Revenue Risk Management for P3 Highway Projects: Implementation of Revenue Guarantees in the U.S. Market

The Public-Private Partnership (P3 or PPP) model has been proposed as an alternative deliverysystem to address funding shortage problems associated with large-scale projects. Appropriately allocating and managing risks among project participants is critically important for a P3 projectâs success. This thesis focuses on one of the tools to manage revenue risk, therevenue guarantee, where a guarantor compensates a concessionaire with a predetermined amount of revenue in the event of a revenue shortfall. It is a form of real optionâspecifically a put option if a premium is paid for the downside protection or a collar option if potential upsiderevenue is traded for the protection.Previous research has explored the purpose and valuation of revenue guarantee options. Thisstudy focuses on the feasibility of utilizing a guarantee in US P3 highway projects throughpreparatory study and field investigation. In the preparatory phase, the work examines existingrevenue risk management methods and how revenue guarantee options supplement them while alsoproposing an implementation framework. Additionally, it discusses a new option type,a collar option, including its concept, benefits, applicability, and valuation. In the field investigation phase, the preparatory work is synthesized into interview protocols that are used to seek market perspectives on revenue risks and revenue guarantee feasibility. Twenty people representing government officials, concessionaires, financial advisors and lending institutions were interviewed.The interview results indicated that a revenue guarantee shows promise as a viable tool, and thegovernment should be willing to provide one. The decision to utilize a revenue guaranteedepends on funding method selection, a public agencyâs institutional capacity, and theeffectiveness of alternative risk mitigation approaches. Suggestions for implementation, such as applicable projects and a guarantee triggering criterion, are also provided.