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The Real Option Value of Renegotiation in Public-Private Partnerships

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Anton Setiawan

2 May 2016 – Milan, Italy – A new resource has been added to the PM World Library related to Public-Private Partnerships (PPPs). The new resource is titled “The Real Option Value of Renegotiation in Public-Private Partnership”. This paper was originally published in the Journal of Construction Engineering and Management.

PPP projects require high flexibility to share risks between a private party and the government. In other words, a PPP contract, both with incomplete and complete contracts, allows the renegotiation element to be included. Specifically, in incomplete PPP contracts, renegotiation is a mechanism to provide flexibility.

Taking an incomplete contract approach, this paper presents a theoretical real option and game model to assess the value of renegotiation in PPP projects. The case study shows that the renegotiation in PPP projects may have a substantial real option value, the higher the uncertainty, the higher the renegotiation value. The result of this research is helpful for both the private party and the government to assess the value they could gain from a renegotiation-allowed contract.

To access this new resource, go to the “Applications and Hot Topics” section of the library at, click on “Public-Private Partnerships”, and scroll down to desired resource. Must be a registered member and logged-in to access.