Investigation and Modeling of Financial Risks Associated with PPP Road Projects in India

In the last two decades, there is an increased demand for the infrastructure development but because of having constraints like finance or lack of experience and expertise in building and operating the facility has led governments to adopt a Public-Private-Partnership model which is popularly known as “PPP” model. PPP model encourages private sector to involve in development of infrastructure and in provision of public services. According to the World Bank, India is one of the leading countries in terms of readiness for PPPs. Government of India is looking forward for huge investments in India by private companies mainly in infrastructure development. The road sector, accounting for nearly 80% of all PPP projects, dominates the PPP scenario in India. Among various PPP models, the commonly adopted models in India are design-build-operate-transfer (DBOT), Build-own-operate-transfer (BOOT) and build-operate-transfer (BOT). Typically, PPP road projects are long term in nature and have many risks associated with them. Many of the past PPP projects have either been delayed or abandoned due to insufficient financial risk management. This paper focuses towards the financial risks associated with the BOT road projects in India with the real-world road projects data. The net present value (NPV)-at-risk method is used for the evaluation of critical risks. NPV-at-risk financial risks model is developed which can be used as decision tool. The developed financial risk model also uses Monte Carlo simulation for the consideration of the probability distributions associated with the input risk parameters. The developed model can provide better decision for risk evaluation of and investment in privately financed infrastructure projects. It can also be used for the identification of the most influential source of uncertainty for the financial returns.