Evaluating risk in put-or-pay contracts: An application in waste management using fuzzy Delphi method

Put-or-pay agreements are contractual structures that can be used to allocate risks during the operating period in a project finance transaction. Put-or-pay contract obliges the guarantor either to put predefined minimum amounts of inputs at a fixed price for a specific period, or to pay for the shortfall. Thus, the (private) facility owner and operator have guaranteed revenue to cover capital and operating costs, while the guarantor bears the risk related to the unpredictability of the input delivered. The risk could be reduced through an appropriate risk mitigation clause consisting of the possibility of finding other users able to fulfill the gap (similar to the "option capacity" in take-or-pay contracts). The aim of this paper is to estimate the guarantor risk in put-or-pay contracts and the effect of such a mitigation clause. A real option based approach was used to accomplish this goal. An application to disposal contracts between municipalities and waste incinerators in the waste management sector shows the model and its results.