Financial Risk Analysis of Chinese Metro PPP Projects

PPP has gained popularity worldwide, because it can solve scarcity of public funds and take advantage of technique and experience of private sector entities. However, the financial evaluation of PPP projects is complex and challenging. The traditional evaluation methods cannot address financial risks involved in PPP projects sufficiently. This paper identified major financial risks involved in financial evaluation of Chinese Metro PPP projects. Then financial risk analysis is performed with the use of Monte Carlo simulation. To better illustrate the process, a case study of Beijing Metro Line 4 is presented. Simulation results show that the value of financial indices with consideration of financial risks have a large difference from those without financial risks. Public sector has a large probability to provide subsidy to private investor for social benefit brought by the project. And lenders are also at great risk because of the insufficient income of metro lines. Output statics reveal that the operation revenue may have a big significance on the financial indices. Further, long-term interest ranks second for self liquidation ability of the project while construction cost and its escalation also impact the profit and debtpaying ability of the project. Scenario analysis related to equity ratio under two situations is also discussed and some advices are given for future metro PPP projects.