The optimal debt ratio of public–private partnership projects

Abstract

Many governments regard the publicÀprivate partnership (PPP) as the best approach to implement high speed rail projects. However, most PPP schemes incorporate long-term debts in the capital structure due to huge initial investments and long recovery periods. An optimal capital structure, meaning the financing mix between debt and equity, maximizes the value of the PPP project. The terms and conditions of the debt are subject to negotiations between the private sponsor and the financiers, given the concession agreement between the host government and the sponsor. Debt ratio is a key term in the project finance funding agreement. This study contributes to the project preparation of PPP schemes by developing a simple model to determine the optimal debt ratio for financing PPP projects and to establish the relationship between debt ratio and hurdle rates of projects' financial indices. Results suggest that the hurdle rate of financial net present value determines the lower limit of debt ratio and the hurdle rate of times interest earned decides the upper limit of debt ratio in the Taiwan high speed rail project.

Critical Factors on the Capital Structure of Public–Private Partnership Projects: A Sustainability Perspective

“…Under different configurations, this factor is the core concern of all participants of PPP projects [129]. The private sector and financial institution care more about the economic benefits [48,79], while the public interest is also essential indicator including social and environmental benefits. The capital structure that considers both the economic and non-economic benefits can promote the healthy development of PPP projects, industry, region and society [92].…”

“…As the investor of PPP projects, the private sector is concerned with return of investment [92], while the public sector cares more about the public interests, such as social and environment benefits rather than economic benefits [48]. Besides, the financing institution focuses on the stability of repayment of debt funds and the benefits of creditors [79].…”

“…Moreover, construction ability, operation ability and life-cycle management ability all impact the success of PPP projects. Therefore, the public sector and financial institution both take these into account to analyze the future cash flow of projects to select proper capital structure [79].…”

“…However, previous studies of the capital structure in PPP projects mostly relied on economic indicators while ignoring the sustainability [79,92]. In practice, sustainability has not been embodied in PPP projects, which means participants cares more about the short-term demand of funds rather than long-term development of projects when deciding the capital structure.…”

Improving Sustainability Performance for Public-Private-Partnership (PPP) Projects

“…In other words, better sustainability performance can be obtained by arranging proper investment distributions between the two sectors in a PPP-type project. In the current practice, the determination of the investment distribution in a PPP-type scheme is a complicated decision process, affected by various factors including economic performance of the given project, private sector's expected return on project investment, and the concession period [23,27]. The application of the proposed model SPbEM to the case study suggests that the effective investment distributions between the public and private sectors should be arranged in the way that public sector contributes around 25% investment (α = 0.25), and private sector shares around 75% investment (β = 0.75).…”