Real Options a Solution for Evaluating Public Private Partnerships

Effective evaluation of the financial value of PPP contracts is a very multifaceted task due to, the long development horizon of PP contracts, risk related to the evolutions of prices, effect on state revenue, loss of natural resources, natural disorder, cultural impact and uncertainty of the operating conditions and legal evolutions. The main approach to analyzing PPP contracts by public managers is the use of benefit/cost ratio (B/C), discounted cash flow (DCF) techniques such as the net present value (NPV) and internal rate of return (IRR). The main deficiency with these approaches is the failure to evaluate the managerial flexibility induced by uncertainty.