198 / F: CONSTRUCTION MANAGEMENT International Conference on Sustainable Infrastructure and Built Environment in Developing Countries November, 2-3, 2009, Bandung, West Java, Indonesia ISBN 978-979-98278-2-1 Maximizing Equity Net Present Value of Project-Financed Infrastructure Projects under Build, Operate, Transfer (BOT) Scheme Andreas Wibowo 1 1 Research Institute for Human Settlements Agency for Research and Development, Ministry of Public Works Jalan Panyawungan Cileunyi Wetan Kabupaten Bandung 40393 E-mail: andreaswibowo@daad-alumni.de Abstract Capital structure is one of most relevant issues in greenfield infrastructure projects which typically require a bulk of up-front capital. The underlying problem is to set the capital structure that optimally creates wealth to the project promoter while maintaining the attractiveness of the project for the creditor(s) to provide debt financing. This paper presents a financial model of maximizing the equity net present value of projects implemented under build, operate, transfer (BOT) contract with debt arranged on non-recourse basis. The proposed model takes into account both interest rate and cost of equity as the functions of leverage ratios which many previous studies fail to address. Keywords: build/operate/transfer, cost of equity, infrastructure, interest rate, net present value. 1. Introduction Due to fiscal constraints and disenchantments with the quality service of public infrastructure, many governments around the world have contracted out the service delivery to the private sector. It is widely acknowledged that a major infrastructure project is typically funded with mixed debt and equity capital because of high up-front capital requirements. To what extent the project is debt financed is of the concern of different project stakeholders. From the creditor’s perspective, a project is bankable if the project under evaluation has (expected) sufficient cashflow to service debt over the repayment period. This is essentially germane to projects with debt arranged on a non-recourse or project finance basis where the project cashflow and its asset are the only collateral. For the project promoter, employing more debt financing allows them to enjoy a higher interest tax shield. However, if the project is more leveraged, both cost of debt and cost of equity nonlinearly increase which may offset to some extent the benefit of tax shield, thereby lowering the project market value. From the government’s angle, the equity level represents the commitment of the project promoter to succeed the project in question. With no equity injected, the project promoter may not be more incentivized than otherwise would be if some money invested to the project. This paper presents a spreadsheet-based model that addresses the issue of capital structure of non-recourse financed infrastructure projects, especially those implemented under build, operate, transfer (BOT) contracts. Under the contract, the private sector is required to build a new facility, commercially operate it during the concession term and transfer the facility back, usually at no cost, to the government when the term expires. The paper is motivated by at least two reasons. First, existing literatures often do not take into account the issue of risk- return relationships that serve as the backbone of modern finance theories. Second, if they do, the computational requirements are often cumbersome as involving complex calculus algebra