Advancing Investment Valuation Models for Infrastructure Systems
For the past five years, we have worked to create novel real options analysis models to evaluate investments in transportation infrastructure systems that are developed through innovative funding sources and alternative financing mechanisms, e.g., public-private partnerships (PPPs). There is a considerable amount of evidence indicating that the improper consideration of uncertainty about traffic demand, funding, and revenue sources in financial valuation of transportation projects contributes to the failure of several PPP projects around the nation and around the world. From the theoretical standpoint, this problem is primarily due to the inherent limitation of conventional financial analysis methods and most notably the net present value (NPV) approach, which is typically used in investment valuation of transportation projects. They created investment valuation models to: (a) explicitly price risk and revenue sharing options in PPP projects; and (b) determine the correct market value of flexibility embedded in multistage highway development strategy.
Our research has made significant scholarly contributions in the academic domain of infrastructure asset valuation. The findings of these new valuation models were presented in 2 journal articles and several peer-reviewed conference papers. “A Risk-neutral Pricing Approach for Evaluating BOT Highway Projects with Government Minimum Revenue Guarantee Options” was published in the Journal of Construction Engineering and Management. “A Real Options Model to Evaluate Toll Highway Project under Two-Phase Development Plan” was published in the Built Environment Project and Asset Management Journal. This paper is the 2012 Highly Commended Award Winner at the Emerald Literati Network Awards for Excellence. We were invited by the Transportation Research Board (TRB) of the National Academies to present their real options work “Optimal Timing of Investment in Highway Expansion” in the TRB 91st Annual Meeting in January 2012. We collaborated with Dr. Wang fromTianjin University in China on this paper.
The real options models have several prominent attributes that make them different from the previous models. We used a market-based option pricing approach called Risk-Neutral Valuation Method to determine correct market value of risk and revenue options. Unlike other models, this approach treats traffic demand risk internally and adjusts for the traffic market risk in valuation processes. We described a procedure for characterizing public and private sector’s financial risk profiles in a transportation project. The private sector can use their valuation models to make better project entry decisions considering the level of government support. The government can use these models to identify appropriate support level to encourage private investments without comprising its future budgetary strength.
Our research in innovative project delivery systems and alternative financing mechanisms is a cross-over to industry with major practical applications. We have been working extensively with State Departments of Transportation (State DOTs) especially Georgia Department of Transportation (GDOT) to elevate the state of practice in innovative project delivery systems. He was the principal investigator (PI) on two completed research projects for GDOT, $172,242 research project on “Recommended Guide for Next Generation of Transportation Design Build Procurement and Contracting in the State of Georgia” and $199,976 research project on “How Can Innovative Project Delivery Systems Improve GDOT’s Overall Efficiency in Transportation Project Delivery?”. The former research project was highly acclaimed at the national level. It was the recipient of 2013 High Value Research “Sweet Sixteen” Award by the Value of Research Task Force of the American Association of State Highway and Transportation Officials (AASHTO). Our project was selected out of 120 submitted projects as one of the top sixteen high impact research projects that provide transportation excellence through research. Considering the successful impact of these two research projects, GDOT recently awarded us two research grants to continue working on innovative project delivery, $206,164 research project “Innovative Project Delivery Using Alternative Financing Mechanisms: Assessment of Benefits, Costs, and Risks”, and $499,994 research project “Streamlining Project Delivery through Risk Analysis”. On the later project, we are collaborating with two professors in the School of Public Policy at Georgia Tech: Drs. Kingsley and Rogers.
Our scholarly and research activities in infrastructure asset valuation have gained considerable attention in research and professional communities that have brought several recognitions at the national level. For instance in 2012, Dr. Ashuri was invited by the American Society of Civil Engineers (ASCE) to work with the Industry Leaders Council (ILC) to develop an Infrastructure Business and Financial Model Toolkit. He selected to serve on Strategic Highway Research Program (SHRP 2) Expert Task Group for Project C12 “Effect of Public-Private Partnerships and Non-Traditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision-Making”. Dr. Ashuri and his team worked to advance the state of practice in financial decision-making of PPP highway projects. He was selected by the Transportation Research Board (TRB) of the National Academies as an Expert Task Group (ETG) Member of the National Cooperative Highway Research Program (NCHRP) 15-46 “Design-Management Guide for Design-Build and Construction Manager/General Contractor Projects”. Advancing investment valuation of infrastructure assets will remain the trajectory of our scholarship over the next several years. Currently we are working on our NSF CAREER proposal aiming to enhance the state of knowledge in investment valuation of infrastructure systems.