Baabak Ashuri

Risk-Neutral Pricing Approach for Evaluating BOT Highway Projects with Government Minimum Revenue Guarantee Options

AbstractBuild-operate-transfer (BOT) is a public-private partnership (PPP) project delivery system for the financing, development, and operations of highway projects around the world. Uncertainty about future traffic demands is one of the most important risk factors in the operations phase of a BOT project. There is a considerable amount of evidence indicating that the improper consideration of this uncertainty contributes to the financial failure of BOT projects. The inherent limitation of conventional economic analysis methods contributes to this uncertainty; most notably the net present value (NPV) approach that is typically used in the economic valuation of BOT projects. In addition, the NPV approach is insufficient to determine the correct market value of minimum revenue guarantee (MRG) options. The government offers MRG options to the concessionaire as a revenue risk-sharing strategy in BOT projects. The authors apply the real options theory from finance/decision science to explicitly price MRG opti...

Time Series Analysis of ENR Construction Cost Index

Every month, Engineering News-Record (ENR) publishes the construction cost index (CCI), which is a weighted aggregate index of the 20-city average prices of construction activities. Although CCI increases over the long term, it is subject to considerable short-term variations, which make it problematic for cost estimators to prepare accurate bids for contractors or engineering estimates for owner organizations. The ability to predict construction cost trends can result in more-accurate bids and avoid under- or overestimation. This paper summarizes and compares the applicability and predictability of various univariate time series approach for in-sample and out-of-sample forecastings of CCI. It is shown that the seasonal autoregressive integrated moving-average model is the most-accurate time series approach for in-sample forecasting of CCI, while the Holt-Winters exponential smoothing model is the most-accurate time series approach for out-of-sample forecasting of CCI. It is also shown that several time s...

A novel method for forecasting time series based on fuzzy logic and visibility graph

Time series attracts much attention for its remarkable forecasting potential. This paper discusses how fuzzy logic improves accuracy when forecasting time series using visibility graph and presents a novel method to make more accurate predictions. In the proposed method, historical data is firstly converted into a visibility graph. Then, the strategy of link prediction is utilized to preliminarily forecast the future data. Eventually, the future data is revised based on fuzzy logic. To demonstrate the performance, the proposed method is applied to forecast Construction Cost Index, Taiwan Stock Index and student enrollments. The results show that fuzzy logic is able to improve the accuracy by designing appropriate fuzzy rules. In addition, through comparison, it is proved that our method has high flexibility and predictability. It is expected that our work will not only make contributions to the theoretical study of time series forecasting, but also be beneficial to practical areas such as economy and engineering by providing more accurate predictions.

Empirical tests for identifying leading indicators of ENR Construction Cost Index

Engineering News-Record (ENR) publishes its Construction Cost Index (CCI) monthly. CCI is the weighted average price of construction activities in 20 United States (US) cities. CCI has widely been used for cost estimation, bid preparation and investment planning. Cost estimators and investment planners are not only interested in the current CCI, but also are interested in forecasting changes in CCI trends. However, CCI is subject to significant variations that are difficult to predict. An important step towards forecasting CCI trends is to identify its leading indicators. The research objective is to identify the leading indicators of CCI using empirical tests. The results of Granger causality tests show that consumer price index, crude oil price, producer price index, GDP, employment levels in construction, number of building permits, number of housing starts and money supply are the leading indicators of CCI. The results of Johansen’s cointegration tests show that money supply and crude oil price are the leading indicators with long-term relationships with CCI. These findings contribute to the body of knowledge in CCI forecasting. CCI can be predicted more accurately using its leading indicators. Cost estimators and capital project planners can benefit from better forecasting through reduction in uncertainty about future construction costs.

A real options framework to evaluate investments in toll road projects delivered under the two‐phase development strategy

Purpose – This paper aims to present a financial valuation framework based on the real options theory to evaluate investments in toll road projects delivered under the two‐phase development plan.Design/methodology/approach – The approach is based on applying the real options theory to evaluate investments in toll road projects. In particular, the risk‐neutral valuation method is used for pricing flexibility embedded in the two‐phase development plan. Risk‐neutral binomial lattice is used to model traffic uncertainty and to find the optimal time for the toll road expansion. Probabilistic life cycle cost and revenue analysis is conducted to characterize the investors financial risk profile and determine the flexibility value of the expansion option.Findings – The flexible, two‐phase development plan can improve the investors financial risk profile in the toll road project through limiting the downside risk of overinvestment (i.e. decreasing the probability of investment loss) and increasing the expected i...

Investment Valuation Model for Renewable Energy Systems in Buildings

AbstractTransformative technologies for producing renewable energy have promising features for substantial reductions in carbon emissions and environmental footprints of the building sector. Investments in renewable energy systems require substantial implementation costs followed by a long period of recovering the invested capital through savings in utilities bills. Favorable timing of renewable energy system implementation can reduce capital expenses and enhance returns on investments. An appropriate investment valuation method is needed to identify the appropriate time to implement any given renewable energy system and to find the values of properly scheduled investments. Real options analysis provides the ability to cope with investment timing under uncertainty. However, current real options models are theoretically limited in the context of decision making about investments in building energy improvements. In this paper, the writers address the theoretical limitations of current real options models an...

State of Private Financing in Development of Highway Projects in the United States

The U.S. Department of Transportation and state DOTs across the nation seek private investments to leverage their shrinking financial resources and fulfill their growing funding shortfalls. The decision to involve the private sector in financing highway projects varies from state to state in several aspects. State DOTs pursue a wide range of objectives when they utilize private financing for highway projects. State DOTs utilize different procurement methods for project financing and use different approaches to evaluate financial qualifications and proposals. State DOTs face different kinds of financial, political, legal, management, and organizational issues affecting their abilities to attract private investments in highway projects. Various strategies have been utilized by state DOTs to facilitate adoption of private financing in their highway projects. Considering variations in current practices of private financing among state DOTs, there is a need for a study to enhance the state of knowledge about current practices of private financing among different state DOTs. The major objective of this study is to capture the underpinnings of private financing as utilized by state DOTs in development of highway projects. A national survey was developed and sent to transportation officials in 50 state DOTs. Results of this survey were examined and analyzed in detail. The results of the survey indicate that only some state DOTs have established mature private financing programs, and private financing will remain a viable alternative for highway project development in these state DOTs. It was found out that state DOTs typically think of private financing more as an instrument to bridge their funding gaps and financing shortfalls and less as an innovative solution to gain life cycle cost efficiencies, encourage competition, and transfer critical project risks to the private sector. Stringent organizational policies and inefficient project development processes were found to be among the major concerns of state DOTs in effective utilization of private financing. Statutory limitations and inefficient frameworks for project financing and procurement method in the public sector were recognized as major barriers for private sector involvement in financing highway projects. Legislative flexibility for engaging private financing and commitment of key project stakeholders and top state officials were identified as critical factors that significantly enhance the adoption of private financing in highway project development.

Price Adjustment Clauses and Submitted Bid Prices for Major Asphalt Line Items in Highway Projects

AbstractUnprecedented uncertainty in the price of asphalt cement over the last decade has been a source of major concern for state departments of transportation (state DOTs) and highway contractors. This uncertainty may lead to price speculation and inflated bid prices by highway contractors, in order to secure their financial positions against possible rising prices. One of the most common risk-sharing strategies widely used by transportation agencies is price adjustment clauses (PACs) that shift potential upside and downside risk of material prices from contractors to owners. PACs are aimed at eliminating extra risk premiums and therefore reducing contractors’ submitted bid prices. However, the actual effect of offering PACs on submitted bid prices for major asphalt line items has not been empirically studied. The research objective of this paper is to examine the effect of PACs offered by state DOTs on the variations of contractors’ submitted bid prices for major asphalt line items. Data on 841 transpo...

FORECASTING ENR CONSTRUCTION COST INDEX: A TIME SERIES ANALYSIS APPROACH

Every month, Engineering News-Record (ENR) publishes Construction Cost Index (CCI), which is a weighted-aggregate index of the 20-city average prices of construction activities. Although CCI is increasing in the long-term, it is subject to considerable short-term variations, which make it problematic for cost estimators to prepare accurate estimates. The ability to predict CCI can result in more-accurate bids and avoid under- or over-estimation. We conduct time series analysis and develop a CCI forecasting model based on the Seasonal Auto-Regressive Integrated MovingAverage (SARIMA) methodology. SARIMA investigates the underlying characteristics of the CCI data and makes systematic forecasts. The predictability of the developed SARIMA model is better than the predictability of the ENR subject matter experts’ forecasts. The developed forecasting model can be used to prepare more-accurate estimates for contractors and budgets for owners and reduce construction costs by better-timed project execution.

A cost-benefit case for RFID implementation in hospitals: adapting to industry reform

Purpose – The purpose of this paper is to analyze a conceptual framework to identify significant benefit and cost attributes of a radio-frequency identification (RFID) system for asset tracking in healthcare facilities. Sources of value function for RFID in healthcare are categorized according to major improvement. Several cost functions are proposed to measure aspects of automated tracking implementation. Design/methodology/approach – The four phases of problem definition, literature identification, assessment and analysis were used to begin the research. A cost–benefit analysis (CBA) was completed to identify the factors within healthcare with major benefits, and finally, a recommended group of items were identified to track with the CBA. Findings – RFID to manage mobile devices increases the utilization rate, decreases annual spending, allows withdrawal of funds for underutilized assets and establishes confidence that equipment is readily available when needed. These benefits provide improved staff productivity, quicker patient turnover, higher quality of care and more cost savings. Real-time location system technologies allow hospitals to be prepared for emergencies requiring the immediate use of medical devices without delay and allow staff to determine the status, condition and location of essential equipment, leading to a decrease in patient wait time. Additional improvements were also found. Originality/value – The transition from pay-for-service to pay-for-performance is taking place in an industry hampered by rising costs and limited available resources. Healthcare expenditures are estimated to grow dramatically, and various factors contribute to rising expenses, including an aging population and increased chronic conditions resulting in higher demand for care, poor quality and operational inefficiencies. Therefore, understanding benefits of new technology use like RFID is critical for improvement and efficiency in healthcare.