Abstract
Financial risks, such as inflation and interest rate changes, significantly affect the costs and benefits of infrastructure projects. Nevertheless, there is a dearth of research concerning financial investment (government subsidies) for infrastructure projects in the context of inflation and interest rate changes. Accordingly, this study builds a stochastic differential equation model based on inflation rate and interest rate, through which the expression of government subsidies in public-private partnership is optimised. Specifically, the Monte Carlo simulation was used to undertake a calculation of the present value of operating loss subsidy and risk-sharing subsidy for the N City Metro Line 3. Subsequently, the effect of inflation, nominal interest rates, interest rate volatility, as well as inflation volatility, on the present value of operating loss subsidies was investigated. It was established that the dynamic random discount rate based on inflation rate and interest rate may effectively simulate the effect of inflation rate and interest rate changes on project operating loss. Moreover, it is feasible to calculate the present value of the risk-adjusted operating loss subsidy and the present value of the risk-sharing subsidy. Inflation rate, inflation volatility, and interest rate volatility are positively correlated with the present value of operating loss subsidies, whereas the interest rate is negatively correlated with the present value of inflation-adjusted operating loss subsidies. Inflation volatility has the greatest effect on the present value of subsidies, followed by interest rate volatility and inflation rate. Ultimately, this paper provides an effective tool for quantitative simulation of and risk-sharing in public-private partnership projects, which can facilitate a regional economy’s sustainable development.
Highlights
Given that infrastructure projects have public welfare and quasi-commercial aspects, it is far from straightforward to anticipate that decent revenue may be derived from social capital
It was established that the dynamic random discount rate based on inflation rate and interest rate may effectively simulate the effect of inflation rate and interest rate changes on project operating loss
It is feasible to calculate the present value of the risk-adjusted operating loss subsidy and the present value of the risk-sharing subsidy
Summary
Given that infrastructure projects have public welfare and quasi-commercial aspects, it is far from straightforward to anticipate that decent revenue may be derived from social capital. Local governments distribute some subsidies to facilitate such social capital becoming proactively involved in infrastructure projects. Limited research has focused on the inflation and discount rate, these are the principal parameters involved in the calculation of government subsidies for infrastructure projects. The government is supposed to establish an appropriate interest rate as the discount parameter for the DCF valuation of infrastructure projects, with fluctuation of the interest rate having a tremendous effect on how government subsidies are calculated. E unreasonable distribution of risks relating to uncertainty between the government and social capital may result in the withdrawal of social capital and failure of the infrastructure projects. Identifying an appropriate method for conducting a more scientific simulation of the effect of inflation, interest rate, and risk-sharing on government subsidies, in addition to the calculation of a more reasonable present value of government subsidies in publicprivate partnership, is meaningful to investigate
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