Governance of PPP Infrastructure Projects: A Variable Capital Structure Valuation Approach

Over the next decade, governments around will invest massively in new projects, aiming at closing the long-identified infrastructure gap, to sustain economic and social development, and to recover from recent adverse shocks. This paper examines this topic from two perspectives: (i) how should the projects be valued and selected? and (ii) how should those projects be financed? We discuss conceptual, methodological and governance issues raised in the context of infrastructure investment project valuation with variable capital structures. The commonly used free cash flow (FCF) valuation approach may prove inappropriate, or even imprudent, for valuing, namely, very long-term infrastructure projects financed with variable capital structures arrangements. Under this framework, the literature recommends using the Capital Cash Flow (CCF), the Equity Cash Flow or the Adjusted Present Value models, to mitigate some of the biases of the standard FCF approach. We show that despite treating tax benefits differently, FCF and CCF models are algebraically equivalent, the latter being a way to value future cash flows using the same assumptions made in the context of the FCF methodology, while overcoming its limitations.