Adoption of Real Options Valuation in Sub-Sahara Africa PPP Developments

Abstract

The objective of this paper is to apply ROA to the valuation of the option to abandon a toll road project. The research is aimed at providing an efficient technique for the valuation of real options in PPP projects in Africa. The research design is a cross sectional design. The derived model is a conceptual model based on binomial option pricing; it involves a stochastic movement i.e. the occurrence of tomorrow event is not determined by the past event. In relating this to the financial world, it can be said that the value for a given asset for a particular period is not always stationary for some periods to come. This model involves two probabilistic occurrences which are the success (p) and failure (q) stating that the value of an asset can either move upward or downward at a particular period of time. The paper shows that real options have a great potential in offering plausible explanations to existing relationships in project finance including strategic management in discovering new theories that will transform the field of PPP project in Africa as whole. In order to alleviate the problem of risk, public partners offer private partners numerous risk mitigation strategies such as MRG, TRC, and abandonment options, thus providing them flexibility to decide upon their investments during the project life. The ROA approach was introduced because traditional approaches to valuing investment opportunities do not consider managerial flexibility to revise decisions in the future.