Transport Policy 62 (2018) 2–11

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Transport Policy
journal homepage: www.elsevier.com/locate/tranpol

Financial risk assessment and modelling of PPP based Indian highway

infrastructure projects☆
Lakshya Kumar a, Apurva Jindal a, Nagendra R. Velaga b, *
a
Student, Civil engineering department, Indian Institute of Technology (IIT) Bombay, Mumbai 400076, India
b
Assistant Professor, Transportation systems engineering, Civil engineering department, IIT Bombay, Mumbai 400076, India

A R T I C L E I N F O A B S T R A C T

Keywords:: This paper investigates financial risk associated with highway infrastructure projects by identifying parameters
NPV-at-risk such as traffic flow and project cost; and further models the risk by analysing real-world PPP based highway
PPP projects in India. It applies the Net Present Value (NPV)-at-risk model tool which uses Monte Carlo Simulation
Uncertainties taking into account the probability distributions for different input parameters, and gives uncertainty associated
Highway infrastructure with NPV. Further, the model is applied to 30 real-world BOT highway projects to identify critical risks and
Monte Carlo Simulation
discuss mitigation strategies. The critical contribution of the paper is towards applying a standard risk-analysis
Project cost
Investment risk
model (NPV-at-risk tool supported by Monte Carlo Simulation) to the real-world PPP based highway infrastruc-
Financial analysis ture projects. The application of the developed model can be used as a decision tool to judge the profitability of a
project and make investment decisions in the bidding phase by the private investors. It also helps in identifying
which source of uncertainty has the most influence on the project’s financial returns and what is the actual
relationship between the critical influencing parameters and associated NPV; this will be helpful to government
agencies and public authorities to identify the factors that have largest impacts and consider the corresponding
mitigation strategies.

1. Introduction
India is one of the world’s biggest markets for PPP with over 1300
major national level infrastructure projects as on 31st March 2014;
moreover, half of them are road infrastructure projects and have been
operated under various models such as BOT, BOT Annuity and Engi-
neering Procurement and Construction (EPC). (PPP India Database,
2014). In India, National Highways Authority of India (NHAI) is a gov-
ernment agency responsible for the administration and maintenance of a
network of over 70,000 km of national highways. Indian policy makers
have realized that national highways form the economic backbone of the
country; and a wide gap lies between the demand of the infrastructure
and the supply available (Shetty, 2012). Therefore, it is crucial to make
plausible efforts for substantial raise in infrastructure investment and
improve the quality of infrastructure facilities. Some of the problems
associated with transportation infrastructure development include
financing, land acquisition and delays in construction.
Public-Private-Partnership (PPP) is a project delivery system that can
address some of these issues. PPP involves a contract between a public
sector authority and a private party, in which the private party is
responsible for providing and operating a public service or a project and
collect revenues (Delmon, 2011). Because of this, a substantial part of the
financial, technical and operational risk associated with the project is
vested with the private party. The Government of India is looking for-
ward to huge investments in infrastructure from private investors and has
been focusing on the development of tools and activities to attract more
investments through PPP format (Ernst and Young, 2012). The main
advantages to government from PPP arrangements are in two folds.
Firstly, they can use the private funds to finance their infrastructure
projects. This is especially very important if the government is facing
fiscal constraints. Secondly, through PPP, they may benefit from the
expertise and experience of a private entity to build and operate a facility
in a more cost-effective way (Delmon, 2011).
Build-Operate-Transfer (BOT) model is a form of PPP which has
extensive applications in infrastructure projects. In a typical BOT high-
way project, a private entity is authorized to construct and operate a
transportation infrastructure facility and in return, is allowed to collect
tolls for a specified period of time to recover all the costs and earn a

☆
Note: This paper was presented in the E Session, Transport Economics and Finance, at the 14th WCTR in Shanghai in July 2016.
* Corresponding author.
E-mail addresses: velaga@civil.iitb.ac.in, n.r.velaga@iitb.ac.in (N.R. Velaga).

https://doi.org/10.1016/j.tranpol.2017.03.010
Received 1 October 2015; Received in revised form 1 December 2016; Accepted 6 March 2017
Available online 11 March 2017
0967-070X/© 2017 Elsevier Ltd. All rights reserved.
L. Kumar et al. Transport Policy 62 (2018) 2–11

reasonable profit. PPP-BOT projects typically involve high financial risks
because of their long-term nature and uncertainties associated with
projected future cash flows, traffic forecast, delay in construction and
cost overrun. One of the major unanswered questions is the risk assess-
ment and modelling of these uncertainties for road transport infrastruc-
ture projects. In India, many of the past BOT projects have either been
delayed or abandoned and had to be bailed out by the government due to
inefficient financial risk management and strategy planning. For
example, the ‘Vadodara-Halol Toll project’ in Gujarat state which has
been operational since 2000 is currently under loss due to wrong traffic
projections, thereby raising both policy and revenue risks for the
involved parties (Raghuram, 2003).
This paper investigates the investment risk associated with a BOT
highway infrastructure project with the help of 30 real-world highway
projects. It applies Net Present Value (NPV)-at-risk model providing a
cumulative probability distribution curve for NPV by considering a range
of associated parameters and corresponding suitable distributions. The
developed model after appropriate customizations can be used as a de-
cision tool to judge the profitability of a project and make investment
decisions in the bidding phase by the private investors. It also helps in
identifying which source of uncertainty (e.g., traffic projections or con-
struction delay) has the most influence on the project’s financial returns
and what is the actual relationship between the critical influencing
parameter and associated NPV. Towards the end of the paper, various
mitigation strategies and its applications have been discussed.
2. Literature review
Prior research endeavours have focused on the analysis of various
options like NPV within a confidence interval, binomial lattice, govern-
ment guarantees and fuzzy set theory to analyse the uncertainties with a
BOT projects (Iyer and Sagheer, 2011; Attarzadeh et al., 2011; Ashuri
et al., 2012; Ye et al., 2013). NPV-at-risk can be used for incorporating
the risk profile by combining the Weighted Average Cost of Capital
(WACC) and dual risk-return methods which gives NPV within a confi-
dence interval using a Monte Carlo Simulation (MCS) technique (Ye and
Tiong, 2000). Attarzadeh et al. (2011) used different techniques like
Fuzzy set theory, probability modelling for decision making using
insufficient data about parameters and complete information about their
probability.
Wibowo et al. (2012) provided methods for quantifying payments of
guarantees given to protect project sponsors from skyrocketing costs of
acquiring land, delays in scheduled toll adjustment, and compensation
payments in case of nationalization events. Nemuth (2008) implemented
a two stage model, identifying and analysing the risks and then evalu-
ating using MCS and discussed alternative actions. Further details of
existing state-of-the-art research are illustrated in Table 1.
One of the major uncertainties involved in calculating NPV for a
highway project is associated with estimating future traffic flow. Bagui
and Ghosh (2011) proposed a method to determine lower and upper
limits of traffic/revenue at risk. Iyer and Sagheer (2011) proposed a
traffic band using binomial lattice method which was combination of
both upper and lower limits of traffic which ensure certainty through an
equitable risk and revenue sharing mechanism. Pathan and Pimplikar
(2013) represented the risk of financing during the post construction
period due to fluctuation in prime lending rate (PLR) through a case
study and provided a reasonable agreement to change concession period
corresponding to the change in prime lending rate.
The risk associated with a project is the probability of investment’s
actual return being different from the estimated return (Krishnamurthi,
2008). Risk includes the possibility of losing some or all of the original
investment. Different versions of risk are usually measured by calculating
the standard deviation of historical returns or average returns of a spe-
cific investment. Various valuation methods have been used to estimate
the profitability and risk of a project which can be broadly categorized
into two categories – Discounted cash flow (DCF) models and
Non-Discounted cash flow models. Former gives importance to the time
value of money and calculates the present value of future and past cash

Table 1
Review of project risk assessment models.

Author Model Name/Utility Research Tool Remarks

Ye and Tiong Evaluation of investment Monte Carlo Simulation Developed a new method – NPV-at-Risk - by combining the Weighted Average
(2000) decision in infrastructure project Cost of Capital (WACC) and dual risk-return methods which incorporates
confidence interval.
Nemuth Implement risk assessment in estimation Monte Carlo Simulation Implemented a two stage model - Stage 1 includes identifying and analysing the
(2008) procedure and tender process risks and Stage 2 uses Monte Carlo Simulation to evaluate the risks followed by
close monitoring of the risks.
Bagui and Traffic and Revenue Forecast at Risk for a Monte Carlo Simulation, Lower and upper limit of traffic/revenue at risk can be determined using proposed
Ghosh BOT Road Project Regression Analysis method. Regression equations are developed for different confidence limits
(2011) varying standard deviation/mean ratio to determine revenue at various level of
risks.
Iyer and Real options based traffic risk mitigation Binomial lattice Only one risk variable (traffic volume) was considered. NPV was calculated by
Sagheer model for BOT highway projects in India incorporating the traffic guarantee option.
(2011)
Attarzadeh Risk management of Long Term Uncertainty, probabilistic and Decision making based on incomplete or insufficient data and complete
et al. Infrastructure PPP-BOT projects stochastic model, fuzzy set information about the probability
(2011) theory
Ashuri et al. Evaluating BOT Highway Projects with Real options analysis, Risk This approach treats the risk of overestimating future traffic demands internally
(2012) Government neutral valuation method with and adjusts for the traffic market risk in the valuation of MRG options.
Minimum Revenue Guarantee (MRG) MCS
Options
Wibowo et al. Modelling Contingent Liabilities Arising Monte Carlo Simulation, WACC, Provided methods for quantifying payments of guarantees given to protect project
(2012) from Government Capital Asset Pricing Model sponsors from skyrocketing costs of acquiring land, delays in scheduled toll
Guarantees in Indonesian BOT/PPP Toll (CAPM) adjustment, and compensation payments in case of nationalization
Roads
Kokkaew and Modelling Government Revenue Multi Least Squares Monte Carlo Proposed a new model of government revenue guarantees in which key
Chiara Guarantees in PPP road project- a risk method, Variance model parameters are evolved over time to reflect the inter-temporal risk profiles and
(2013) adjusted approach evaluated revenue guarantee, Guarantee period is assumed to be shorter than the
operating period
Ye et al. Venture evaluation of highway BOT Fuzzy Analytic Hierarchy Proposed a step by step process for risk rating by combining AHP with fuzzy set
(2013) project Process model theory. Risk factors considered are independent to each other.
Pathan and Risk Assessment of BOT Road Projects Examines financial risks through Represented the risk of financing in operation period due to fluctuation in prime
Pimplikar a case study analysis lending rate which can be overcome by change in concession period.
(2013)

3
L. Kumar et al.
Fig. 1. Methodology.
flows using a discount rate. It includes tools like NPV, internal rate of
return (IRR) and modified IRR. On the other hand, the latter focuses on
the time required to recover the initial cost of investment without ac-
counting for the time value of money and includes methods like payback
period and accounting rate of return. (Atrill and McLaney, 2014).
Time value of money is an important aspect of every investment as all
projects deal with cash flows over a long period of time; thus DCF models
are a better valuation method (IFAC report, 2012). Among different DCF
models, NPV is the most commonly used valuation method which is
calculated as the “difference amount” between the sums of discounted
cash inflows and outflows. It compares the amount invested today to the
present value of the future cash receipts from the investment, taking
inflation and rate of return into account. The decision rule to be followed
is that a project is acceptable if the NPV is positive. However, this deci-
sion rule fails to provide decision-makers with a confidence level.
Therefore, the concept of NPV-at-risk is developed which computes NPV
at some specific confidence levels. It mathematically and objectively
computes the risk associated with different possible future scenarios and
keeps a track of these results.
Extensive research has been done for the success and improvement of
BOT projects like including risks associated with future traffic flow,
lending rate and project cost, but in individualistic approaches. A wide
gap still persists when it comes to combining uncertainties associated
with different parameters in one model while estimating future cash
flows. Further application of such models for real-world PPP based
highway projects in India is yet to explore. This paper aims to narrow
down the gap by outlining a standard NPV-at-risk tool (supported by
Monte Carlo Simulation) to analyse PPP highway projects and apply such
powerful tools for 30 real-world projects. In this paper, probability dis-
tributions have been assigned to different parameters which affect the
NPV of the project; and Monte Carlo Simulation is applied which in-
corporates uncertainties associated with different parameters to give
NPV within a certain confidence interval. Also, the critical influencing
parameter (parameter which affects output the most) is determined and
appropriate risk mitigation efforts are discussed.
3. Methodology
A highway BOT project is influenced by a number of parameters; and
uncertainties associated with those parameters are one of the major
complications with the investors. In this paper, various risk categories
influencing a BOT highway project and the associated parameters are
first identified. Then, a corresponding probability distribution is assigned
to each parameter to forecast the actual value of parameter. Then data is
fed into a model developed in @Risk after which the results have been
4
Transport Policy 62 (2018) 2–11
interpreted and analysed. The steps shown in Fig. 1 summarize the whole
methodology used in this paper for developing the NPV-at-risk model.
3.1. Risk identification and assigning probability distribution
A highway BOT project is influenced by various types of risks and
each risk is associated with a different parameter as shown in Table 2.
Uncertainties associated with these parameters become a major dif-
ficulty for the investors while analysing profitability of these projects.
Probability distributions are thus assigned to each parameter as it gives a
probability to various values of a parameter and is very helpful in fore-
casting the actual value of parameter. Some of those uncertain parame-
ters which have been incorporated in the model developed in this paper
are stated below along with their distributions:
3.1.1. Traffic
Annual Average Daily Traffic (AADT) data is used to measure traffic
and is calculated in terms of Passenger Car Units (PCU) by using con-
version units shown in Table 3. Revenue from a highway project is
directly proportional to the number of vehicles passing through it. Thus
growth in traffic is one of the most critical parameter and prone to risk
more than any other parameter. This paper focusses on highly congested
traffic conditions, hence growth in traffic is assumed to have normal
probability distribution with a COV (Coefficient of Variation) of 0.1 (Ye
and Tiong, 2000).
3.1.2. Discount rate
The discount rate refers to the interest rate used in discounted cash
flow (DCF) analysis to determine the present value of future cash flows.
The discount rate in DCF analysis takes into account not only just the time
value of money, but also the risk or uncertainty of future cash flows; the
greater the uncertainty of future cash flows, the higher the discount rate
(Kelly et al., 2015). Grimsey and Lewis (2004) have argued about the
need for incorporating uncertainty in the Discount rate. Since there are
multiple ways to calculate discount rate for a project, it has been taken as
an uncertain parameter in the paper. Due to unavailability of data, this
paper assumes discount rate to be the same as interest rate given by
Reserve Bank of India (RBI). For getting probability distribution, mean
and the standard deviation of interest rate for the past 10 years’ data is
used; and the results conclude it to be normally distributed.
3.1.3. Toll rate
National Highways Authority of India (NHAI) has laid out a set of
fixed criteria for calculation of toll fee to be levied on customers. Formula
for determining the applicable rate of fee (GoI Report, 2009):
L. Kumar et al. Transport Policy 62 (2018) 2–11

Table 3

Construction cost, Operations and Maintenance cost

PCU Conversion.

Type of Vehicle PCU

Car / Jeep/Van or LMV 1

Light Commercial Vehicle, Light goods vehicle, Mini bus 1.5

Construction period, Construction cost

Bus or Truck (2 Axles) 3
Three Axle Commercial Vehicle 3
Heavy Construction machinery (HCM), Earth moving equipment (EME) or 4.5

Toll rate, Estimated Traffic

Multi axle vehicle (MAV) 3–6 Axles
Oversized vehicle (7 or more axles) 4.5
Associated Parameter

Source: Kadiyali (2013)

 
Discount rate

Inflation rate
WPIA  WPIB
TollRate ¼ BaseRate⋅ 1 þ 0:4⋅
WPIB

Where, A and B are two consecutive years and WPI is wholesale price
index which is “the price of a representative basket of wholesale goods”.
The projected revenues and consequently the achievement of the designated rate of return would be adversely affected in case the inflation rate is lower than

It is a measure of inflation; the rate at which the general level of prices for
goods and services is rising, and, subsequently, purchasing power is
falling. The uncertainty associated with toll rate is directly proportional
to WPI which follows a normal distribution as seen from analysing the
Determination of project viability is predicated on the existing interest rate scenario prevailing in the country. A drastic increase in the interest

mean and standard deviation values of last ten years WPI.

In the event of actual costs exceeding the estimates used for the establishment of financial viability, residual cash flows for debt/equity

3.1.4. Project cost

It is one of the most significant costs which the concessionaire has to
bear and so has to be forecasted in the best possible way keeping in mind
all the uncertainties. The concessionaire aims to bear minimal cost so
maximum probability occurs at lower cost values and hence it follows a
lognormal probability distribution.
Delays in land acquisition can lead to delays in the start of construction resulting in escalation of project cost

3.1.5. Concession period

It is defined as the time period for which the concessionaire owns the
transport facility and has the right to collect revenue. It is the most crucial
factor in a BOT project as in case of a revenue shortfall, duration of
concession period can be increased for the concessionaire to recover all
the costs. It generally varies from 15 to 30 years. In this paper concession
period is not taken as an uncertain variable rather NPV is calculated for
Uncertainty about future traffic demands can lead to financial failure of BOT projects

the specified concession period and as per the profitability, decision is

rate scenario may affect the debt servicing capability through project cash flows

made to change the concession period.

services would be lower than anticipated there by affecting project returns

3.1.6. Construction period

The concessionaire generates no revenue during the construction
period. Thus, the concessionaire targets to complete the project in the
given time to avoid cost overruns. Hence lognormal probability distri-
bution can be assumed but for the scope of this paper it has been set as a
fixed parameter.
what has been assumed in the financial model

3.1.7. Operations and maintenance cost

O&M costs mean all operation, maintenance and administrative costs
relating to the projects after the construction has completed and the
services have commenced. It is also a highly uncertain expenditure and is
considered to be normally distributed with a COV of 0.1 (Ye and
Tiong, 2000).
Identification of risk and associated parameters.

Risk Identification

3.2. Developing NPV-at-risk model

Time value of money is an important aspect of every investment as all

projects deal with cash flows over a long period of time. NPV-at-risk is a
concept which computes NPV generated from a particular project within
a specific confidence level (the minimum expected NPV at a given con-
fidence level) by drawing a cumulative distribution graph of NPV. The
Land acquisition

first step towards developing model is dividing all the parameters into
Traffic revenue
Risk Category

Debt servicing
Cost overrun

Economical

two categories: certain (construction period, concession period) and

uncertain (growth in traffic, WPI, discount rate, project cost, operations
Table 2

and maintenance cost) inputs. Then the respective probability distribu-

tion is assigned to the uncertain parameters along with their mean and

5
L. Kumar et al. Transport Policy 62 (2018) 2–11

Fig. 2. National Highways under consideration.

standard deviation. NPV is set as the desired risk output and the re- India’s (NHAI) website. The parameters which are not specific to one
lationships between different parameters and their effects on NPV project are obtained from different Government sites. There are a number
are examined. of methods to calculate discount rate but due to unavailability of data,
Costs include initial project cost for the construction period and op- discount rate is assumed to be same as the interest rate for past 10 years,
erations and maintenance cost for the subsequent years till the end of given by Reserve Bank of India (RBI). Also, to calculate the change in toll
concession period. Revenue starts only after construction period is fee every year, Wholesale Price Index values for the past ten years have
completed and it is calculated on the basis of AADT (Annual Average been taken from Ministry of Commerce and Industry, Government of
Daily Traffic) and toll rate taking into account the net increase in reve- India website.
nue. The base revenue is calculated as follows:
X 4.1. Project specific characteristics and data
BaseRevenue ¼ ðVehiclecount⋅TollrateÞ⋅365
The 30 projects considered in this paper are Build-Operate-Transfer
For subsequent years, revenue is calculated using net increase in projects and all are widening projects involving widening to 4 lanes or
revenue. Traffic is assumed to be linearly increasing throughout the 6 lanes. The considered case studies cover a wide range of projects with
concession period until it reaches the highway capacity. For the projects length of stretch varying from 19.5 to 291 km. Thus, the base toll for each
with multiple toll plazas, the final revenue is calculated as the sum total project is set differently on the basis of their length using Table 4 (GoI
of individual revenues. Formulas used are: Report, 2009). The toll revenue from only 13% of these projects are
collected by NHAI Agency; for other projects, concessionaire has the right
ΔR ¼ ðΔTr Þ⋅ð1 þ ΔTÞ Ir ¼ Inflation Rate
n ¼ Year b – Year a to collect tolls. Among these, around 17% of the projects are in con-
ΔTr ¼ ð1 þ 0:4⋅Ir Þ
  C ¼ Concession Period struction phase and remaining are operational.
PCUb  PCUa
ΔT ¼ Ri ¼ Revenue for year i The traffic flow (Annual Average Daily Traffic) for different type of
n⋅PCUa Ci ¼ Cost for year i vehicles for few years is also obtained from NHAI’s website and is con-
X
C
Ri  Ci Dr ¼ Discount rate
NPV ¼
ΔT ¼ Growth in Traffic
verted to Passenger Car Unit (PCU) when used in the model. Information
i¼1 ð1 þ Dr Þi
ΔR ¼ Net Increase in Revenue factor about all 30 projects and few of the input parameters are mentioned
ΔTr ¼ Increase in Toll Rate factor in Table 5.
PCUb ¼ PCU value for year b
PCUa ¼ PCU value for year a

After the model is created in @Risk, static values for all parameters
are fed in the model, cash flows throughout the concession period are Table 4
Base rate of fee per km.
calculated, number of iterations are fixed at 1000 and MCS is done to
obtain the cumulative probability distribution graph and tornado chart Type of Vehicle Base rate of fee per km for the
for NPV. year 2006–2007 (in Rs.)

Car / Jeep/Van or LMV 0.60

4. Data collection Light Commercial Vehicle, Light goods vehicle, 1.00
Mini bus
Bus or Truck (2 Axles) 2.10
The paper studies 30 BOT highway projects spread across major states Heavy Construction machinery (HCM), Earth 3.25
in India which is illustrated in Fig. 2. The relevant project data (that moving equipment (EME) or Multi axle vehicle
includes project characteristics like type of project, brownfield, total (MAV) 3–6 Axles
project cost, operations and maintenance cost, construction period and Oversized vehicle (7 or more axles) 4.00

concession period) is obtained from National Highways Authority of (Source: GoI Report 2009)

6
L. Kumar et al. Transport Policy 62 (2018) 2–11

Table 5 Table 6
Details of 30 projects considered in this paper. Input Data for NH-7 Katdal to Armoor.

Project Information Input Data Parameter Mean Value Probability Distribution COV

S Project Name Nature of Project O&M Concession Concession Period 20 years Constant –
No. Project Cost (in Cost Period Construction Period 2 years Constant –
(widening) Crorea (in (Years) Number of lanes 8 Constant –
Rs) Crore Project Cost Rs 273.1 Crore Lognormal 1
Rs) O&M Cost per year Rs 3.2145 Crore Normal 0.1
Inflation (WPI) 4.88% Normal 0.4
1 AP Adloor 2 lane to 4 546.16 9.58 20
Discount Rate 7% Normal 0.2
Yellareddy to lane
Gundla
Pochampali
2 AP Hyderabad - 2 lane to 4/6 2269.00 49.98 15 Table 7
Vijaywada lane AADT and Toll data for NH-7 Katdal to Armoor.
3 AP Hyderabad - 2 lane to 4 388.00 2.01 23
Yadgiri lane Type of Vehicle 2011–2012 2012–2013 2013–2014
4 AP Katdal to 2 lane to 4 271.73 3.21 20
Count Toll Count Toll Count Toll
Armoor lane
Rate Rate Rate
5 AP MH-AP Border- 2 lane to 4 360.42 5.36 20
Islam Nagar lane Car / Jeep/Van or LMV 816 45 921 30 1199 30
6 AP Vijayawada - 4 lane to 6 675.38 12.00 15 Light Commercial Vehicle, 318 70 413 50 514 50
Chilakaluripet lane Light goods vehicle, Mini
7 GJ Vadodara to 4 lane to 6 660.00 15.68 15 bus
Bharuch lane Bus or Truck (2 Axles) 712 140 689 100 944 105
8 HR-Ambala- 2 lane to 4 298.00 5.50 20 Three Axle Commercial 725 210 314 110 1321 115
Chandigarh lane Vehicle
9 HR-PB-HP- 2 lane to 4 295.00 9.00 20 Heavy Construction 725 210 1263 160 611 170
Zirakpur- lane machinery (HCM), Earth
Parwanoo- moving equipment
Parwanoo bypass- (EME) or Multi axle
Pinjore-Kalka vehicle (MAV) 3–6 Axles
10 HR-PB-Panipat- 2/4 lane to 6 2747.50 140.84 15 Oversized vehicle (7 or 0.4 270 1 195 1 205
Jalandhar lane more axles)
11 KT-AP border- 2 lane to 4 402.87 4.72 20
Nandi lane
12 KT-Banglore 2/4 lane to 6 450.00 19.20 20
Elevated lane Table 8
13 KT-Banglore- 2/4 lane to 6 445.00 11.81 20 Cash Flows for the simulation (in Crore Rs).
Neelamangla lane
14 KT-Bijapur- 2 lane to 4 748.00 4.70 20 Year Cost Revenue Cash flows Present Value
Hungad lane 1 163.038 0.000 163.038 152.372
15 KT-Hyderabad- Upgradation 680.00 5.13 20 2 108.692 0.000 108.692 94.936
Banglore of 6 lane 3 3.215 12.314 9.099 7.428
16 KT-Neamangla- 2 lane to 4 441.00 2.95 25 4 3.215 14.430 11.215 8.556
Devihalli lane 5 3.215 16.909 13.695 9.764
17 KT-Tumkur- 4 lane to 6 1142.00 14.73 26 6 3.215 19.815 16.600 11.062
Chitradurga lane 7 3.215 23.220 20.005 12.458
18 MH-Kondhali- 2 lane to 4 212.00 13.21 17 8 3.215 27.210 23.995 13.966
Talegaon lane 9 3.215 31.885 28.671 15.595
19 MH- 2 lane to 4 835.00 7.51 18 10 3.215 37.365 34.150 17.360
MP&Maharashtra lane 11 3.215 43.785 40.571 19.275
Border Dhule 12 3.215 51.309 48.095 21.355
20 MH- 2 lane to 4 1170.52 9.16 27 13 3.215 60.126 56.911 23.616
MP&Maharastra lane 14 3.215 70.458 67.243 26.078
Border Nagpur 15 3.215 82.565 79.350 28.760
21 MH-Nagpur- 2 lane to 4 168.00 10.78 20 16 3.215 96.752 93.538 31.685
Kondhali lane 17 3.215 113.378 110.163 34.875
22 MH-Pimpalgaon- 2 lane to 4/6 944.00 5.10 20 18 3.215 132.860 129.646 38.358
Nashik-Gonde lane 19 3.215 155.691 152.476 42.161
23 MH-Pune Satara 2/4 lane to 6 1724.55 24.00 24 20 3.215 182.444 179.229 46.316
lane Total 329.591 1172.515 842.924 161.359 (NPV)
24 MH-Pune Solapur ( 2 lane to 4 1371.10 18.90 21
Package-I) lane
25 MH-Satara-Kagal 2 lane to 4 724.90 45.49 20
5. Analysis with example
lane
26 MH-Vadape-Gonde 2 lane to 4/6 579.00 8.21 20
lane Though 30 projects are considered in this research, a detailed analysis
27 PB-Kurali-Kiratpur 2 lane to 4 368.00 5.52 20 of a project titled “Andhra Pradesh - from Katdal to Armoor National
lane Highway-700 , is presented here for thorough understanding of the model.
28 RJ Bharatpur- 2 lane to 4 250.00 4.50 25
It provides detailed information on input data (Table 6 and Table 7). The
Mahua lane
29 RJ Jaipur-Gurgaon 4 lane to 6 1896.25 42.43 12 complete model outcome of 30 projects has been summarized in the
NH-8 lane next section.
30 WB Dhankuni- 4 lane to 6 1396.18 29.44 25 The project started on 4th May 2007 and the revenue collection began
Kharagpur lane
from 21st August 2009 and has collected Rs 64.85 Crore (with dis-
a
1 Crore ¼10 million. counting) as on 31st March 2015. The average traffic was 17,000 PCU/
day as on 30th November 2013. The project also involved construction of

7
L. Kumar et al.
Fig. 3. Probability Distribution Curve of NPV for AP – Katdal to Armoor.
Fig. 4. Tornado Chart.
2 major bridges and has a tollable length of 31.77 km road.
Traffic data and the corresponding toll rate for the project are out-
lined in Table 7. This data is used to calculate the growth in traffic be-
tween the years 2011–2012 and 2013–2014 by converting traffic count
into PCU values.
Since the construction period of the project is 2 years, costs include
initial project cost for the first 2 years and then a constant operations and
maintenance cost for the subsequent years till the end of concession
period. Revenue starts after 2 years and base revenue is calculated from
the above data using traffic count of the year 2011–2012. Thereafter,
revenue keeps increasing due to increase in traffic count and toll rate.
Also, PCU per lane is calculated for each year and as it reaches the
limiting value of 700 PCU per hour per lane capacity (i.e. 16,800 PCU per
day) (Kadiyali, 2013), there is no further growth in traffic flow and net
increase in revenue is only due to increase in toll rate. For this project,
cash flows throughout the concession period and final NPV are shown
in Table 8.
This project was completed 100 days ahead of the scheduled
completion date and has been under operation since 2009. Similar pro-
cess of evaluation has been applied to other 29 projects.
After the simulation is completed, @Risk provides a series of graphs
and charts which can be used to analyse the results. One of such graphs is
the Cumulative Probability Distribution curve of NPV (Fig. 3) through
which the probability of occurrence of different values of NPV can be
computed. Based on the obtained probabilities, concessionaire can judge
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Transport Policy 62 (2018) 2–11
the profitability of a project and make the go-no-go decision. At α%
confidence level, NPV-at-risk is the value at which α% of the possible
values are smaller and 1-α% are larger. For example, in above case, NPV
at 95% confidence level is Rs 44.64 Crore ($0.45 Billion as in Fig. 3)
which means that there is a 95% chance that the concessionaire will
obtain a NPV greater than this. It also provides a Tornado chart which
ranks input by their effect on NPV through which effect of different pa-
rameters on NPV can be examined. For example, discount rate is the
critical influencing parameter for the above case study project (Fig. 4).
6. Results and findings
The above model is applied to all the 30 projects using Excel-VBA to
decrease the computational time. A summary of results obtained for all
30 projects which includes static NPV, NPV-at-risk for 95% confidence
interval, critical influencing parameter and probability of positive NPV
are provided in Table 9. From the table, it can be concluded that discount
rate has the maximum influence on NPV, as in 56% projects (i.e. 17 out of
30 projects), discount rate is the critical influencing factor. This shows
the importance of arriving at an accurate Discount Rate while doing
financial feasibility studies for a PPP project by private investors. The
percentage of each parameter in having the maximum influence on NPV
is shown in Fig. 5.
It has been observed that 6 out of 30 projects have zero probability of
getting a positive NPV. Also, it is seen that project cost is the critical
L. Kumar et al. Transport Policy 62 (2018) 2–11

Table 9
Output Data of 30 Projects.

S No. Project Name Static NPV (in cr Rs) NPV-at-risk (in cr Influencing Probability of positive
Rs) Parameter NPV

1 AP Adloor Yellareddy to Gundla Pochampali 274.46 423.80 Project Cost 0.0%

2 AP Hyderabad - Vijaywada Section 1389.83 2075.00 Project Cost 0.0%
3 AP Hyderabad - Yadgiri 1579.57 533.60 Discount Rate 100.0%
4 AP Katdal to Armoor 161.36 43.19 Discount Rate 98.5%
5 AP MH-AP Border-Islam Nagar 910.88 469.40 Growth in Traffic 100.0%
6 AP Vijayawada - Chilakaluripet 202.48 25.33 Project Cost 95.7%
7 GJ Vadodara to Bharuch 805.99 581.30 Discount Rate 100.0%
8 HR-Ambala-Chandigarh 81.18 27.34 Discount Rate 88.9%
9 HR-PB-HP-Zirakpur-Parwanoo-Parwanoo bypass-Pinjore- 10.79 94.30 Discount Rate 27.5%
Kalka
10 HR-PB-Panipat-Jalandhar 159.86 472.90 Toll Rate 64.6%
11 KT-AP border-Nandi 17.42 90.31 Discount Rate 62.1%
12 KT-Banglore Elevated 623.49 349.50 Discount Rate 99.9%
13 KT-Banglore-Neelamangla 322.30 137.80 Discount Rate 99.8%
14 KT-Bijapur-Hungad 1021.97 165.80 Discount Rate 99.6%
15 KT-Hyderabad-Banglore 510.30 27.67 Growth in Traffic 97.0%
16 KT-Neamangla-Devihalli 65.77 111.60 Discount Rate 55.9%
17 KT-Tumkur-Chitradurga 1543.61 426.80 Discount Rate 99.6%
18 MH-Kondhali- Talegaon 136.07 191.30 Project Cost 0.0%
19 MH-MP&Maharashtra Border Dhule 158.52 211.20 Project Cost 0.1%
20 MH-MP&Maharastra Border Nagpur 3613.14 1014.00 Discount Rate 100.0%
21 MH-Nagpur- Kondhali 135.95 180.50 Project Cost 0.0%
22 MH-Pimpalgaon-Nashik-Gonde 666.30 1020.00 Project Cost 23.4%
23 MH-Pune Satara 7126.88 2349.00 Discount Rate 100.0%
24 MH-Pune Solapur ( Package-I) 816.03 1136.00 Project Cost 0.0%
25 MH-Satara-Kagal 394.79 35.02 Discount Rate 96.2%
26 MH-Vadape-Gonde 1916.11 1225.00 Discount Rate 100.0%
27 PB-Kurali-Kiratpur 833.45 402.70 Discount Rate 100.0%
28 RJ Bharatpur-Mahua 673.10 392.10 Discount Rate 100.0%
29 RJ Jaipur-Gurgaon NH8 2349.22 1493.00 Toll Rate 100.0%
30 WB Dhankuni-Kharagpur 68.75 320.30 Toll Rate 53.7%

Fig. 6. Standard deviation of Project Cost vs NPV-at-risk.

6.1. Risk mitigation strategies

Fig. 5. Critical Influencing Factor.
influencing factor in these projects. Therefore, it can be inferred that to
minimize the project risk, uncertainty associated with project cost needs
to be reduced. This has been illustrated by changing the Standard devi-
ation for project cost from 100% to 50% which results in increased NPV
at risk (see Fig. 6).
The above model is a stepping stone to develop a complete financial
risk assessment model and can be customized to include more data points
such as Premiums, Government guarantees and Debt repayments. as per
the project requirements. The results of this analysis can be used by the
concessionaire/government to prioritize different risk parameters on the
basis of their impact on NPV and accordingly can make the action plan to
overcome/reduce the impacts.
Each critical factor mentioned above can be associated to a risk
category as given in Table 2. For example, Project Cost can be associated
with Cost Overrun Risk. World Bank has provided mitigation and risk
allocation strategies which can be applied to the critical influencing pa-
rameters discussed in the paper as shown in Table 10 (World Bank
report, 2008).
Following are some of the examples of PPP highway infrastructure
projects where different mitigation strategies were adopted to reduce the
effect of critical risks:
1. China: Ke et al. (2011) in their paper identified and assessed principal
risks for the delivery of PPP projects in China and concluded that
Government related risks were predominant. These risks included
Government corruption, government intervention,

9
L. Kumar et al. Transport Policy 62 (2018) 2–11

Table 10
Risk Mitigation and Allocation.

S Parameter Risk Mitigation Allocation

No. Category

1 Discount Rate Debt Hedging instruments, Fixed rate loans Concessionaire

Servicing
2 Growth in Traffic Traffic Government support to the Concessionaire Jointly Grantor and
Revenue Concessionaire
3 Inflation Rate Economical Toll-rate adjustment. Grantor
Recurrent market analysis and adjustment of toll-rates to meet market conditions.
4 Operations and Cost Penalty deductions and monitoring. Concessionaire
Maintenance Cost Overrun Contracting operation of the motorway to a highly qualified contractor, who can provide financial
guarantees to his commitments.
5 Project Cost Cost Fixed price contracts for supply of construction materials. Concessionaire
Overrun Contract provisions for contingencies.

(Source: World Bank report, 2008)

Table 11
Risk Mitigation strategies for Indian scenario.

S Risk Stakeholder Affected Mitigation Strategy

No. Parameter
Government Concessionaire End-
users

1 Discount Yes  Avoid using static discount rate throughout the concession period while doing the analysis
Rate  Borrowing can be done by government which might reduce the interest rate as guarantee is more
2 Growth in Yes Yes Yes  Clause to be included in contract to renegotiate toll rates at later point in time if the traffic count is below a
Traffic certain level
 Guarantees by government in form of traffic floor and ceiling
3 Inflation Yes Yes  This directly affects the toll rate so provisions should be given to ensure that the toll rate doesn’t get too high
Rate which discourages people from using the road
4 O&M Cost Yes  Increase the concession period
5 Project Cost Yes  Partial investment by government; for instance Hybrid Annuity Model in which government pays 40% of
project cost and concessionaire bears remaining 60%

nationalization/expropriation, public credit and poor public 7. Conclusion

decision-making process. To mitigate such political risks, the Gov-
ernment of China has taken various steps like organizing training
sessions for local governments to help them in designing efficient PPP
models, providing guidelines for appropriate risk sharing mechanisms
between public and private sectors and developing model contracts.
2. USA: Texas SH 130 was a PPP project which failed to meet its ex-
pected outcomes because of project location and unrealistic estima-
tion of toll road demand and revenue. High toll rates and road’s extra
distance resulted in insufficient traffic growth and as a result, Texas
Department of Transportation had to reduce the toll rates (Zatar,
2014).
3. India: In India, some of the state governments have taken an initiative
to create a uniform policy to mitigate different risks. Karnataka
government through its Karnataka Infrastructure Policy has identified
different risks involved during a BOT project life cycle and has pro-
vided appropriate mitigation strategies. Andhra Pradesh and Bihar
Governments have made a provision to identify debt risk by assisting
the developer in scrutinizing project asset and revenue in favor of
lenders (Athena Infonomics report, 2012).
The following are some mitigation strategies which focus on Indian
scenario (Table 11).
For the success of a PPP project, allocating risks to appropriate
stakeholders is very crucial. With the help of developed model, the
stakeholders can identify critical risks towards the beginning of the
project and further utilize the above mentioned strategies for risk miti-
gation and allocation.
To conclude, the Government should be liberal in terms of revisiting
the contracts to ensure the risks faced by the concessionaire are properly
accommodated and not entirely transferred to the general public in terms
of higher tolls. Also, it’s worth noting that revisiting contracts alone
would not help in attaining successful PPP BOT road projects but an
appropriate dispute resolution mechanism is equally important.
The critical contribution of the paper is towards applying a standard
risk-analysis model (NPV-at-risk tool supported by Monte Carlo Simula-
tion) for analysing financial risk involved in 30 real-world PPP based
highway infrastructure projects. Structural changes in PPP models are
required to incorporate risk and uncertainty within the project model so
as to avoid huge losses to the concessionaire and wastage of their funds.
NPV-at-risk as discussed in this paper can be used to find the associated
uncertainty and efficient risk analysis of PPP based BOT highway pro-
jects. This model can be used to make contingent plans while making
crucial investment decisions in the bidding phase by judging the profit-
ability of a project. The private sector can use this model to make better
go-no-go decisions for PPP highway projects by carefully considering the
profits to concessionaire. Furthermore, it is possible to identify high risk
projects at a very early stage and monitor their critical influencing pa-
rameters separately. It can also be used to examine the effects of different
input parameters on final output and take appropriate measures to
minimize the risk and maximize the profit. Thus, the model facilitates
project appraisal for both private investors and public sectors. Towards
the end, this paper discusses various risk mitigation approaches and its
application across the world. Though this paper aims to target most un-
certain parameters like project cost and traffic; some parameters like
construction period and concession period have been assumed to be
certain. Thus, further research can be done to incorporate more un-
certainties by taking a lead from this study.
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