Application Of Capital Structure Optimization Model For PPP Projects: The Case Study Of Civil Aviation Training Center Of Thailand

Civil Aviation has been recognized as one of the major developments of Thailand. Due to the establishment of the new infrastructure airport called “Suvarnabhumi”, the role of the aviation becomes more and more important to generate the national income. There have been numerous increases in the number of flights and passengers at the major airports in the recent years. All private Thai airlines have been allowed to operate all domestic routes as of September 2000, and international routes as of September 2001. Today, besides THAI Airway International, six private airlines are in operation and further deregulation is expected to allow more airlines to emerge. As a result, it claims for the need of the aviation training center to fulfill the requirement of the human resources for these developments. At present, most of the countries in the South-East Asia have to depend on the training centers of Australia for recruiting the human resources. So if Thailand can operate the aviation training center by itself, it will surely catch the attention of the neighboring countries and will get the good revenue from this project development.

Aviation training becomes one of the major issues as people are more and more interested in traveling by air. The development of the Aviation training centers is also essential to the Thailand due to the development of the new airport “Suvarnabhumi”. In another words, Thailand also becomes in the need of the human resources development in the aviation sector. However, the development of such a training center is not the easy task, especially concerning with the financing. It needs the assurance of the enough amounts of revenues and profits to overcome the project cost and expense. It also asks for the benchmarking with other institutes in the region to know what its competitive advantages that the institute has especially in the financing sector with the help of the proper financial model.

Many of the privatized infrastructure projects have the difficulties and problems in the financing structure. Financing engineering techniques and capital structuring skills are required to find the proper mix of debt and equity to achieve successful financing for the proposed project. There should be the systematic way of monitoring and controlling the financial condition in every project. There is the need for the development of the sound financial model for evaluating the financial viability of a privatized infrastructure project.

Mr. Aung Khin Tun made a study mainly aimed to investigate and synthesize application of capital structure model in the early stage Public Private Participation (PPP) projects development using modified parameters and variables. After the model has been developed, it was applied to determine the financial viability of capital investment program for the Civil Aviation Training Center of Thailand to enhance its service delivery. In accomplishing his main objective, the following sub-objectives had been accomplished: (1) to identify and adopt the financial indicators to be used in developing the financial model based on their applicability and characteristics; (2) to modify the capital structure optimization model to be used as fundamental criteria for investment decision making in the capital investment program; (3) to test the model and parameters thorough the scenario analysis using capital investment program of the Civil Aviation Training Center of Thailand (CATC); and (4) to recommend the consideration process for the project participants based on the investment degree in the equity levels.

CONCLUSIONS

Many capital investment programs have been developed across a wide range of industries with the help of privatization. Here, construction and financial risks are two major types of risks in these programs, where the capital structure affects not only the total life-cycle cost of the project that in turn affects its financial viability, but also affects the motivation and commitment of different participation to the success of the project. The evaluation of the financial viability of the project can help the participants to give the overall financial condition of the project on the long-term basis. In this research, the financial model to determine the optimal capital structure was developed for the investment decision making process. The model evaluates the program from the equity holder’s (often contractor) point of view. As a result, the model allows the decision makers to make early decision for capital structuring, hence association structuring to get the optimal capital structure.

From the result of the applicability of the financial model development for the capital investment program with the case study of Civil Aviation Training Center of Thailand (CATC), the following conclusions were formed.

1. With the easy input of parameters and variables, the financial model can come up with the useful figures and values to help the decision makers to know about the different scenarios.

2. The financial model developed reflects the characteristics of project finance and incorporates simulation and financial engineering techniques.

3. The model is mainly designed for the capital investment program, by taking accounts of the investment proportions of equity and debt structure, the concession period, and other items featured in the capital investment.

4. The model optimizes the capital structure and evaluates the financial viability of the investment program under construction and economic risks, and is subject to other constraints imposed by different participants such as minimum equity level and minimum DSCR.

5. In generating the model, Total Project Cost (TPC) is found as a function of equity with negative slope because less debt in capital structure means less interest during construction. Accordingly, TPC is a declining function of equity. As a result, more equity means less TPC, and thus less total investment cost for a project. This is one of the reasons why government favors high equity.

6. In determining the optimal equity level for the CATC Program, the maximum equity level that can satisfy the constraints and characteristics of DSCR, NPVp and IRR is selected.

7. Finally, the contribution of the financial model development will significantly facilitate both public and private sector in evaluating the capital investment program’s financial viability and collectively determining an optimal capital structure that safeguards their respective interests.

His thesis abstract is copied and posted.

ABSTRACT

The development of PPP projects has been growing rapidly, and numerous projects have been implemented around the world. Public-Private Participation (PPP), in other words, is the initiated combination of capital investment from the public sector and the private sector. One key aspect to the successful implementation of the PPP project in any country is the raising of finance by project sponsors. Financial engineering techniques and capital structuring skills are required to find the proper mix of debt and equity and to achieve successful financing for the proposed project. The objective of this research is to present a simplified model to determine the optimum equity level for decision-makers at the evaluation stage of the PPP project, which takes place after the completion of the feasibility study. The resulting model is the combination of optimization model developed in Microsoft Excel with the function of determining the optimal equity level from the equity holder’s point of view. To show versatility of the model, a real case study (Civil Aviation Training Center of Thailand) is conducted. Thus, this research is concerned with the determination of an equity funding level in PPP project development. There are different equity levels found in this kind of program, and there is a need for such a model to determine optimal capital structure, which would assist the project sponsors to ensure that the equity level necessary for optimal capital structure is available prior to the project implementation stage.