AN INTEGRATED REAL OPTION-RISK MANAGEMENT FRAMEWORK FOR PPP/PFI PROJECTS

The Public Private Partnership/Private Finance Initiative (PPP/PFI) schemes have made the private sector become a major participant involved in the development of infrastructure systems along with the government. Due to more integrated efforts among project participants and longer concession period, PPP/PFI projects are inherently more complex and risky. It is therefore very important to proactively manage the risks involved throughout the project life cycle. Conventional risk management strategies sometimes ignore managerial flexibility in the planning and execution process. This paper starts with a revised risk management framework which incorporates the real option concept. Following the presentation of the framework, a new risk classification is proposed which leads to different ways of structuring options in a project according to the stage of the project life cycle. Finally, the paper closes by discussing other issues concerning option modeling and negotiation.