Development of Financial Model for Hybrid Annuity Model Road Project

Abstract

AbstractPublic-Private-Partnership (PPP) models are in demand for infrastructure development all over the world. Road transport is an important infrastructure for the economic development of the country. Commonly adopted PPP models by the National Highways Authority of India in road projects are Build-Operate-Transfer (BOT) toll, BOT—annuity, Hybrid Annuity Model (HAM), toll-operate-transfer, operate–maintain–transfer, Engineering Procurement Construction (EPC). HAM is a combination of the traditional EPC and BOT—annuity model. HAM considers the involvement of both the parties that is the public and private sector. Mixed initial investment and different risk allocations make HAM distinct from other PPP models. PPP models are often long-term in nature, which makes both the parties check project’s financial viability. This study aims to develop a financial risk model using Net Present Worth (NPW)-at-risk method. From the literature, financial key risk parameters are identified. A case study is selected and cash flows from the public’s perspective are prepared. Probability distributions are allocated to risk parameters and Monte Carlo simulation is carried out using @Risk tool. The study also compares central and state policies of HAM. The findings from the developed financial model show variation of NPW as well as critical risk parameters. This financial model can be used as a decision tool for public authority and certain mitigation techniques can be applied to optimize project characteristics for the identified critical risk parameter.KeywordsFinancial risk modelHybrid annuity modelNet present worth-at-riskPublic-private-partnership