Monte Carlo Simulation–Based Assessment of Risks Associated with Public–Private Partnership Investments in Toll Highway Infrastructure

Abstract

The demands for delivering highway services keep growing worldwide. However, funding from government and public agencies alone cannot cover the capital needed to operate and maintain existing highway systems, much less to construct new ones. Public–private partnerships (PPPs) are an innovative funding mechanism for highway agencies to use private capital and expertise in transportation infrastructure projects so as to increase funding options to bridge the budget gap. Even though parties involved in PPPs take different roles and responsibilities, there are still risks taken or shared by the public and private sectors. In particular, assessing risks associated with the potential returns of investments is of great importance to the private and public sectors. This paper presents a methodological framework for assessing the investment risks of PPP toll highway projects, which may help decision makers. The financial viability associated with the components of a project is considered and analyzed, and the Monte Carlo simulation technique is applied to evaluate the overall project risks. Finally, a numerical case study is conducted to demonstrate the application of the proposed method. The risk analysis provides statistical distribution of investment returns for the project under analysis, which will supply decision makers with direct information to estimate the project’s overall financial risks and develop corresponding risk control measures. The risk simulation results are interpreted so that quantitative information can be provided to agencies to establish investment decision criteria.

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