Financial risk assessment and modelling of PPP based Indian highway infrastructure projects

Abstract

This paper investigates financial risk associated with highway infrastructure projects by identifying parameters such as traffic flow and project cost; and further models the risk by analysing real-world PPP based highway projects in India. It applies the Net Present Value (NPV)-at-risk model tool which uses Monte Carlo Simulation taking into account the probability distributions for different input parameters, and gives uncertainty associated with NPV. Further, the model is applied to 30 real-world BOT highway projects to identify critical risks and discuss mitigation strategies. The critical contribution of the paper is towards applying a standard risk-analysis model (NPV-at-risk tool supported by Monte Carlo Simulation) to the real-world PPP based highway infrastructure projects. The application of the developed model can be used as a decision tool to judge the profitability of a project and make investment decisions in the bidding phase by the private investors. It also helps in identifying which source of uncertainty has the most influence on the project’s financial returns and what is the actual relationship between the critical influencing parameters and associated NPV; this will be helpful to government agencies and public authorities to identify the factors that have largest impacts and consider the corresponding mitigation strategies.