Traffic revenue risk management through Annuity Model of PPP road projects in India L. Boeing Singh, Satyanarayana N. Kalidindi * Building Technology and Construction Management, Department of Civil Engineering, Indian Institute of Technology Madras, Chennai 600 036, India Abstract The Government of India has been promoting involvement of private entrepreneurs in development of road projects with a focus on overcoming the limitations of the traditional public procurement system. Participation of private entrepreneurs through Public–Private Partnership (PPP) route brings in additional capital and imparts techno-managerial efficiency in the project development and operation. The success of projects procured through PPP route greatly depends on the transfer of risks associated with the project to the parties best able to manage the risks. The traffic revenue risk has been identified as one of the most critical risks impacting the commercial success of the Indian road projects procured through PPP mode. Private sector’s reluctance to assume traffic revenue risk and lack of users’ will- ingness to pay have led to development of innovative contractual structures, such as Annuity Model. This paper discusses the Annuity Model with the help of a case study. Annuity Model is a traffic risk-neutral PPP model where private investment by the project promoters in designing, constructing, and operating the facility is recouped with the annuities paid by the granting authority over the concession period. Ó 2006 Elsevier Ltd and IPMA. All rights reserved. Keywords: Public-private partnership; Annuity Model; Risk management; Traffic revenue risk; India 1. Introduction Roads play a pivotal role in the economic development of a nation, by increasing the productivity and competitive- ness [1]. The Indian Central Government and the state gov- ernments realizing the importance of the road network in economic development have taken numerous initiatives to improve the national road network, both in terms of upgrading the quality and augmenting the magnitude, to keep pace with the demands dictated by the economic lib- eralization. Innovative delivery systems have been devised to overcome the shortcomings like budgetary constraints, and weakness in planning and implementation of the road projects related with the traditional public procurement system [2]. The Build Operate Transfer (BOT) approach has been most commonly used to implement road projects in the Public Private Partnership (PPP) mode. This approach brings additional resources to fill the fiscal gap, assists in transfer of technical know-how, and imparts effi- ciency in project procurement and operation through the involvement of private sector. The procurement of PPP road projects evolves through project development, construction, and operation. The pri- vate parties’ investment in the project through develop- ment, construction, and operation of the project is recouped with the returns in the form of either user’s fee or grant. The certainty within which the private parties’ investments will be recouped is influenced by the various risks associated with the different phases of the project. The traffic revenue risk has been identified as one of the most critical risks impacting the commercial success of 0263-7863/$30.00 Ó 2006 Elsevier Ltd and IPMA. All rights reserved. doi:10.1016/j.ijproman.2006.07.008 * Corresponding author. Tel.: +91 44 2257 4268; fax: +91 44 2257 0545. E-mail addresses: boeing@iitm.ac.in (L. Boeing Singh), satyakn@iitm. ac.in (S.N. Kalidindi). www.elsevier.com/locate/ijproman International Journal of Project Management 24 (2006) 605–613 INTERNATIONAL JOURNAL OF PROJECT MANAGEMENT