# **5. PPP contract design and early terminations of highway PPPs in India**

PPPs in national highways in India experienced several early terminations between 2013 and 2015. Anecdotal evidence points to the incentives created by some contract designs as a potential reason for the early termination (ADB and others 2018; Pratap and Chakrabarti 2017). This section takes advantage of the existence of different contract designs for national highways PPPs in India during the early 2010s to identify contract features that can help explain the large number of early terminations. Narrowing the sample to national highways PPPs in India allows looking at contract features that are not available for the global and cross-sectoral sample used in previous sections. The analysis in this section can help improve the design of road PPPs and their contract structure as well as inform the design of PPPs in other sectors with similar incentive structures.

The analysis uses the national highway PPPs in India with financial closure or concession agreement years from 2010 to 2014 included in the PPI database. Out of the 125 projects with financial closure or concession agreement year between 2010 and 2014, 26 were canceled, and 24 of those cancellations occurred between 2013 and 2014. One cancellation occurred in 2015 as a result of a lengthy court process over the terms of termination after the project company decided to withdraw from the project in 2014. The timeframe allows comparing canceled projects with contemporaneous active projects.

Data on the investment amount, the project status, the length of the road to be constructed, and the data on financing mix were extracted from the PPI database. When the data for a project is missing in the PPI database, the data were collected from the concession agreements published on the National Highways Authority of India (NHAI) website, and in the case of financing data from online news articles or private sponsors’ annual reports.

During this period, two types of PPP contracts were mainly initiated by NHAI: toll- and annuitybased projects. Toll-based projects entitled the project company to charge tolls, and annuity-based projects entitled the project company to semi-annual availability payments from the NHAI after the construction or rehabilitation of the road.

All contracts were awarded through competitive auctions. For toll-based projects, the outcome of the auction could be either an annual _premium payment_ from the private sponsor to the government, which would escalate at 5 percent yearly, or an upfront _capital grant_ from the government for the PPP project through the Viability Gap Funding—based on the expected profitability of the roads. Sponsors would bid either the highest premium they would pay or the lowest capital grant they would require. For annuity-based projects, the sponsors would bid the lowest annuity payments they require.<sup>23</sup> The procurement process ends in three types of contracts each of which presents a different set of risks. While both types of contracts for toll-based projects expose the project company to demand

> 23 In the chosen timeframe, there were only two projects which did not adhere to these two schemes. The first is a project which was awarded on the basis of payment of a percentage of toll revenues. The second is a hybrid annuity project which entitled the project company to both availability payments and a capital grant. The hybrid annuity model became the preferred method more recently. Both projects were excluded from the analysis.

27