Optimal Financing Mix of Financially Non-Viable Private-Participation Investment Project with Initial Subsidy


  • Borliang Chen National United University
  • Fen-May Liou Chihlee Institute of Technology
  • Chih-Pin Huang National Chiao Tung University




PPI, subsidy, optimal capital structure, discounted cash-flow model, linear programming


Governments with limited fiscal budgets tend to encourage private sector participation in building economic and social infrastructure to meet the economic growth or social welfare through Private-participation (PPI) schemes. However, since large projects may be financially non-viable despite their net economic benefits for the society, host governments may choose to subsidize a portion of the initial cost to create financial feasibility for private participation so as to realize the expected net economic benefits.

The private partners in a pure private-financed PPI scheme are expected to finance the original investment cost and recover it, with an acceptable return to compensate the project risk, from operating benefits under terms and conditions given in the concession agreement. The financial structure, that is, the financing mix between equity and debt, of the project determines the cost of capital and the value of the underlying project. An optimal financial structure minimizes the cost of capital and in turn, maximizes the project worth.

Scientific problem – the government’s role in PPI-led projects changes the traditional capital structure model in financial management, which includes only the financing mix of owners’ equity and debt. It is necessary to develop a model into which the government’s financial support is incorporated to identify the optimal financial structure of PPI projects.

This paper develops a linear programming model based on discounted cash flow to determine the optimal financing mix of the project given governmental initial subsidy for non-financially viable PPI projects. The model takes a two-stage approach: first, a debt-free cash flow is developed to determine the government’s initial subsidy; then, the optimal financing mix is determined based on the government’s subsidy. We apply the proposed model to the Taiwan West Corridor High-Speed Railway project as an example. The results provide guidance for public-private negotiations.

Scientific novelty – a linear programming model built on discounted cash flow is proposed to determine the optimal capital structure for non-financially viable PPI projects with government subsidy.

The aim of this research – to develop a model into which the government’s role in PPI projects is incorporated to determine the optimal capital structure. The results provide guidance to the public-private negotiations.

The object of the research – non-financially viable PPI projects, taking Taiwan West Corridor High-Speed Railway Project as the example.

The method of the research – a linear programming model built on discounted cash flow is used to find the optimal solution for multi-objective decisions.

DOI: http://dx.doi.org/10.5755/j01.ee.23.5.3130

Additional Files