The Value of Flexibility in the Italian Water Service Sector: A Real Option Analysis

We analyze the optimal investment strategy of a monopolist which has subscribed a concession contract to provide a public utility, i.e. water service. We present a strategic model in which a monopolist chooses both the timing of the investment and the capacity. We focus not only on the value of the immediate investment, but rather on the value of the investment opportunity. We then extend the model to two interdependent projects, where investing in the first project provides the opportunity to acquire the benefits of the new investment by making a new outlay. We show that flexibility to defer an investment may generate, ceteris paribus, additional profits which may induce positive effects in terms of policy and consumers surplus.Irreversible investment, Flexibility to defer, Capacity expansion choice

"It Is Never too late": Optimal Penalty for Investment Delay in Public Procurement Contracts

We provide a general framework in which to determine the optimal penalty fee inducing the contractor to respect the contracted delivery date in public procurement contracts (PPCs). We do this by developing a real option model that enables us to investigate the contractor’s value of investment timing flexibility which the penalty rule - de facto - introduces. We then apply this setting in order to evaluate the range of penalty fees in the Italian legislation on PPCs. According to our calibration analysis, there is no evidence that the substantial delays recorded in the execution times of Italian PPCs are due to incorrectly set penalty fees. This result opens the way for other explanations of delays in Italian PPCs: specifically, we extend our model to investigate the probability of enforcing a penalty which we assume negatively affected by the "quality" of the judicial system and the discretionality of the court in voiding the rule. Our simulations show that the penalty fee is highly sensitive to the "quality" of the judicial system. Specifically referring to the Italian case, we show that the optimal penalty should be higher than those set according to the present Italian law.Public Procurement Contracts, Penalty Fee, Investment Timing Flexibility, Contract Incompleteness, Enforceability of Rules

Common-Property Resource Exploitation: A Real Options Approach

Agricultural land and forestlands can have multiple uses and generate multiple sources of utility. Although landowners benefit from most of them, society can benefit from others because of their intrinsic characteristics as common-property resources and customary practice. In many Italian territories, the picking of mushrooms is allowed on privately owned agricultural land and in forests. The management of these resources is challenging due to the emerging conflicts between landowners and users. In addition, the pressure exerted by users gives rise to issues on stock preservation, thus contributing to putting biodiversity at risk in contexts already heavily jeopardized by modern agriculture. Through the years, regulation established the primacy of the landowner’s right, introduced a permit fee for users, and set limits on the resource stock to be collected daily. Nonetheless, the relationship between public and private interests in common-property resource exploitation is still controversial. In this paper, we investigate and model a right holder’s decision whether to exploit a common-property resource according to their actual status of being an actual or potential user. The model is developed within the real options valuation framework. In detail, we investigate the entry/exit decision on the exploitation of the resource by considering the uncertainty that affects the resource stock, the entry/exist costs, and the number of rival users

LA VALUTAZIONE DELLE MISURE DI RIQUALIFICAZIONE ENERGETICA NELL’EDILIZIA RESIDENZIALE PUBBLICA: UN APPROCCIO GERARCHICO

In this paper we provide a multiple criteria model, based on the Analytic Hierarchy Process (AHP), to rank alternative packages of energy retrofit measures (ERMs). Following the AHP methodology, a hierarchy was created and a group of experts ranked all the elements of the hierarchy at each level. The prioritization of ERMs was set as the goal at the top of the hierarchy, three families of criteria (i.e., economic, environmental and social) and a set of sub-criteria were identified, whereas at the lower level of the hierarchy alternative packages of implementable ERMs are positioned. We found that Economic criteria play a major role in the achievement of the goal, in addition the Life Cycle Cost (LCC) of the building emerged as the most important sub-criterion. Thermal insulation of the building envelope resulted as the most important alternative: it contributes to minimization of management and maintenance costs and ensures thermal comfort throughout the useful life of the building. Specifically, the cost-effectiveness of this ERM may significantly contribute to reduce fuel poverty

Risk and returns in real estate development projects at the black swan test

The real estate market is affected by great uncertainty due to the nexus of various factors: a) the specificity of the assets traded, which are illiquid, unique and very hetherogeneous from each other; b) the ‘structural disequilibrium’ of the market caused by the differences emerging in elasticity of supply with respect to demand; c) the non-competitiveness of the market, which often turns into a bilateral monopoly; d) the great variability of market prices. Since the subprime mortgage crisis that broke out at the end of 2006 in the United States, it has clearly emerged that, in a sector that represents about a third of world wealth, it is necessary, on the one hand, to implement proper and increasingly sophisticated valuation tools, to support the design of effective risk management strategies and, on the other hand, to improve the reliability of real estate data, in order to allow for a more robust verification of the hypotheses on the trend of the cash flows generated by the investment and a more accurate valuation of the investment risk and, consequently, of the project expected rate of return. The main objective of this work is to investigate the accuracy and robustness of the estimates of real estate investors of the expected returns on an urban development project in a medium-sized city representative of the North East of Italy. Using a simulation-based approach, the gap between the observed internal rate of return, estimated ex post on the basis of the actual trend of the parameters that influence investment returns, and the expected internal rate of return, calculated ex ante on the basis of the information available at the time of the investment decision. Firstly, we constructed the time series from 1995 to 2015 of the expected and observed internal rates of return of investments in the residential sector. We obtained the time series of the cash flows generated by the investment under investigation by implementing a simulation-based approach. Starting from the comparison between observed internal rate of return and expected internal rates of return, we identified ex post the risk implicitly assumed by the investor at the time of the decision to undertake the investment. Secondly, the effectiveness of the Capital Asset Pricing Model as a method for estimating the return on a property investment was verified, by comparing the project’s observed (ex post) internal rate of return with its ex ante rate of return, estimated through the Capital Asset Pricing Model. To carry out the above analyses, we constructed the time series of observed and expected internal rate of returns from 1995 to 2015 of investments in the residential sector. The time series of the internal rate of returns of real estate investments were obtained by implementing a simulation-based approach to determine the cash flows of real estate investments representative of the context under investigation and by adopting as model inputs the parameters usually adopted in ex-ante and ex-post real estate valuations. Starting from the comparison between observed and expected internal rate of returns, we identified ex-post the risk implicitly assumed by the developer at the time of the decision to undertake the investment. Finally, by investigating the determinants of the divergence between the investment’s observed and expected internal rate of return and cyclical variables, we identified the factors (i.e., the macroeconomic fundaments) which, in the period under investigation, affected investment risk and, consequently, investment return. Finally, by investigating the relationships that account for the difference between the observed and expected internal rate of return and the economic factors that can determine the current stage in economic cycles, we identified the determinants of invetment risk and returns

IL VALORE DI VENDITA FORZATA DEGLI IMMOBILI A GARANZIA DEI CREDITI

As a consequence of the long lasting crisis that begun in 2006, the evaluation of collaterals and guarantees become a key issue. The global financial crisis had actually a heavy relapse on loans supply. The decrease of new granted mortgages was mainly related to the weakness and decline of the housing market and the negative phase of the economic cycle, characterized by an increase in the unemployment rate and a reduction in household incomes. In this context, robust risk assessment procedures and proper evaluation of collaterals are required for lending institutions to the granting of loans. The aim of this paper is to investigate whether assets used as collaterals are overestimated and how much of the mortgage lending value (VC) can be recouped by the property forced sale price (VF). The present study analyses the Italian foreclosed homes market, by surveying 89 forced sales, which occurred between 2006 and 2014 in the provinces of Treviso, Venice and Padova.DOI: http://dx.medra.org/10.19254/LaborEst.14.0

The valuation of ecosystem services in the Venice Lagoon: A multicriteria approach

none2Coastal ecosystems are among the most economically valuable and highly threatened on Earth; they provide valuable ecosystem services (ESs) but are severely exposed to climate changes and human pressure. Although the preservation of coastal ecosystems is of the utmost importance, it is often sub-optimally pursued by Governments and Societies because of the high costs involved. We consider salt-marsh ecosystems in the Venice Lagoon as an example of a threatened landscape, calling for innovative, integrated management strategies, and propose an application-driven methodological framework to support policymakers in the identification of cost-effective incentive policies to ecosystem preservation. By combining group decision-making and Value-Focused-Thinking approaches, we provide a multiple-criteria decision model, based on pairwise comparisons, to identify which ESs are top-priority policy targets according to a cost-effective perspective. We implemented an online Delphi survey process and interviewed a pool of experts who identified “recreation and tourism”, “coastal protection from flooding”, “carbon storage”, “biodiversity and landscape”, and “nursery habitats for fisheries” as the five most relevant ESs for the Venice Lagoon taking into consideration the Environmental, Economic, and Social perspectives. Our results suggest that the Environmental perspective is the most important criteria, whereas “biodiversity and landscape” is acknowledged as the most important ESnoneD'Alpaos C., D'Alpaos A.D'Alpaos, C.; D'Alpaos, A

The Evaluation of Sustainable Development Projects in Marginal Areas: An A’WOT Approach

The increasing urbanization trend, projected to reach 70% of the global population residing in cities by 2050, underscores the pivotal role of cities in achieving the Sustainable Development Goals (SDGs) set by the 2030 Agenda for Sustainable Development (UN, 2015) and combating climate change. Nonetheless, the 2023 report by the United Nations Human Settlements Programme (UN Habitat) reveals an alarming gap in achieving SDG 11 “Sustainable cities and communities” by 2030. This gap highlights the urgent need for transformative shifts in urban policies and investments to prevent cities from becoming centers of global disparities, including socio-economic inequalities, digital divide, and spatial fragmentation, particularly in marginal areas. Marginal areas suffer indeed from conditions of sub-optimality in planning capacity, valuable decision-making, and project implementation. The inadequate planning, management, and governance of marginal areas, coupled with suboptimal investments, can severely compromise their socioeconomic condition. Planning efforts frequently fall short in achieving long-term sustainability goals due to localized and short-sighted decision-making processes, particularly evident in marginal areas. It is crucial, though, to support their public administrations in the achievement of the SDG 11 targets and in their responsive participation in the calls for the allocation of public funding. In this paper, we provide a theoretical and methodological approach to evaluate urban regeneration projects in marginal areas. In detail, we develop an A’WOT approach, which combines a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis to the Analytic Hierarchy Process (AHP), to rank alternative urban development projects

Boosting Investments in Buildings Energy Retrofit: The Role of Incentives

More than 40% of the EU building stock was built before 1960 and 90% before 1990. It is common wisdom that older buildings typically exhibit greater energy demand than new ones. The renovation of existing buildings is therefore a cornerstone in the reduction of energy consumption and relative CO2 emissions under the post-carbon city paradigm. In the present work, we analyze various energy retrofit strategies, evaluate their impact on buildings energy performance and determine their relative cost-benefit tradeoffs to address the multiple benefits of renovations and the financial barriers to their implementation and taking up. Aim of the paper is to identify cost-effective energy retrofit strategies which match technological advancements and knowledge in energy retrofitting with environmental needs and end-user’s behavior. To determine how far (and how much) it is optimal to push on retrofitting of existing buildings, we investigate the role of incentives and their impacts on private investment decisions

Investing in Photovoltaics: Timing, Plant Sizing and Smart Grids Flexibility

In Italy and in many EU countries, the last decade was characterized by a large development of distributed generation power plants. Their presence determined new critical issues for the design and management of the overall energy system and the electric grid due to the presence of discontinuous production sources. It is commonly agreed that contingent problems that affect local grids (e.g. inefficiency, congestion rents, power outages, etc.) may be solved by the implementation of a “smarter” electric grid. The main feature of smarts grid is the great increase in production and consumption flexibility. Smart grids give producers and consumers, the opportunity to be active in the market and strategically decide their optimal production/consumption scheme. The paper provides a theoretical framework to model the prosumer’s decision to invest in a photovoltaic power plant, assuming it is integrated in a smart grid. To capture the value of managerial flexibility, a real option approach is implemented. We calibrate and test the model by using data from the Italian energy market