Description of various risks associated with a Public Private Partnership scheme is included along with various mitigation strategies

1. TOLL ROADS & ITS RISK
ASSESSMENT
Aswathy V.V.
Devika Santhosh
Vijai Krishnan V.
(M. Tech Students, RIT Kottayam)

2. TOLL ROADS
 A form of road pricing
 Toll road is a public or private road for which a fee is assessed for
passage
 Helps to recoup the cost of construction and maintenance
 BOT (Toll) model is adopted for NHs with high/medium traffic
density
 Toll amount depends on
 Vehicle type
 Weight
 No. of axles

3. PUBLIC-PRIVATE PARTNERSHIP (PPP)
 Engineering, Procurement and Construction (EPC)
 Build-Operate-Transfer (BOT)
 Build-Own-Operate-Transfer (BOOT)
 Build-Own-Operate (BOO)
 Build-Lease-Transfer (BLT)
 Design-Build-Finance-Operate (DBFO)
 Design-Build-Operate-Transfer (DBOT)
 Design-Construct-Manage-Finance (DCMF)
 Hybrid Annuity Model (HAM)

4. BUILD-OPERATE-TRANSFER (BOT)
 Authority :- Road alignment, location of structures, environmental
clearance
 Concessionaire :- Structural design, finance, construction, O & M
 Tolling :- on the basis of GoI toll policy
 Concession period :- Depend on road capacity, max 30 yrs

5. 1. BOT – Annuity Model
 Traffic risk-neutral PPP Model
 Granting authority pay a fixed semi-annual annuity
 Concessionaire does not bear traffic risk
2. BOT – Toll Model
 Commercial and technical risks relating to construction, operation,
and maintenance of the projects + traffic revenue risk are allocated
to the concessionaire

6. CRITICISM – TOLL ROADS
 Require vehicles to stop or slow down
 Manual toll collection wastes time and raises VOCs
 Collection costs can absorb up to one-third of revenues
 Increases congestion on parallel free road
 A form of regressive taxation
 Profit motive of private entities

7. RISK
 A combination of probability of occurrence of an event and the
possible extent of its adverse effects and consequences in terms
of economic loss or human injury
RISK = PROBABILITY OF EVENT x SERIOUSNESS OF ITS CONSEQUENCES

8. RISK MANAGEMENT FRAMEWORK
Risk
Identification
&
Classification
Risk
Mitigation
Strategies
Risk Analysis

9. RISK IDENTIFICATION &
CLASSIFICATION

10. TYPES OF RISK
Design
Stage Risk
Build
Stage Risk
Operation
Stage Risk

11. DESIGN STAGE RISKS
 Design risk
 Project not designed adequately for the purpose
 Responsibility – Private Partner – allocate to subcontractors
 Environmental & social risk
 Existing environmental conditions affecting project
 Damage to the environmental or local communities
 Private partner – manage environmental & social strategy –
environmental plans
 Contracting authority – conduct study to ascertain environmental
fitness - disclose all environmental issues - review plans -
compensation for land & relocation of communities

12.  Land purchase & site risk
 Selection of site, geophysical conditions of site & acquiring title to
land
 Contracting authority - responsible for providing ‘clean site’ –
bear unforeseeable ground risks
 Private partner – risk relating to known adverse conditions

13. BUILD STAGE RISKS
 Resource or input risk
 Supply of inputs or resources for the operation of the project is
interrupted or the cost increases
 Private partner – ensure uninterrupted supply of resources and
manage its cost
 Contracting authority monitor for sufficient resource before
starting
 Performance/price risk
 Asset should be able to achieve the specified performance and
the cost of doing so
 Responsibility – Private partner

14.  Completion Risk
 Commissioning the asset on time and within the budget (delay &
cost overrun)
 Private partner – bear risk arising due to delay – loss of expected
revenue, ongoing cost of financing construction, holding cost of
subcontractors, extended site cost
 Construction Risk
 Labour/Subcontractor disputes, Cost overrun where no relief
applies, quality assurance and standards issues etc.
 Private partner – agree on lump sum price to exclude risk of cost
overrun

15. OPERATION STAGE RISKS
 Inflation risk
 Cost of project increases more than expected
 Private partner – bear the risk during construction
 Contracting authority – during concession term
 Payment – fixed component + variable component
 Regulatory/Change-in-law risk
 Risk of change in law or taxation affect the ability of project to
perform
 Contracting Authority – responsible for change in law post-bid/
post-contract signature

16.  Insurance Risk
 The risk that insurance for particular risk is or becomes unavailable
 Private partner – approach insurance market to get relevant
insurance
 Contracting authority – bear uninsurable risks
 Exchange & interest rate risk
 Risk of currency & interest rate fluctuations over the life of project
 Shared – passes the risk to the user by toll adjustments

17.  Maintenance risk
 Risk of maintaining the asset to appropriate standards and
specifications
 Maintenance cost increases due to increased volume, incorrect
estimate etc.
 Private partner – responsible to meet performance standards
specified – risk of periodic/preventive/emergency maintenance,
design or construction error, rehabilitation work
 Toll road need to be maintained to sufficient level of quality &
reliability so as to continue to attract business
 Payment – adjusted based on failing to meet performance
standards

18.  Demand risk
 Uncertainty of demand for the product of service of a project by
users
 Due to lack of credible forecasting methodologies
 Traffic volume – sensitive to income and economic growth
 Private partner – retain demand & toll revenue risk
 Contracting authority – provide a min. guarantee, if toll revenue is
insufficient to cover project cost and contingencies by taxation-
based support in payment

19.  Force majeure risk
 Unexpected events occurs that are beyond the control of the
parties and delay or prohibit performance
 Natural force majeure events, which can be insured (fire/flood...)
 Force majeure events which cannot be insured (strike/terror...)
 Contracting Authority – bear the risk after certain period of time
or cost has been exceeded
 Private partner – should be insured against natural events

20.  Disruptive technology risk
 Risk that a new emerging technology unexpectedly displaces an
established technology
 Contracting authority – impose obligations on Private partner to
adopt/integrate new technology or foreseeable developments
 Strategic risk
 Risk of change in shareholding of Private Partner or conflict of
interest between them
 Responsibility – Private partner
 Contracting authority limit the ability of Private Partner to change
shareholding for a specific period

21.  Political risks
 Risk of Government intervention, discrimination, seizure or
termination of the project
 Contracting authority – responsible to provide license and access
to toll road & surrounding land to fulfill obligations
 Private partner can expect compensation relief and ability to exit
project
 Early termination risks
 Risk of project being terminated before the expiry of time & the
monetary consequences of such termination
 Private partner will get necessary compensation

22. RISK MITIGATION

23. RISK MITIGATION
 Developing tools and strategies to reduce risk exposure.
 four different response strategies
 Risk retention
 Risk reduction
 Risk transfer
 Risk avoidance
 The financial structure of a project does not change the return of
that project.
 Two projects with the same asset market risk (or total risk) have
the same return
 This asset market risk is measured by β

24.  Risk allocation through the financial structure is the seniority of
debt to equity
 Match equity and debt with two types of risks,
 Upside risks
 Downside risks.
 Upside risks -if properly controlled, can increase the value of the
project
 Downside risks - if properly controlled, prevent the value of the
project from being less than the intrinsic value
 Do not increase the project value above its intrinsic value.

25.  Financial Instruments -hedge for the market risks.
 Forward Contracts -A forward contract allows its owner to buy a given asset
on a specified date at a price specified at the origination of the contract.
 Futures contract - obligates its owner to purchase a specified asset at a
specified exercise price on the contract maturity date.
 The presence of four provisions that lower the credit risk: daily settlement,
margin requirements, the clearinghouse and price limits.
 Swap contract - obligates two parties to exchange or swap specified cash
flows at specified intervals.
 Option Contracts -the owner of the contract does not have the obligation
but the right to perform

26.  Incentives and Contractual Arrangements
 The contractual agreements between parties constitute a very important risk
mitigation strategy
 They rely on two concepts: incentives and legal accountability.
 Principal-agent contract
 Corporations are structured in such a way that ownership and
management are separated. This
 Will allow share ownership to change without any interference with the
operation of the business.
 It also allows the corporation to retain professional managers

27.  Construction Contracts
 Apportion the risks between the sponsor ,the designer, the
operator, the contractors, the subcontractors and the suppliers
using the liability (legal responsibility or accountability) as the main
driver for performance.
 Government Support
 Support tools provided by the government in toll road concessions
are:
 Guarantees and insurances
 Subordinated loans
 Subsidies.

28.  Support from Global Multilateral Institutions
 The International Monetary Fund (IMP) and the World Bank are
two non profit, global multilateral institutions
 To provide direct support for financing and insuring infrastructure
projects in developing countries.
 Joint Ventures and Unbundling
 Appropriate risk reduction strategies undertaken by sharing
ownership, management and expertise with host-country
nationals

29. THE FOUR “S" STRATEGIES

30. RISK ANALYSIS

31. RISK ANALYSIS
 Risk analysis is an integral part in the risk management framework.
 It allows us to evaluate a project, knowing the cash flow as well
as the return expected by the investors in exchange of assuming
project risk.
 This is done through the Expected Net Present Value Approach.

32.  Net Present Value Approach
 The Net Present Value of a project is the sum of the cash flows
generated by the project and discounted at the opportunity cost
of capital.
 opportunity cost of capital for a project is the sum of three
components: the risk free interest rate, the risk premium and the
inflation rate.
 Expected Utility Approach
 The Expected Value Theory states that the investment decision to
be taken should be the one with the maximum Expected Net
Present Value.
 It ignores the sponsor's attitude to risk.
 They make different decisions within the same risk environment.

33.  Other Approaches Dealing With Uncertainty and Complexity
 Sensitivity Analysis
 Sensitivityanalysis is useful in identifying the crucial variables that could
contribute the most to the riskiness of the investment.
 Decision Tree Analysis
 Decision Trees are tools that can also be used by sponsors in analyzing
and accounting for the uncertainties in a project.
 Decision trees structure the problem in such a way that the major
uncertainties and the decisions contingent on those uncertainties are
represented in a tree.

34. REFERENCES
1. Global Infrastructure Hub: PPP Allocation [https://ppp-
risk.gihub.org/risk_category/road]
2. El-Amm L.A., Risk Management in Toll Road Concessions, MIT, 2003

35. THANK YOU.....