A Model for Evaluating Option to Abandon (OTA) in Public-Private- Partnership (PPP) Building Projects

Build-operate-transfer (BOT) building projects have long-term financial commitment and are exposed to a significant degree of uncertainty and risk. One mechanism of support provided by governments to attract private investment in public infrastructure is the option to abandon (OTA) which gives the private investor the right to abandon a project that is no longer financially viable. OTA has been relatively under-researched in comparison to other support mechanisms like the minimum revenue guaranty because its value is predicated on the joint evolution of cost, revenue and time rather than a single guaranty threshold. Previous works have dealt with transportation and energy concessions. However, few computational tools have been developed specifically for the PPP-BOT building projects. Moreover, traditional discounted cash flow approaches assume investment decisions as static and are unable to capture the value of the managerial flexibility offered by OTA. This paper seeks to fill this gap by developing a model based on the real options theory for evaluating OTA in the early investment appraisal stage of PPP-BOT building projects. Mathematical equations and algorithms were developed and implemented into a structured Microsoft Excel spreadsheet tool based on the binomial method of Real Options Analysis (ROA). The model was applied to a hypothetical PPP-BOT building project with realistic cost and revenue parameters. The binomial model generated a positive Abandonment Option Value (AOV) of 1.86, which supported the decision to invest for the private investor. While, the traditional NPV method generated a negative value of -2.02, recommending no investment. This discrepancy suggests that NPV systematically underestimates projects with embedded flexibility, confirming the advantage of using ROA for PPP-BOT investment appraisal. Sensitivity analysis reveals that inflation rate, rental value, concession period and volatility have the highest effect on AOV and hence require careful attention. This model provides a practical spreadsheet-based tool for investment analysts, concession negotiators and public sector agencies to value abandonment provisions in the early stages