Demand risk and contractual abandonment: a real options analysis of the BR-381/262/MG/ES highways concession
DOI:
https://doi.org/10.14295/transportes.v29i4.2371Keywords:
Real options, Highway concessions, Early abandonment, Demand riskAbstract
This article assesses the relationship between demand risk and contractual abandonment of highway concessions according to recent changes in Brazilian regulation. Contractual abandonment is an existent tacit managerial flexibility in contracts of this type and can add value to the project since the concessionaire, according to the law, must be compensated for the investments made, regardless of the termination origin. The real options theory was applied to model the abandonment option of the BR-381-262/MG/ES highway concession. Based on the expected cash flow for the project, currently in the bidding process, and historical data on demand risk for similar projects, the binomial model was applied to price the option. Under those conditions, it was found that the option adds substantial value to the project, about R$ 2.6 billion. This work contributes to a better understanding of the relationships among uncertainties, the abandonment of the project and the added value. It is important to have prior knowledge on the issue of contractual abandonment in order to define optimal levels of incentives and indemnities for provision purposes.
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