Monte-Carlo optimization model for dynamic capital structure adjustment in Chinese public-private partnerships under revenue uncertainty

Abstract

In the case of revenue uncertainty, the static capital structure predefined in the feasibility stage of Public-Private Partnership (PPP) cannot satisfy the need of dynamic adjustment in the capital structure of Chinese PPPs during project operation, thus deteriorating project financial viability in the long run. Therefore, this paper aims to propose a Monte-Carlo optimization model that can enhance the requirement of the dynamic capital structure of PPPs in the uncertain environment regarding the Chinese bridge sector. By quantifying the adjustment cost derived from changes in equity and debt, the proposed model can make a comparison analysis of dynamic capital structures of a specific project in different scenarios with three capital structure adjustment strategies adopted, respectively. In particular, the before-and-after effects and effectiveness derived from the use of government subsidies, capital market financing, and debt financing in adjusting capital structures of a PPP project, respectively, can be compared and evaluated. Based on historic data of the Hangzhou Bay Bridge (HBB) case, the imbalanced roles of the three strategies are unveiled that the strategy of government subsidies has a stronger effect as compared with the other two strategies, thereby enhancing project financial viability and sustainability. The simulation results of the HBB case further indicate that the debt financing strategy, which is the actual strategy applied to HBB can alleviate the short-term project operation pressure, but it may affect the project revenue in the long term, and aggravate the repayment risk of the project. These analyses have uncovered the strategic role of dynamic capital structure in maintaining financial viability and avoiding project bankruptcy. This model fills a gap when we need to deal with changes through dynamic capital structures in PPP projects. Several policy implications are provided in the end for transport PPP projects to improve the survival of PPPs during project operation under revenue uncertainty.