Study On The Optimal Capital Structure Of BOT Highway Project

Highway is an important driving force for the development of the national economy.As a new financing method suitable for infrastructure construction,BOT can play an important role in promoting highway construction.From the data of the Ministry of Finance,PPP highway projects account for about 30% of the total investment.Facing such a huge amount of capital investment,how to realize the success of transportation projects is an important issue.Based on this background,this paper takes highway BOT project as research object,and studies the optimal capital structure of BOT highway projects.The trade-off theory takes into account the advantages and disadvantages of equity and debt and believes there is an optimal ratio of debt to equity.In the BOT highway project,government parties,private partner and creditors have different interests on the capital structure.The government controls the minimum capital ratio and high rate of return.Private capital will pursue higher internal rate of return.Creditors focus on solvency.Therefore,there is also an optimal financial structure to balance the interests of all parties.Besides these,the project risk also has an impact on the capital structure.Highway projects often face the uncertainty of traffic volume.The government usually provides the minimum traffic guarantee and excess return sharing measures to reduce the risk which SPV should deal with.Based on these,the optimal financial structure model constructed in this paper mainly considers two factors:(1)the interests of all parties;(2)the traffic risk and risk sharing measures.After building the model,we uses case studies and comparative analysis methods to explore the impact of minimum traffic guarantee and excess return on the optimal funding structure.This paper develops a quantitative methodology for equity ratio optimization and financial viability analysis that reflects the characteristics of BOT highway projects,incorporates Monte Carlo simulation and financial engineering techniques,and aims for win-win results for both government and private sector.The optimal capital structure decision-making model constructed in this paper is divided into four steps,which are “Data Collection,Risk Assessment,Index Utility and Iterative Optimization” respectively.This methodology integrates the return in equity(stands for the interest of the private investors)and debt service coverage ratio(stands for the interest of the lenders)into a utility function,and evaluates the impact of MTG and revenue sharing on the optimal equity ratio of the project.A case study of a highway project is provided to demonstrate the applicability of this methodology,and the results show that the optimal equity ratio will increase when the government provides a minimum traffic volume guarantee and a revenue sharing scheme.