Optimal equity ratio of BOT highway project under government guarantee and revenue sharing

Abstract

Build-Operate-Transfer (BOT) is an important financing scheme to deliver value for money in infrastructure procurement. To mitigate its financial risk, the private sector often asks for a minimum traffic guarantee (MTG) from the government. On the other hand, the government usually requires sharing the excessive revenue when the traffic volume is greater than a certain level. This paper develops a quantitative methodology for equity ratio optimization and financial viability analysis. This methodology integrates the return in equity and debt service coverage ratio 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.

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