AD - Tolling - Aug 2023 - PPP

PPP Projects
Public-private partnerships allow large-scale government

projects to be completed with private funding.
PPP types (commonly used)
1. BOT (Toll) Built Operate & Transfer.
2. BOT (Annuity) now Hybrid Annuity.
3. EPC Engineering Procurement & Construction.
Financing of PPP Projects 1 M. S. Rawat

Financial Assessment of PPP project
Financial Assessment is a tool designed to make

informed fiscal decision.
Financial assessment involve gathering specific

project information and determining a
government's role at key stages in the project
cycle.
PPP units in ministries of finance takes financial
decisions on PPP projects based on impacts and risks
from Financial Assessment.

Financial Feasibility Assessment
 Solely on the basis of returns (FIRR) on investments; Is the
project possible through a PPP framework
 Are financial returns from the project more than the

investment cost ?
 Are the project returns attractive for the private partner to

participate ?
 Revenue sharing with the Government in case the project is

attractive for PPP (Premium) ?
 Need any assistance from Government (Grant / Annuity)?
 Is the project amenable to Deby financing ?

Revenue Forecast
 Revenue is multiplication of Traffic & Toll.
 Traffic is considered as 7 days average and project for

Average Annual Daily Traffic. (AADT).
 Toll Policy has defined toll rates (per km) for different
categories of vehicles in linear length.
 Toll for structures >=60m is 10x; toll for Bypasses is 1.5x

& remaining length as 1x.
 Toll policy allow discount rate passes for frequent users,

like Local pass, Daily Pass, Monthly Pass & free pass for
Police, Ambulance etc.
 Yearly revenue is projected (based on traffic growth rate

& wholesale price index) for the Concession period.
Financial Viability
(Financial Internal Rate of Return).
 By listing every expected project expense and
revenue forecast, Financial assessment can calculate
the project viability in terms of IRR.
 The internal rate of return (IRR) is a metric used in

financial analysis to estimate the profitability of
potential investments.
 IRR is a discount rate that makes the net present

value (NPV) of all cash flows equal to zero in cash
flow analysis.
Financial Model Assessments
Models can be used to assess the :
 Length of contract needed to generate an acceptable

return on equity (Duration-Years; Length km )
 To workout optimum debt and equity ratio;
 Losses in early years (if applicable) that nee to be

met by the Concessionaire
 Corporate Tax revenue to government (when profits

are made)
 Impact of changing key variable such as toll rate,

project Cost etc.

Source of Funding
There are three basic sources by which a PPP project

can be financed:
 Debt (Loan from Banks / financial institution/

Lenders; generally 2/3 of TPC)
 Equity (Investment by Developer; generally 1/3 of

TPC)
 Government Support (Grant/ VGF – Part of TPC if

required)
TPC: Total Project Cost

Total Landed Cost (TPC)
Sl. Amount
Particulars
No. (Rs in Cr.)
A Concessionaire Cost
Civil Construction Cost base year (2020-21) 471.5
1
Escalation for one year (Civil Cost in 2021-22) 495.1
Physical Contingencies Charges (1% Civil Construction 4.95
2
Cost)
3 Estimated Project Cost (EPC), base year 500.03
4 IC & Preoperative Expenses (1% of EPC) 5.00
5 Interest During Construction, IDC 28.0
6 Finance Charges (1.0% of Debt) 3.85
7 Escalation @ 5.0% per annum (on TPC) 40.02
Viability Gap Funding VGF (During Construction period
8 0.00
& Operation Period)
9 Concessionaire Cost of Project after Grant 576.90
Concept of Project Finance
PPP is to attract private sector funding into the project,
arrangement is also popularly known as non-recourse or
limited recourse financing where
 Lenders are paid only from the project’s revenues;
 The project company’s obligations are ringfenced from

those of the equity investors, and debt is secured on
the future cash flows.
 Hence, lenders (finance the project around 2/3 of

TPC) need to undertake rigorous due diligence of
project cash flows and the contractual structure.
 Generally, PPP projects have Debt-Equity ratios

ranging from 70:30 to 80:20.

Bankable Project
A project could be termed financially viable
(or bankable) if
 It meets debt service obligations
 The project NPV and Equity NPV are positive
 The estimated Equity IRR is more that the

cost of equity
 This means operating cash flows need to be
high enough to cover debt service plus an
acceptable margin.

Return on Equity
EIRR represents the time adjusted earnings over

project life. (Desired > 15%)
It is that rate that equates the present value of cash

inflows to the present value of cash outflows of the
project.
OR in other words, the discount rate that set sets NPV

of cash flows to zero .
EIRR- Equity Internal Rate of Return:

NPV-Net Present Value

Debt Service Cover Ratio
Cash flow at all times be higher than the debt due.
Else project may fall into debt trap.
The projected cash flow must, at a minimum, be

adequate to finance the projected debt service.
The usual requirement is that the net cash flow each year
must be at least 1.2 times (depends on the risk profile)
the debt payment due in that year.
Cost Recovery
The number of years to pay back the equity

investment.
Infrastructure projects that involve large upfront

capital costs, such as roads, require long timeframes
for cost recovery. 15 to 30 years.
Cost recovery options – Whether the revenue from

the PPP will be from a user-charges or annuity paid
by the public sector has important implications for the
nature of the risk sharing.
Viability Gap Funding (VGF)
Viability Gap Funding (VGF) is often called as Grant.
VGF is designed to provide capital support to PPP

projects which would not otherwise be financially
viable.
VGF has the effect of reducing the revenue required to

recover costs and provide a financially attractive return
for the private sector.
 Government norms allow up to 40% Total Project Cost as VGF.
 TPC (Total Project Cost) is Civil Cost plus Centages. (approx. 25%)
Quantitative Risk Analysis.
Quantitative risk analysis uses mathematical

models and simulations to assign numerical
values to risk.
Qualitative risk analysis relies on a person's

subjective judgment to build a theoretical
model of risk for a given scenario.
Risk Analysis is often both on Civil Cost and
Revenue.

Quantitative Risk Analysis.
Risk Scenario / Sensitivity Analysis:
1. 10% Increase in civil cost due to higher

inflation
2. 10% decrease in revenue due to decrease

in economic activities.
3. Above two scenario together. Civil Cost

+10%, Revenue -10%

Summary
PPP type: BOT(Toll), Hybrid Annuity, EPC
Risk : Cost Risk (Time Over Run/ Cost Over

Run) & Revenue Risk (Competing facility)
Financial Assessment is a toll to take informed

financial decision.
Cash flow needs to be critically reviewed at all

stages.
Paradox
Highway projects on PPP are good

in theory, but in India they are a
failure in practice

Common Reasons for Failure
1. Deficient Quality of DPR ( 50% - 60% Magnitude)

LA, CoS, Time & Cost Over Run
2. Poorly drafted Contracts (20% -30% Magnitude)
3. Lack of experience in either public sector or developer
4. A failure to adopt a partnership attitude
5. Lack of understanding of complexity, context and

dependencies of contract
6. Aggressive bidding by Concessionaires (5%)

What do the Private Sector want?
 Scope to be clearly defined together with risk allocation
& project cost should be realistic
 All clearances viz. LA, Utility, Environmental, etc. to be
made available upfront
 Quick decisions on CoS, issues arising out of law and
order, force majeure, etc.
 Traffic control, incident management, etc. to be addressed
jointly by Client and Concessionaire
 Dispute settlement mechanism to be quick, fair and
efficient
 Flexibility in design & specification and in use of
materials, as per site conditions
M. S. Rawat
011-8826011448
[email protected]
[email protected]
Financing of PPP Projects M. S. Rawat
21

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PPP Projects

Public-private partnerships allow large-scale government

2. BOT (Annuity) now Hybrid Annuity.

3. EPC Engineering Procurement & Construction.

Financing of PPP Projects 1 M. S. Rawat

Financial Assessment is a tool designed to make

Financial assessment involve gathering specific

Financing of PPP Projects 2 M. S. Rawat

 Are financial returns from the project more than the

 Are the project returns attractive for the private partner to

 Revenue sharing with the Government in case the project is

 Need any assistance from Government (Grant / Annuity)?

 Is the project amenable to Deby financing ?

 Traffic is considered as 7 days average and project for

 Toll for structures >=60m is 10x; toll for Bypasses is 1.5x

 Toll policy allow discount rate passes for frequent users,

 Yearly revenue is projected (based on traffic growth rate

 The internal rate of return (IRR) is a metric used in

 IRR is a discount rate that makes the net present

Models can be used to assess the :

 Length of contract needed to generate an acceptable

 To workout optimum debt and equity ratio;

 Losses in early years (if applicable) that nee to be

 Corporate Tax revenue to government (when profits

 Impact of changing key variable such as toll rate,

Financing of PPP Projects 6 M. S. Rawat

There are three basic sources by which a PPP project

 Debt (Loan from Banks / financial institution/

 Equity (Investment by Developer; generally 1/3 of

 Government Support (Grant/ VGF – Part of TPC if

TPC: Total Project Cost

Financing of PPP Projects 7 M. S. Rawat

 Lenders are paid only from the project’s revenues;

 The project company’s obligations are ringfenced from

 Hence, lenders (finance the project around 2/3 of

 Generally, PPP projects have Debt-Equity ratios

Financing of PPP Projects 9 M. S. Rawat

 The project NPV and Equity NPV are positive

 The estimated Equity IRR is more that the

Financing of PPP Projects 10 M. S. Rawat

EIRR represents the time adjusted earnings over

It is that rate that equates the present value of cash

OR in other words, the discount rate that set sets NPV

EIRR- Equity Internal Rate of Return:

Financing of PPP Projects 11 M. S. Rawat

Cash flow at all times be higher than the debt due.

Else project may fall into debt trap.

The projected cash flow must, at a minimum, be

The number of years to pay back the equity

Infrastructure projects that involve large upfront

Cost recovery options – Whether the revenue from

VGF is designed to provide capital support to PPP

VGF has the effect of reducing the revenue required to

Quantitative risk analysis uses mathematical

Qualitative risk analysis relies on a person's

Financing of PPP Projects 15 M. S. Rawat

Risk Scenario / Sensitivity Analysis:

1. 10% Increase in civil cost due to higher

2. 10% decrease in revenue due to decrease