Optimization of Bid-Winning Potential and Capital Structure for Build-Operate-Transfer Road Projects in India

Abstract

Build/Operate/Transfer (BOT) arrangement has gained wide acceptance across the world for providing public infrastructure. Such arrangements, which reallocate risks and rewards between public and private sectors, present complex issues for the prospective concessionaires. During the bidding stage, the prime concerns of the private investors are the bid-winning probability and financial profitability of the project. In Indian BOT highway projects, the grant sought from the government is the sole bid variable that determines the successful concessionaire. A higher grant, although ensuring increased chances of winning the concession, would also lead to significant cash outflows adversely affecting the profitability of the project. The profitability of the project is also a function of debt-equity structure, which is determined by using financial engineering techniques. Hence, from the private investors’ point of view, a systematic model for optimizing the bid-winning potential and capital structure is needed, which would assist the project sponsors in bidding and financing decisions. Prior researches in this area have considered these optimization issues in a fragmented manner. This paper presents a genetic-algorithm (GA)-based model that yields a set of optimal solutions for the key decision variables: grant, debt, and equity. The proposed model, demonstrated through a real life BOT highway project, can aid the private investors in fast and efficient decision-making.