Empirical Analysis of Capital Structure Determinants in Infrastructure Projects under Public–Private Partnerships

Abstract

Public–private partnerships (PPPs) have emerged as a promising alternative to financing infrastructure projects in order to address the infrastructure restoration and rehabilitation challenge. However, in the current practice no unanimous agreement exists on what factors to consider when making capital structure decisions in PPP infrastructure projects. To close this gap, generalized least-squares (GLS) regression analysis was performed on data from 498 projects across 22 countries to identify the capital structure determinants. At the 10% significance level, three project-specific factors (number of sponsors, number of lenders, and contract type) and four country-specific factors (total tax rate, real interest rate, risk premium on lending, and bond market capitalization) were identified as critical. It contributes to the body of knowledge (1) by explaining the financial decision from the lender’s perspective, which complements common capital structure theories that focus on sponsors; and (2) by providing sponsors, lenders, and governments with knowledge on the primary factors that drive decisions, which in turn forms the base for effective negotiation and optimization of the capital structure in PPP infrastructure projects.