Governance of PPP infrastructure projects: a variable capital structure valuation approach

Over the next decade, governments around the world will invest massively in new projects, aiming at closing the long-identified infrastructure gap, in order to sustain economic and social development, and recover from recent adverse shocks. This paper examines this topic from two perspectives: (i) how should these projects be valued and selected? and (ii) how should these 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 structure arrangements. Under this framework, the literature recommends using the Capital Cash Flow (CCF) or the Adjusted Present Value models to mitigate some of the biases of the standard FCF approach. We show that despite dealing with 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 some of its shortcomings.