jazia    
Aix-Marseille University, CERGAM
France