Feasibility Assessment Framework for Financing Public-Private Partnership Infrastructure Projects through Asset-Backed Security

In modern days, along with restricted traditional funding sources and massive demand of infrastructure investment comes a significant gap of funding. Institutional investors are considered reliable sources of financing for infrastructure due to the long-term investment horizon and asset/liability management (ALM) requirement. Hence, institutional investors start to embrace infrastructure as an attractive asset class because infrastructure assets are able to generate long-term, stable, and predictable cash flows and diversify investors’ portfolios. As a result, financial innovations to encourage institutional investment have become an important issue. Asset-backed securitization (ABS) of Public-Private Partnership (PPP) infrastructure project’s receivables has been promoted in China since Dec. 2016 as an alternative financing instrument to encourage institutional investment to finance infrastructure projects. Traditional approaches of project financing are considered less attractive vis-à-vis the innovative PPPABS financing method, regarding liquidity, steady operational asset, risk sharing, bankruptcy remoteness, long maturity, and standardization. Despite these advantages, lack of knowledge and experience is still preventing project participants from seeking finance opportunities with PPPABS. In order to provide a guideline for practitioners to understand this innovative financing method, this thesis proposes a feasibility assessment framework for financing PPP infrastructure projects through ABS. Firstly, a list of 25 critical success factors (CSFs) of PPPABS is identified through a literature analysis, case studies, and expert interviews. Then a questionnaire survey is designed to collect opinions on these 25 critical factors from not only PPP stakeholders but also capital markets. Preliminary analysis is performed then to have a basic understanding of the data, including descriptive analysis, agreement analysis, and analysis of variance (ANOVA). Furthermore, after applying factor analysis to reduce the dimensions of the model, 5 principal components are derived, including “Effective ABS issuance and lifetime management”, “Clear regulatory guidance”, “Robust PPP and concessional arrangements”, “Supportive capital market conditions”, and “Reliable underlying asset quality”. Based on this finding, an assessment framework and index are proposed for PPPABS financing. Afterward, a case study of the pilot batch of PPPABS in China is presented as validation of the framework. By investigating the causal relationships among the critical factors of successful PPPABS financing, an advanced model is constructed to assist the project participants to quantify the feasibility. A focus group is conducted to collect rating data from experienced experts who have participated infrastructure ABS issuance and management intensively. Structural equation modeling (SEM) method is used to analyze the rating data of PPPABS products on the market. Hypothetical models are then examined, and the best-fit model for illustration is verified and proposed. Causal relationships in this model are investigated and proved to be significant. The result indicates that “Capital market conditions”, “Underlying asset quality”, and “Regulatory guidance” are exogenous variables and affect the overall feasibility of PPPABS indirectly. Furthermore, both “ABS issuance and lifetime management” and “PPP and concessional arrangements” are endogenous variables, affecting the overall feasibility directly. The path coefficients are employed to calculate the weights allocated to each principal factor and to create the feasibility assessment index. In the end, the pilot batch of PPPABS launched in China is used again to illustrate the application in practice and validation of the advanced assessment model. As an in-depth work to understand critical pricing determinants of PPPABS, a regression analysis is performed to build a financing cost estimation model for practitioners. This work can serve as a fundamental guideline in this particular research area of ABS financing for infrastructure projects. And the proposed framework shall support the decision-making process for not only the project managers who consider financing through ABS, but also the institutional investors who consider investment opportunities in PPPABS products.