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.

Get full access to this article

View all access options for this article.

References

ASCE. 2009 Report Card for America’s Infrastructure, 2009. http://www.asce.org/reportcard/2009/. Accessed July 28, 2016.

Brown

Are Public–Private Transactions the Future of Infrastructure Finance?

Public Works Management & Policy, Vol. 12, No. 1, 2007, pp. 320–324. https://doi.org/10.1177/1087724X07303680.

Ortiz

, Buxbaum

, and Little

. Protecting the Public Interest: Role of Long-Term Concession Agreements for Providing Transportation Infrastructure. Transportation Research Record: Journal of the Transportation Research Board, No. 2079, 2008, pp. 88–95. https://dx.doi.org/10.3141/2079-12.

Pagano

M. A.

, and Perry

. Financing Infrastructure in the 21st Century City. Public Works Management & Policy, Vol. 13, No. 1, 2008, pp. 22–38. https://doi.org/10.1177/1087724X08321015.

Han

Procedures and Resources for Analyses Related to Public–Private Partnerships. Thesis. University of Texas at Austin. 2013.

Yescombe

E. R.

Public–Private Partnerships: Principles of Policy and Finance. Butterworth-Heinemann, Elsevier Science, 2011.

Pantelias

A Methodological Framework for Probabilistic Evaluation of Financial Viability of Transportation Infrastructure Under Public Private Partnerships. Dissertation. University of Texas at Austin, 2009.

Grimsey

, and Lewis

. Public Private Partnerships: The Worldwide Revolution in Infrastructure Provision and Project Finance. Edward Elgar Publishing, 2007.

Wang

S. Q.

, Tiong

R. L.

, Ting

, and Ashley

. Evaluation and Management of Political Risks in China’s BOT Projects. Journal of Construction Engineering and Management, Vol. 126, No. 3, 2000, pp. 242–250. https://doi.org/10.1061/(ASCE)0733-9364(2000)126:3(242).

10.

Sachs

, Tiong

, and Wang

S. Q.

. Analysis of Political Risks and Opportunities in Public Private Partnerships (PPPs) in China and Selected Asian Countries: Survey Results. Chinese Management Studies, Vol. 1, No. 2, 2007, pp. 126–148. https://doi.org/10.1108/17506140710758026.

11.

Reinhardt

The Role of Private Investment in Meeting US Transportation Infrastructure Needs. Public Works Financing, Vol. 260, 2011, pp. 1–31.

12.

Cuttaree

Successes and Failures of PPP Projects. World Bank, Washington, D.C., 2008.

13.

Minnesota Department of Transportation. Online reference. Official Website of MnDOT, 2016. http://www.dot.state.mn.us/tfac/docs/PPP%20Failures.pdf. Accessed Nov. 4, 2016.

14.

Edwards

, and Bowen

. Risk Perception and Communication in Public–Private Partnerships. Public–Private Partnerships—Managing Risks and Opportunities, Wiley–Blackwell, 2003. https://doi.org/10.1002/9780470690703.ch4.

15.

Songer

A. D.

, Diekmann

, and Pecsok

R. S.

. Risk Analysis for Revenue Dependent Infrastructure Projects. Construction Management and Economics, Vol. 15, No. 4, 1997, pp. 377–382. https://doi.org/10.1080/014461997372935.

16.

Kalidindi

S. N.

, and Thomas

. Private Sector Participation Road Projects 15 in India: Assessment and Allocation of Critical Risks. In Public-Private Partnerships: Managing Risks and Opportunities, Wiley–Blackwell, 2008.

17.

Jeon

C. M.

, and Amekudzi

A. A.

. Risk Management for Public–Private Partnerships: Using Scenario Planning and Valuation Methods. Presented at 86th Annual Meeting of the Transportation Research Board, Washington, D.C., 2007.

18.

Asenova

, and Beck

. A Financial Perspective on Risk Management in Public–Private Partnership. In Public Private Partnerships: Managing Risks and Opportunities, Wiley–Blackwell, 2003, pp. 127–151.

19.

Xenidis

, and Angelides

. The Financial Risks in Build–Operate–Transfer Projects. Construction Management and Economics, Vol. 23, No. 4, 2005, pp. 431–441. https://doi.org/10.1080/01446190500041552.

20.

Kakimoto

, and Seneviratne

P. N.

. Investment Risk Analysis in Port Infrastructure Appraisal. Journal of Infrastructure Systems, Vol. 6, No. 4, 2000, pp. 123–129. https://doi.org/10.1061/(ASCE)1076-0342(2000)6:4(123).

21.

Keown

A. J.

, Martin

J. D.

, Petty

J. W.

, and Scott

D. F.

. Financial Management: Principles and Applications, 10th ed. Pearson Prentice Hall, Upper Saddle River, N.J., 2005.

22.

Lee

A Real Option Approach to Valuating Infrastructure Investments. Dissertation. KDI School of Public Policy and Management, 2011.

23.

Blank

F. F.

, Baidya

T. K.

, and Dias

M. A.

. Real Options in Public Private Partnership–Case of a Toll Road Concession. Presented at 13th Annual International Conference on Real Options, Portugal, Real Options Group, 2009.

24.

Rakić

, and Rad-enović

. Real Options Methodology in Public–Private Partnership Projects Valuation. Ekonomski Anali/Economic Annals, Vol. 59, No. 200, 2014.

25.

Vajdić

, and Damnjanović

. Risk Management in Public–Private Partnership Road Projects Using the Real Options Theory. International Symposium Engineering Management and Competitiveness, June 2011, pp. 24–25.

26.

Vandoros

, and Pantouvakis

. Using Real Options in Evaluating PPP/PFI Projects. In Symposium on Sustainability and Value Through Construction Procurement, 2006.

27.

, and Tiong

R. L.

. NPV-at-Risk Method in Infrastructure Project Investment Evaluation. Journal of Construction Engineering and Management, Vol. 126, No. 3, 2000, pp. 227–233. https://doi.org/10.1061/(ASCE)0733-9364(2000)126:3(227).

28.

Mohamed

, and McCowan

A. K.

. Modelling Project Investment Decisions under Uncertainty Using Possibility Theory. International Journal of Project Management, Vol. 19, No. 4, 2001, pp. 231–241. https://doi.org/10.1016/S0263-7863(99)00077-0.

29.

Jafarizadeh

, and Khorshid-Doust

R. R.

. A Method of Project Selection Based on Capital Asset Pricing Theories in a Framework of Mean–Semideviation Behavior. International Journal of Project Management, Vol. 26, No. 6, 2008, pp. 612–619. https://doi.org/10.1016/j.ijproman.2007.09.004.

30.

Pantelias

, and Zhang

. Methodological Framework for Evaluation of Financial Viability of Public–Private Partnerships: Investment Risk Approach. Journal of Infrastructure Systems, Vol. 16, No. 4, 2010, pp. 241–250. https://doi.org/10.1061/(ASCE)IS.1943-555X.0000015.

31.

Public–Private Infrastructure Advisory Facility (PPIAF). Online reference. Official website of PPIAF. 2015. http://www.ppiaf.org/node/83. Accessed July 28, 2016.

32.

Ridlehoover

Applying Monte Carlo Simulation and Risk Analysis to the Facility Location Problem. Engineering Economist, Vol. 49, No. 3, 2004, pp. 237–252. https://doi.org/10.1080/00137910490498942.

33.

Arnold

, and Yildiz

Ö.

. Economic Risk Analysis of Decentralized Renewable Energy Infrastructures–A Monte Carlo Simulation Approach. Renewable Energy, Vol. 77, 2015, pp. 227–239. https://doi.org/10.1016/j.renene.2014.11.059.

34.

da Silva Pereira

E. J. S.

, Pinho

J. T.

, Galhardo

M. A. B.

, and Macêdo

W. N.

. Methodology of Risk Analysis by Monte Carlo Method Applied to Power Generation with Renewable Energy. Renewable Energy, Vol. 69, 2014, pp. 347–355. https://doi.org/10.1016/j.renene.2014.03.054.

35.

Carrasco

I. J.

, and Chang

S.-Y.

. Random Monte Carlo Simulation Analysis and Risk Assessment for Ammonia Concentrations in Wastewater Effluent Disposal. Stochastic Environmental Research and Risk Assessment, Vol. 19, No. 2, 2005, pp. 134–145. https://doi.org/10.1007/s00477-004-0221-5.

36.

S. K.

, Wang

Z.-H.

, and Lo

S.-M.

. Compartment Fire Risk Analysis by Advanced Monte Carlo Simulation. Engineering Structures, Vol. 29, No. 9, 2007, pp. 2381–2390. https://doi.org/10.1016/j.engstruct.2006.11.024.

37.

Fender

, and Kiff

. CDO Rating Methodology: Some Thoughts on Model Risk and Its Implications. No. 163, BIS Working Papers from Bank for International Settlements, 2004. https://doi.org/10.2139/ssrn.623662.

38.

Seneviratne

P. N.

, and Ranasinghe

. Transportation Infrastructure Financing: Evaluation of Alternatives. Journal of Infrastructure Systems, Vol. 3, No. 3, 1997, pp. 111–118. https://doi.org/10.1061/(ASCE)1076-0342(1997)3:3(111).

39.

Javid

, and Seneviratne

P. N.

. Investment Risk Analysis in Airport Parking Facility Development. Journal of Construction Engineering and Management, Vol. 126, No. 4, 2000, pp. 298–305. https://doi.org/10.1061/(ASCE)0733-9364(2000)126:4(298).

40.

Public–Private Infrastructure Advisory Facility. Toolkit for Public–Private Partnership in Roads & Highways. http://www.ppiaf.org/ppiaf/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/index.html. Accessed July 28, 2016.

41.

KWTX. Farmers and Ranchers Rally Against Trans Texas Corridor Project, 2005.

42.

KXII. Trans Texas Corridor—Misconceptions. 2006. http://www.kxii.com/home/headlines/3381786.html. Accessed July 28, 2016.

43.

Taylor

Trans Texas Corridor Road Race. Journal of the New American, Vol. 23, No. 17, 2007.

44.

Skitmore

, and Ng

S. T.

. Analytical and Approximate Variance of Total Project Cost. Journal of Construction Engineering and Management, Vol. 128, No. 5, 2002, pp. 456–460. https://doi.org/10.1061/(ASCE)0733-9364(2002)128:5(456).

45.

Wright

, Hu

P. S.

, Young

, and Lu

. Variability in Traffic Monitoring Data, Vol. 8. Final summary report. Oak Ridge National Laboratory, U.S. Department of Energy, 1997.

46.

Aunet

Wisconsin’s Approach to Variation in Traffic Data. Paper presented at North American Travel Monitoring Exhibition and Conference, Middleton, Wis., 2000.

47.

Turner

S. M.

, Eisele

W. L.

, Benz

R. J.

, and Holdener

D. J.

. Travel Time Data Collection Handbook. No. FHWA-PL-98-035. FHWA, U.S. Department of Transportation, 1998.

48.

Jain

P. K.

, and Khan

. Basic Financial Management. Tata McGraw-Hill, 2005.

49.

Brigham

E. F.

, and Ehrhardt

M. C.

. Financial Management: Theory & Practice. Cengage Learning, 2013.

50.

Baker

K. R.

, and Trietsch

. Principles of Sequencing and Scheduling. John Wiley & Sons, 2013.

51.

Wall

D. M.

Distributions and Correlations in Monte Carlo Simulation. Construction Management and Economics, Vol. 15, No. 3, 1997, pp. 241–258. https://doi.org/10.1080/014461997372980.

52.

van Haastrecht

, and Pelsser

. Generic Pricing of FX, Inflation and Stock Options under Stochastic Interest Rates and Stochastic Volatility. Quantitative Finance, Vol. 11, No. 5, 2011, pp. 665–691. https://doi.org/10.1080/14697688.2010.504734.

53.

Piyatrapoomi

, Kumar

, and Weligamage

. Identification of Critical Input Variables for Risk-Based Cost Estimates for Road Maintenance and Rehabilitation. 4th International Conference on Maintenance and Rehabilitation of Pavements and Technological Control, Aug. 2005, Ulster, Northern Ireland.

54.

Miltersen

K. R.

, Sandmann

, and Sondermann

. Closed Form Solutions for Term Structure Derivatives with Log-normal Interest Rates. Journal of Finance, Vol. 52, No. 1, 1997, pp. 409–430. https://doi.org/10.1111/j.1540-6261.1997.tb03823.x.

55.

Marques

R. C.

, and Berg

. Risks, Contracts, and Private–Sector Participation in Infrastructure. Journal of Construction Engineering and Management, Vol. 137, No. 11, 2011, pp. 925–932. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000347.