Capital structure optimization for build-operate- transfer (BOT) projects using a stochastic and multi-objective approach

Sungmin Yun, Seung Heon Han, Hyoungkwan Kim, Jong Ho Ock

Research output: Contribution to journalArticle

28 Citations (Scopus)

Abstract

Private financing has long been recognized as playing an important role in providing public infrastructure facilities worldwide. Private investors-operators, however, are often exposed to the financial risk of low profitability due to the inaccurate forecast of facility demand, operating income, and maintenance costs. From the operator's perspective, a sound and thorough financial feasibility study is required to establish the appropriate capital structure of a project. To this end, operators are likely to reduce the equity amount to minimize the level of risk exposures, whereas creditors or lenders continue to raise it in an attempt to secure a decent level of financial responsibility from the operators. This paper presents an optimized capital structure model for both creditors and operators to reach an agreement for a balanced structure that synchronizes both profitability and repayment capacity. The model is developed with the use of Monte Carlo simulation and a multi-objective generic algorithm (GA) for drawing an optimal level of equity ratio. Results of a case study on a railway project show that the proposed model provides a proper range of capital structure for privately financed infrastructure projects while accounting for the project-specific risks under variable conditions.

Original languageEnglish
Pages (from-to)777-790
Number of pages14
JournalCanadian Journal of Civil Engineering
Volume36
Issue number5
DOIs
Publication statusPublished - 2009 May 1

Fingerprint

Profitability
profitability
equity
infrastructure
Model structures
feasibility study
Acoustic waves
railway
income
project
Costs
cost
simulation
Monte Carlo simulation
risk exposure
financing
demand
responsibility
sound
public

All Science Journal Classification (ASJC) codes

  • Civil and Structural Engineering
  • Environmental Science(all)

Cite this

@article{e79ad44ebf9a4c4d8c27769b44447862,
title = "Capital structure optimization for build-operate- transfer (BOT) projects using a stochastic and multi-objective approach",
abstract = "Private financing has long been recognized as playing an important role in providing public infrastructure facilities worldwide. Private investors-operators, however, are often exposed to the financial risk of low profitability due to the inaccurate forecast of facility demand, operating income, and maintenance costs. From the operator's perspective, a sound and thorough financial feasibility study is required to establish the appropriate capital structure of a project. To this end, operators are likely to reduce the equity amount to minimize the level of risk exposures, whereas creditors or lenders continue to raise it in an attempt to secure a decent level of financial responsibility from the operators. This paper presents an optimized capital structure model for both creditors and operators to reach an agreement for a balanced structure that synchronizes both profitability and repayment capacity. The model is developed with the use of Monte Carlo simulation and a multi-objective generic algorithm (GA) for drawing an optimal level of equity ratio. Results of a case study on a railway project show that the proposed model provides a proper range of capital structure for privately financed infrastructure projects while accounting for the project-specific risks under variable conditions.",
author = "Sungmin Yun and Han, {Seung Heon} and Hyoungkwan Kim and {Ho Ock}, Jong",
year = "2009",
month = "5",
day = "1",
doi = "10.1139/L08-134",
language = "English",
volume = "36",
pages = "777--790",
journal = "Canadian Journal of Civil Engineering",
issn = "0315-1468",
publisher = "National Research Council of Canada",
number = "5",

}

TY - JOUR

T1 - Capital structure optimization for build-operate- transfer (BOT) projects using a stochastic and multi-objective approach

AU - Yun, Sungmin

AU - Han, Seung Heon

AU - Kim, Hyoungkwan

AU - Ho Ock, Jong

PY - 2009/5/1

Y1 - 2009/5/1

N2 - Private financing has long been recognized as playing an important role in providing public infrastructure facilities worldwide. Private investors-operators, however, are often exposed to the financial risk of low profitability due to the inaccurate forecast of facility demand, operating income, and maintenance costs. From the operator's perspective, a sound and thorough financial feasibility study is required to establish the appropriate capital structure of a project. To this end, operators are likely to reduce the equity amount to minimize the level of risk exposures, whereas creditors or lenders continue to raise it in an attempt to secure a decent level of financial responsibility from the operators. This paper presents an optimized capital structure model for both creditors and operators to reach an agreement for a balanced structure that synchronizes both profitability and repayment capacity. The model is developed with the use of Monte Carlo simulation and a multi-objective generic algorithm (GA) for drawing an optimal level of equity ratio. Results of a case study on a railway project show that the proposed model provides a proper range of capital structure for privately financed infrastructure projects while accounting for the project-specific risks under variable conditions.

AB - Private financing has long been recognized as playing an important role in providing public infrastructure facilities worldwide. Private investors-operators, however, are often exposed to the financial risk of low profitability due to the inaccurate forecast of facility demand, operating income, and maintenance costs. From the operator's perspective, a sound and thorough financial feasibility study is required to establish the appropriate capital structure of a project. To this end, operators are likely to reduce the equity amount to minimize the level of risk exposures, whereas creditors or lenders continue to raise it in an attempt to secure a decent level of financial responsibility from the operators. This paper presents an optimized capital structure model for both creditors and operators to reach an agreement for a balanced structure that synchronizes both profitability and repayment capacity. The model is developed with the use of Monte Carlo simulation and a multi-objective generic algorithm (GA) for drawing an optimal level of equity ratio. Results of a case study on a railway project show that the proposed model provides a proper range of capital structure for privately financed infrastructure projects while accounting for the project-specific risks under variable conditions.

UR - http://www.scopus.com/inward/record.url?scp=67649786487&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=67649786487&partnerID=8YFLogxK

U2 - 10.1139/L08-134

DO - 10.1139/L08-134

M3 - Article

AN - SCOPUS:67649786487

VL - 36

SP - 777

EP - 790

JO - Canadian Journal of Civil Engineering

JF - Canadian Journal of Civil Engineering

SN - 0315-1468

IS - 5

ER -