Managing Traffic Demand Risk in Road Sector Public-Private Partnerships (PPPs) through the Use of Put and Call Option Agreements

Abstract

One of the major problems facing road sector PPPs is the management of traffic demand risk. The reasons for this are that traffic studies are notoriously unreliable and also the possibility that an alternative route or intermodal competition might affect demand. Therefore, it is usual for private sector investors to seek additional assurances from the government that they would recover their investments through the use of guarantees or other forms of protective contractual clauses that either enable the term of the concession or the revenue accruable to the concessionaire to adjust with demand realizations.  However, these protective clauses not only increase the contingent liability of the government but may also stall the infrastructural development of the country, increasing the likelihood of political risk eventuating. This article argues that the best way to resolve this issue is for parties to consider the use of put and call option agreements, which allow either party to exit the contract where economic or social realities demands it.

Key words: Public-Private Partnerships, Traffic Demand Risks, Road Sector, Put and Call Options