Traffic revenue risk management through Annuity Model of PPP road projects in India

The Government of India has been promoting involvement of private entrepreneurs in development of road projects with a focus on overcoming the limitations of the traditional public procurement system. Participation of private entrepreneurs through Public–Private Partnership (PPP) route brings in additional capital and imparts techno-managerial efficiency in the project development and operation. The success of projects procured through PPP route greatly depends on the transfer of risks associated with the project to the parties best able to manage the risks. The traffic revenue risk has been identified as one of the most critical risks impacting the commercial success of the Indian road projects procured through PPP mode. Private sector’s reluctance to assume traffic revenue risk and lack of users’ willingness to pay have led to development of innovative contractual structures, such as Annuity Model. This paper discusses the Annuity Model with the help of a case study. Annuity Model is a traffic risk-neutral PPP model where private investment by the project promoters in designing, constructing, and operating the facility is recouped with the annuities paid by the granting authority over the concession period.