Abstract: PPP(Public-Private Partnership)is adopted throughout the world for delivering public infrastructures. However, the implement has not been without trouble because of the uncertainty of revenue. The insufficiency of revenue results in the failure of many PPP projects, which discourages the private investors. Government compensation becomes indispensable to stimulate private investment and ensures the success in PPP projects.
One of the most common forms of government compensation is the minimum revenue guarantee. Minimum revenue guarantee means the low demand risk is undertaken by government. Many researchers have advocated toll revenue cap so as to balance the risk and benefit. However, the government undertakes the complete low demand risk while shares only part of the over revenue. This leads to inappropriate risk and benefit sharing and over-guarantee occurs a lot in PPP projects. To settle these problems, setting the reasonable minimum revenue guarantee level is extremely significant.
In this paper, a model is established to estimate the minimum revenue guarantee level from the perspective of reasonable risk and benefit sharing. The value of the minimum revenue guarantee should equal to the value that toll revenue cap brings to the government. Binomial Lattice, one of the main methods of Real Option, is used to calculate the value. Because of the uncertainty, the demand varies from year to year. The value of the toll revenue cap option at n year could be estimated by the rise and fall probability of demand, the revenue sharing proportion and the cap. The value at n-1 year is the discounted value of weighted average at t=n year. Similarly, the value at the beginning can be estimated. The value of the minimum revenue guarantee option could be estimated in the same way. The minimum guarantee level should make the value of the two options the same. Then, a numerical example is provided to explain how to estimate minimum revenue guarantee level.
The studying results show that the minimum revenue guarantee level should not be fixed during the operation period. To balance the risk and benefit of government, it is mainly affected by the value of toll revenue cap which is estimated by lots of factors. This model could not only contribute to setting guarantee level, but also favor the intention of risk and benefit sharing in PPP projects. It greatly makes for solving the over-guarantee trouble that has caused huge loss for government.

Key words: PPP, minimum revenue guarantee, real option