Determine optimal capital structure for metro PPP projects to reduce financial risks: Theory and empirical analysis

Abstract

Public Private Partnerships (PPP) projects not only could attract abundant private capital to solve the scarcity of public funds, but also take advantage of techniques and experiences of private sector to accelerate metro development. PPP project capital structure had taken into account the interests of the Government, private investors and creditors, optimizing of the PPP project risks to an optimal capital structure to achieve a win-win situation. The object function was the weighted utility function of the internal rate of return and the debt service coverage ratio which included financial risk variables and financial assessment indicators to minimize the financial risk of the key participants and urban metro PPP projects. Then the Monte-Carlo simulation would draw an optimal capital structure, with the conclusion of the decision-making basis for investor, loaner as well as the governor.