Optimal Contracts, Capital Structure, and Infrastructure Project Financing

67 Pages Posted: 17 Jun 2016 Last revised: 23 Dec 2019

See all articles by Sanjay Banerji

Sanjay Banerji

University of Nottingham

Onur Bayar

University of Texas at San Antonio, College of Business

Thomas J. Chemmanur

Boston College - Carroll School of Management

Date Written: December 1, 2017

Abstract

We theoretically analyze the optimal contracts and the capital structure of public-private partnerships (PPPs) formed to implement infrastructure projects under a limited-recourse project financing arrangement. In our model, a sponsoring company and a host government set up a project company in order to build up a project and to operate it in the long run. The project has two phases: a build-up phase and an operating phase, with contracting between parties occurring before build-up. The sponsoring company and the government each contribute part of the project investment in return for equity stakes in the project company. The remaining investment for project build-up is provided as a limited-recourse loan by a banking consortium. Both the sponsoring company and the government need to provide non-contractible inputs into the project during the build-up phase at a private cost to themselves: these input costs are unknown prior to contracting and are realized only during project build-up. The probability of project success is increasing in the level of inputs provided by each party. We solve for the optimal capital structure (debt versus equity) of the project company; the optimal equity stakes held by each party in the project company; and the interest rate charged. We also solve for the optimal choice between the build-operate-own (BOO) and build-operate-transfer (BOT) provisions in contracts for the long-run ownership and operation of the project, and provide a rationale for the inclusion of performance guarantees in such contracts.

Keywords: Infrastructure finance, Capital structure, Ownership structure, Build-operate-transfer, Build-operate-own, Performance guarantees, Limited-recourse project financing.

JEL Classification: G31, G32, G21, M41

Suggested Citation

Banerji, Sanjay and Bayar, Onur and Chemmanur, Thomas J., Optimal Contracts, Capital Structure, and Infrastructure Project Financing (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=2795889 or http://dx.doi.org/10.2139/ssrn.2795889

Sanjay Banerji

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Onur Bayar (Contact Author)

University of Texas at San Antonio, College of Business ( email )

The University of Texas at San Antonio
One UTSA Circle
San Antonio, TX 78249
United States
210-458-6837 (Phone)
210-458-6320 (Fax)

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

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