Abstract
Numerous public infrastructure projects have been privatized worldwide, where responsibilities, risks, and rewards are substantially reallocated between pubic and private sectors. The financial evaluation of a privatized infrastructure project is complex and challenging because of the risks and uncertainties due to the large size, long contract duration, nonrecourse financing, multiple project participants with different motives and interest, and the complexity of the contractual arrangements. Improved financial engineering techniques are required to overcome the limitations of traditional financial analysis techniques in addressing risks and uncertainties. This paper develops a methodology for capital structure optimization and financial viability analysis that reflects the characteristics of project financing, incorporates simulation and financial engineering techniques, and aims for win-win results for both public and private sectors. This quantitative methodology defines the capital structure of a privatized project in four dimensions, examines different project participants' perspectives of the capital structure, optimizes the capital structure, and evaluates the project's financial viability when it is under construction risk, bankruptcy risk and various economic risks (that are dealt with as stochastic variables), and is subject to other constraints imposed by different project participants. This methodology also evaluates the impact of governmental guarantees and supports, and addresses the issue of the equity holders' commitment to project success by initiating the concepts of equity at project risks, value of governmental loan guarantee, and project bankrupt probability during construction. A framework and a solution algorithm are provided for this proposed methodology. These research outputs will significantly facilitate both public and private sector in evaluating a privatized project's financial viability and collectively determining an optimal capital structure that safeguards their respective interests.
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