Optimizing Concessionary Items' Values for Procuring Privately Financed Infrastructure Projects

Abstract

To provide reliable and cost-effective infrastructure services to the public, governments around the globe often seek participation from the private sector with an emphasis on their ability to provide private finance. As such, most countries exploit competitive tendering to award Privately Financed Infrastructure (PFI) projects to sponsors representing the private sector. Within the framework of competitive procurement, sponsors not only strive to maximize their potential of winning such ventures at the tendering stage, but they also aspire to achieve a certain level of profit reflecting the risk associated with their investment. Moreover, owing to their limited financial capacity, sponsors must seek external funds from financial institutions (lenders) and, consequently, make their best efforts to maximize the potential of attracting lenders. This challenging process is mainly governed by a project’s concession length, base price (such as initial tariff/toll), and debt-to-equity ratio – collectively known as concessionary items. Owing to multiparty involvement, a state of optimality always reigns in determining the ideal values of concessionary items. Although profitability plays the pivotal role, chasing optimal values of concessionary items thus appears as an intrinsic uphill struggle to potential sponsors. Without resolving multiparty conflicting financial interests, the selected values of concessionary items may not only be suboptimal but may also be erroneous, leading to the sponsor’s failure in winning the bid for procuring the project. An exhaustive review of existing literature reveals that previously developed financial analysis models cannot adequately capture the complexities associated with determining optimal values of concessionary items through evaluating their aggregated impact on PFI project cash flows.