Optimizing Capital Structure Of Public-Private Partnership Projects

Public-Private Partnership(PPP)mode has become a hot topic in the field of project finance and project governance.Recently,public sectors are increasingly involved in the financing of PPP projects through offering public equity investment or government subsidies.It is highly necessary to incorporate the influence of public funds and consider the optimization of PPP capital structure under circumstances such as uncertain conditions,multi-target constraints and dynamic gaming.Firstly,this paper reviews the main sources and characteristics of PPP financing through literature review and theoretical research.It then analyzes the main interest demands of key stakeholders in the financing of PPP projects.Combined with the method of discounted cash flow,this paper then calculates the key indicators in the optimization of capital structure and clarifies the way of offering government financial subsidy and determining discount rates for debt,private equity and public funds respectively.On this basis,it further puts forward a decision-making framework for PPP capital structure and defines a three-stage decision-making process,including proposing preliminary capital structure scheme,selecting feasible capital structure scheme,comprehensively evaluating and optimizing the capital structure.This framework would act as guidance for the establishment of optimization models in the following chapters.Secondly,to consider the impact of risky factors on the future cash flow of the projects,this paper uses Monte Carlo simulation to simulate the key risk factors that influence the future cash flow of PPP projects,including construction cost,operation cost and passenger flow.By embedding Monte Carlo simulation into the calculation of fitness module of genetic algorithm,the computation speed has been improved and the algorithm convergence is ensured.The application of the model in the numerical case of Beijing Metro line No.4 has proven the validity of the model.Results show that the optimized capital structure has better performance than the project's original financial arrangement and public sector shall increase the investment of public funds in order to resist the adverse effects of uncertain risk factors.Thirdly,as for the optimization of PPP capital structure under multi target constraints,this paper uses two sub objectives,i.e.maximization of NPVe and minimization of present value of public funds,to represent the interests of private and public sector respectively.It then employs non-dominated sorting genetic algorithm-II(NSGA-II)to solve the problem.A series of non-dominated Pareto solutions is produced as a result for the decision makers to pick up,which largely increases the management flexibility of decision making on this issue.The model is then applied to a numerical case of an urban rail transit PPP project and the results are further selected through Technique for Order Preference by Similarity to an Ideal Solution(TOPSIS)method,which validates the applicability of the model.Finally,based on the mutual gaming process between public and private sectors,a dynamic game model with incomplete information is built.The optimal capital structure and optimal concession price are calculated.And the paper further analyzes the influences of key quantitative factors' variations on the optimal capital structure.