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Sector: State Highway  |  Module 1: PPP Background

Overview of PPP modal variants

Risk allocations under different PPP modes

One of the important features at the heart of a PPP arrangement is the allocation of project risks between the public and private partners. Careful risk allocation is critical to unlocking the efficiency benefits of private sector involvement and is a key driver of value in a PPP.

The risk matrix in the table below summarises the typical allocation of risks in each major PPP modal family in the Roads sector.

Typical risk allocations in the main road sector PPP modes

  Risk Type BOT Toll BOT Annuity BOT Shadow Toll Performance Based Maintenance Contracts
A Pre Operative Task Risks
A1 Delays in Land Acquisition Public Sector Public Sector Public Sector Not Relevant
A2 External Linkages Public Sector Public Sector Public Sector Not Relevant
A3 Financing Risks Private Sector Private Sector Private Sector Not Relevant
A4 Planning Private Sector Private Sector Private Sector Not Relevant
A5 Approvals Private Sector Private Sector Private Sector Not Relevant
B Construction Phase Risks
B1 Design Risk Private Sector Private Sector Private Sector Not Relevant
B2 Construction Risk Private Sector Private Sector Private Sector Not Relevant
B3 Approvals Private Sector Private Sector Private Sector Not Relevant
C Operations Phase Risks
C1 Technology Risk Private Sector Private Sector Private Sector Private Sector
C2 Operations & Maintenance Risk Private Sector Private Sector Private Sector Private Sector
C3 Volume Risk Private Sector Public Sector Private Sector Public Sector
C4 Payment Risk Private Sector Public Sector Public Sector Public Sector
C5 Financial Risk Private Sector Private Sector Private Sector Private Sector
D Handover Risk Events
D1 Handover Risk Private Sector Private Sector Private Sector Private Sector
D2 Terminal Value Risk Private Sector Private Sector Private Sector Private Sector
E Other Risks
E1 Change in Law Public Sector* Public Sector* Public Sector Public Sector
E2 Force Majeure Shared Shared Shared Shared
E3 Concessionaire Risk Public Sector Public Sector Public Sector Public Sector
E4 Sponsor Risk Private Sector Private Sector Private Sector Private Sector
E5 Concessionaire Event of Default Private Sector Private Sector Private Sector Private Sector
E6 Government's Event of Default Public Sector Public Sector Public Sector Public Sector

* In case of financial implications lower than Rs. 1 crore, risk is retained by private sector (Source NHAI model concession agreement)

The allocation shows which party is usually best able to manage the particular risk. It reflects typical contract allocations and presumes that all contract terms can and would be enforced.

The Mode Validation tool incorporates this matrix. It can be used to help match the risk allocation that the Project Sponsor is trying to achieve with one of the modes. The Mode tool indicates where there are differences between the allocation that the Sponsor has in mind and the typical allocation under each mode. The Sponsor is encouraged to think about why there are differences and to consider the appropriate allocation.

The Mode Validation tool is available here.

The NHAI has issued Model Concession Agreements (MCA) for roads sector BOTs. These MCAs contain suggested risk-sharing arrangements.

The Department of Shipping (Ministry of Shipping) has issued a Model Concession Agreement (MCA) for private sector projects in major ports, which can be a useful reference resource for minor ports projects. This MCA contains suggested risk-sharing arrangements.

Some risks are beyond the control of either the public or private sector. For example acts of God, such as natural disasters, and events such as civil unrest. These force majeure risks are typically shared among both parties to a PPP.

Allocation of revenue risk under different payment mechanisms

The allocation of revenue risk to the private sector depends on the type of payment mechanism in the particular PPP mode. The table below shows different levels of revenue risk allocation for different payment mechanisms.

 

Private sector revenue risk under different PPP payment mechanisms

    Annuity / Periodic Payments Operational Subsidy + User Charges Fixed Periodic Payments by Govt + User Charges Output Based Aid for Capex or achieving Performance Milestones + User Charges Construction Grants during construction + User Charges Cross subsidy by providing development rights on an ancillary project (eg, real estate) Fixed Payments based on Take or Pay Arrangements
Capex Recovery Risk Source of capital recovery Annuity payments NA Fixed payments User charges User charges Dependent on the prospects of ancillary project NA
Private sector risk level Low NA Low Medium (reduced to the extent of the aid) Medium (reduced to the extent of the construction grants) High NA
Allocation of time & cost overrun risk Private sector NA Private sector Private sector Private sector   NA
Revenue Risk for Opex Private sector risk level NA Medium – high High High High NA Low
Source of revenue risk NA Revenue Risk reduced by the operational subsidy Revenue Risk due to dependence on user charges Revenue Risk due to dependence on user charges for operating expenses Revenue Risk due to dependence on user charges for operating expenses NA Take-or–pay provides a guaranteed revenue stream

 

 

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