Optimal Financial and Contractual Structure for Building Infrastructure using Limited-Recourse Project Financing

72 Pages Posted: 17 Jun 2016 Last revised: 24 Sep 2018

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 model a sponsoring company and a host government contracting to form a project company to build up and operate an infrastructure project. The government and sponsor contribute part of the investment required for project build-up, with the remaining investment provided as a limited-recourse loan by a banking consortium. Each party takes equity stakes in the project company and provides costly non-contractible inputs which affect the project's success probability. We solve for the optimal capital and ownership structure of the project company, cost of debt, the choice between build-operate-own (BOO) and build-operate-transfer (BOT) contracts, and the optimality of performance guarantees.

Keywords: limited-recourse project financing, infrastructure finance, build-operate-transfer, build-operate-own, performance guarantees.

JEL Classification: G31, G32, G21, M41

Suggested Citation

Banerji, Sanjay and Bayar, Onur and Chemmanur, Thomas J., Optimal Financial and Contractual Structure for Building Infrastructure using Limited-Recourse 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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