Public-Private Partnerships in Roadways: Bidding for MKHP

Investment in infrastructure has become a key focus area across emerging markets as the Indian government seeks to facilitate the development of high-quality infrastructure as a precursor to robust economic growth. However, given the risk of capital-intensive, infrastructure projects creating fiscal stress, governments have sought to develop structures wherein the burden of development can be efficiently shared with private parties. The case presents the setting of a typical auction of an infrastructure project. The Malgudi Kittur Highway Project (MKHP) is being auctioned as a Build-Operate-Transfer (BOT) project by the government. Private entrepreneur bids on an annual premium that the winning bidder will pay to the government in return for the right to build and operate the highway for a period of 26 years. The project is awarded to the highest bidder who undertakes risks associated with development and execution in return for the toll-road proceeds net of running expenses and annual premium. Two key risks are highlighted in this case: (i) a potential delay in development leading to an escalation in development costs and (ii) a difference between the ex-post realized revenues and the ex-ante baseline revenue estimates. The case can be set up as an auction simulation exercise in which students / groups tender bids for the BOT contract. The instructor can use the case to showcase various auction mechanisms used to allocate such contracts (e.g., sealed bid, English auction, Dutch auction, etc.). The excel model can be used to evaluate the NPV of the winning bid based on the ex-ante uncertainty as well as in light of an ex-post resolution of the uncertainty. The case study stimulates discussion on how potential bidders deal with such uncertainty and the steps that they can take to mitigate its impact. The case study also motivates a discussion on the risks associated with infrastructure projects and the concession agreement to facilitate an effective sharing of risks.