Structuring Equity Investment in Ppp Projects

Earlier studies have established guidelines to optimize the capital structure of a privatized project. However, in the US, many Public-Private Partnership (PPP) projects may not be fully self-financed through toll or other operating revenues due to insufficient revenue streams. With the limited debt capacity secured by toll revenues, most PPP projects must be backed by both private equity investment and public funds. The equity structure is of essence in a PPP deal because it implies risk and profit sharing. Therefore it provides a mechanism of private incentive and public interest protection. After identifying the limited upfront analysis of the financing structure, the Government Accountability Office has called for academic research and application of solid tools to protect public interest in PPP projects. This paper presents a structured approach for determining equity investment in PPP projects. Scenarios are generated using a linear programming model to reach the optimal equity structure under risk and uncertainty. The model divides equity investments into private equity and public funds and reaches the optimal equity allocation by maximizing the benefits from PPP financing. The I-10 Connector project is used as a case study to illustrate how equity investment is structured, given the limited bonding capacity from toll revenues.