Valuing Government Guarantees in Toll Road Projects

Abstract

The use of private capital in public infrastructure projects has been sought by many governments as a way to overcome budgetary constraints and foster economic growth. For some types of projects, this investment may require government participation in the form of project guarantees in order to reduce the risk to the private investor. We develop a real options model to assess the value of these guarantees, analyze the cost/benefit of each level of support, and propose alternatives to limit the exposure of the government while still maintaining the benefits to the private investor. We conclude that a minimum traffic guarantee combined with a cap on the total government outlays for the project offers the best combination of risk reduction for the private investor and liability limits for the government.