REAL OPTIONS IN PUBLIC-PRIVATE PARTNERSHIP PROJECTS: AN OVERVIEW

Risk management in public-private partnership projects is based on risk-sharing mechanisms between public and private partners. These mechanisms create flexibility to better manage uncertainty and limit opportunistic reactions. Nevertheless, several projects around the world show that if this flexibility is not properly assessed, it may not be sufficiently attractive for the private partner or may constitute a heavy tax burden for the public authority and therefore an unjustified additional cost for the end consumer. The theory of real options is well suited for assessing flexibility despite some difficulty in its implementation and the diversity of approaches applied. This article is an overview of the most important risk-sharing mechanisms and real option approaches used to evaluate public-private partnership projects. It concludes with a critical analysis of the mechanisms and resolution approaches used for their evaluation and suggestions for new research directions.