Minimum Risk Capital in Project Finance: Example of Harbor Infrastructure Development
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Abstract
The ultimate success of a concession project depends on the joint investment partner chosen by the government. Although, for many projects, risk planning assessment is performed on the investment proposals submitted by investors, the importance of assessing whether the concession company possesses an adequate risk capital has been overlooked. The main objective of this study lies in introducing the market risk capital concept, which would serve as part of the criteria to be used by the government in assessing financial plans submitted by applicants. We adopted the Internal Models Approach (Value at Risk, VaR) developed by the Basle Committee (1994), together with Corporate Metrics developed by the J.P. Morgan Bank using the valueatrisk concept, to derive a minimum risk capital demand under specific financial planning.The thesis focuses on the Taipei Port’s dock infrastructure development project to conduct a factual validation analysis. As revealed through the investor’s investment plan and the government’s stipulations, as opposed to the capital the initial project’s investment applicant needs to raise being pegged at NT$3.756 billion, the net cash flow VaR derived from calculating the VaR puts the project’s required minimum risk capital at NT$4.512 billion under the condition of a 50year buildandoperation period and at a 99% reliability level. The thesis’ findings, by computing the market risk capital of various applicants and comparing the sums of capital the applicants propose to raise, serves to offer the reference point in the government’s selection of the most favorable applicant. In practical implementation, the government may model a project’s characteristics through a computer programming design and expeditiously obtain an applicant’s required minimum capital upon obtaining the applicant’s cash flow sequence, discount ratio and concession period.
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