The conundrum of PPP road projects
Mains Paper 2: Economy
Prelims level: Toll Projects
Mains level: Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
- In recent years, the government has extensively adopted the public
private partnership (PPP) approach in road development.
- Today, India has the distinction of having the largest PPP
programme globally in the roads sector.
- More than 560 road projects comprising a total length of 45,000 km
with an estimated investment exceeding ₹200,000 crore have been awarded on
PPP basis so far by the Centre and various state governments.
- PPP road projects broadly fall in one of the two categories of
toll or annuity, though many recent projects are being implemented under a
hybrid annuity model.
- Toll and annuity projects vary mainly in the way the developers
recoup their investment.
- The road developer collects toll from the users, whereas in the
case of the latter, the developer receives predefined annuity payments from
- While the private developer assumes the demand risk in toll
projects, it is not the case with annuity projects.
- With more than 75% of the PPP projects being implemented using the
toll model, it remains the preferred approach for policy makers.
Toll vs Annuity projects
- A basic difference between the toll and annuity projects is in the
- In the case of annuity projects, the developer does not assume any
demand risk, but the upside is capped.
- However, in toll projects, the private developer assumes the
demand risk, but would also benefit if the traffic growth is more than what
Investment in toll projects
- While PPP in roads has multiple objectives, the fundamental reason
for going for the PPP route in India is that it helps to attract private
- Private developers will consider bidding for toll-based PPPs if
they see a sensible risk-reward balance, because the private sector by its
very nature will pursue the path of higher returns rather than settle for
- If the scales can be tipped towards private sector investing in
toll projects, it would reduce the fiscal burden on the public sector. Under
what conditions would private developers invest in toll projects? A
comparison of toll and annuity projects provides some pointers (see table).
About toll projects
- Toll projects in general are characterized by longer stretches,
and therefore higher project costs.
- They also have more structures as compared to annuity projects,
indicating that they could have a higher degree of complexity.
- The estimated unit project costs are lower, indicating that
developers are able to achieve economies of scale associated with longer
- The average value of state domestic product indicates that toll
projects are seen in those states that are more developed and where economic
activity is higher, indicating the possibility of higher toll collections.
- It shows that annuity projects have higher debt levels indicating
that lenders perceive a lower risk in such projects.
- We can also see that private developers are willing to invest
higher equity provided the expected returns from the project are also
- The higher number of toll projects bears further testimony to the
willingness of private developers to undertake the risk.
What has gone sour?
- It has been an open secret that the response from developers to
new projects has been poor.
- Since many of the PPP road projects have begun operations only
- It is too early to comment on the gap between the actual and
projected traffic estimations made by the developers.
- However, what has happened is that the estimated project costs
have significantly escalated in the case of toll projects, hitting the
- While there is negligible difference in the case of time overruns,
the difference in the case of cost overruns is quite significant.
- A comparison of the actual unit costs is even starker: the average
actual unit cost for toll projects has been ₹2.94 crore per lane-km, whereas
for annuity projects, it is lower by 32% at ₹1.99 crore per lane-km.
- As the government embarks on the next phase of road development by
adopting the hybrid annuity model, treating the disease is more important
than curing the symptoms.
- If the objective is to trigger renewed interest for private sector
investment in road projects, changing the concession structure should not be
the first action taken.
- It is more important to understand the reasons behind the cost
- While it would be easier to criticize the private sector for their
optimistic bias behind aggressive bidding, our results indicate otherwise.
- So, the crux of the matter is this: the government should focus on
making the project development ready at the time of award to attract more
private sector interest, rather than changing
the concession model.
- That would lead to sustainable results, else the euphoria of the
hybrid annuity model will be short lived too.
Q1. Which of the following statements is/are correct with respect to
Engineering, Procurement and Construction (EPC) model deployed in development of
1. The government agency is responsible for acquisition of land for the
2. The private player is responsible for collection of tolls.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Q1. The government should focus on making the project development ready at the
time of award to attract more private sector interest, rather than changing the
concession model. Discuss.