Methodological Framework for Evaluation of Financial Viability of Public-Private Partnerships: Investment Risk Approach

Abstract

The development of highway infrastructure has increasingly been shifting toward the use of public-private partnerships (PPP) and alternative methods of project financing. In such schemes, the evaluation of their financial viability is the most commonly used industry practice for assessing the potential of the project to achieve the financial targets of its various stakeholders and ultimately affects its selection for implementation. In this study, a methodological framework for the evaluation of the financial viability of revenue-generating transportation infrastructure projects is presented in terms of their investment risk, using the method of moments. The investment risk is defined as the risk of not achieving the expected infrastructure-generated profit and thus not being able to service the financing debt outstanding and/or obtain an adequate return on the investment. The framework leads to a probabilistic assessment of the financial viability which can be achieved by performing various sensitivity and scenario analyses. To illustrate the application of the proposed methodology, a comparison of various alternative scenarios of financing is undertaken coupled with a few additional sensitivity analyses, for the case of a highway project developed as a typical PPP concession.