IFRIC 12 PPP Accounting in Indian Infrastructure: NHAI and Airport Operators
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Sai Manikanta Pedamallu
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IFRIC 12 PPP Accounting in Indian Infrastructure: NHAI and Airport Operators
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
An Indian highway developer with a portfolio built over fifteen years will hold concessions under four or five different structures, awarded under successive policy regimes, each allocating risk differently.
Those concessions do not share an accounting model. Some produce a financial asset, some an intangible asset, some both, and some are not concessions at all. The classification is made contract by contract, and an operator that applies a single model across its portfolio because that is how it has always accounted for highways will be wrong on a substantial part of it.
Post 84 covered IFRIC 12's framework. This post applies it to the structures actually used in Indian infrastructure.
The Classification Question, Restated
Two scope conditions must be met: the grantor controls or regulates what services are provided, to whom, and at what price; and the grantor controls any significant residual interest in the infrastructure.
Where both are met, the operator does not recognise the infrastructure. It recognises either a financial asset, an intangible asset, or both, and the determinant is where demand risk sits.
Financial asset model where the operator has an unconditional contractual right to receive cash from the grantor, including through a shortfall guarantee.
Intangible asset model where the operator receives a right to charge users, with amounts contingent on usage.
Both where the arrangement contains elements of each, applied on a residual basis.
The Indian Highway Models
India's highway procurement has moved through distinct phases, and the accounting follows the risk allocation in each.
EPC: Not a Concession at All
Under an engineering, procurement and construction contract, the authority pays the contractor to build the road. The contractor has no role in ownership, toll collection, or long-term maintenance.
IFRIC 12 does not apply. There is no concession, no right to operate, and no long-term arrangement. This is a construction contract accounted for under IFRS 15, with revenue recognised as performance obligations are satisfied.
EPC has consistently accounted for a substantial share of NHAI awards, and it produces none of the complexity discussed in this post.
BOT-Toll: Intangible Asset Model
Under the traditional build-operate-transfer toll structure, the concessionaire finances and constructs the road, collects tolls from users during the concession period, and transfers the asset to the authority at the end.
The concessionaire's return depends entirely on traffic. Demand risk sits with the operator.
This is the intangible asset model. The operator recognises a licence to charge users, measured at the fair value of the construction services provided, and amortises it over the concession term.
BOT-Toll dominated Indian highway procurement through the 2000s. It also produced the problem that reshaped the sector: the collapse of the traditional BOT toll model left more than thirty-five stalled highway projects worth billions of dollars between 2010 and 2015, as traffic underperformed projections and concessionaires could not service debt against revenues that never materialised.
The intangible asset model reflects that exposure directly. When traffic disappoints, revenue falls while amortisation does not.
BOT-Annuity: Financial Asset Model
Under the annuity structure, the concessionaire builds and maintains the road but receives fixed semi-annual payments from the authority irrespective of traffic. The authority collects the tolls.
Demand risk sits with the grantor. The operator has an unconditional right to receive determinable amounts.
This is the financial asset model. The operator recognises a receivable from NHAI, measured initially at the fair value of construction services, and subsequently at amortised cost with annuity receipts split between principal repayment and finance income.
HAM: The Dominant Model, and a Clear Financial Asset
The hybrid annuity model was introduced in January 2016 by the Ministry of Road Transport and Highways, as a direct response to the BOT collapse. It has since become the dominant structure, accounting for roughly forty per cent of NHAI projects awarded since 2016 and a central pillar of the Bharatmala programme, with HAM representing around half of kilometres awarded in some years.
The structure. A special purpose vehicle led by a private developer signs a concession with NHAI for a typical period of seventeen to twenty years, comprising around two years of construction plus fifteen years of operation and maintenance.
NHAI finances forty per cent of the bid project cost directly during construction, paid in five equal instalments tied to physical progress milestones. The concessionaire raises the remaining sixty per cent, of which twenty to twenty-five per cent of total project cost is typically equity and the balance debt.
The critical feature for accounting purposes: there is no toll right. NHAI collects the tolls and retains the revenue. The concessionaire receives fixed semi-annual annuity payments covering repayment of the balance investment plus interest, inflation-indexed, with interest at the bank rate plus a specified margin. Annual operation and maintenance payments are made separately by the authority.
Traffic risk is entirely borne by the government.
Why HAM Is Unambiguously a Financial Asset
The analysis is straightforward once the risk allocation is set out.
The concessionaire has no right to charge users, so no licence arises and the intangible asset model cannot apply.
The concessionaire has an unconditional contractual right to receive determinable amounts from NHAI, in the form of construction milestone payments during construction and semi-annual annuities thereafter, none of which are contingent on traffic.
The financial asset model applies to the whole arrangement.
This is a cleaner classification than BOT-Toll or many mixed structures, and it is one reason HAM has been attractive to lenders and to infrastructure investment trusts acquiring operating assets.
HAM Accounting in Practice
During construction. The concessionaire is providing a construction service to NHAI and recognises construction revenue under IFRS 15 as it performs. The consideration takes two forms: cash received through the forty per cent milestone payments, and a financial asset representing the right to receive the balance through future annuities.
Borrowing costs during construction are expensed, not capitalised. This is the point most frequently missed and it is material. As Post 84 explained, a financial asset is not a qualifying asset under IAS 23. Interest incurred during the two-year construction period on the sixty per cent debt-funded portion goes straight to profit or loss.
For an operator accustomed to BOT-Toll, where construction period interest was capitalised into the concession intangible, this is a significant change in reported construction-phase earnings.
During operations. Annuity receipts are split between repayment of the financial asset and finance income, recognised using the effective interest method. Operation and maintenance revenue is recognised separately under IFRS 15 as the services are provided.
The presentational consequence noted in Post 84 is particularly visible for HAM: a substantial portion of what the sponsor thinks of as project revenue appears as finance income rather than revenue, because it represents the unwinding of a receivable.
Credit risk. The financial asset is measured under IFRS 9, which means the expected credit loss model applies. The counterparty is NHAI, a government authority, which affects the assessment but does not eliminate it. Operators must perform and document the ECL assessment covered in Post 18.
TOT: Paying for the Right to Collect
Under the toll-operate-transfer structure, an operator pays an upfront concession fee to the authority for the right to collect tolls on an existing, already-constructed highway for a specified period, typically alongside maintenance obligations.
The operator receives a right to charge users, with amounts contingent on traffic. Demand risk sits with the operator.
This is the intangible asset model, but with a distinctive feature: there is no construction service. The intangible asset is measured at the cost of acquiring the right, being the upfront concession fee paid, plus any directly attributable costs. It is amortised over the concession period.
Because the asset is acquired for cash rather than created through construction services, borrowing costs on debt raised to fund the upfront payment require assessment against IAS 23. An intangible asset acquired ready for use is not a qualifying asset; the question is whether any substantial period is required to prepare it for its intended use.
Highway Model Comparison
| Model | Who collects tolls | Demand risk | IFRIC 12 model | Construction period borrowing costs |
|---|---|---|---|---|
| EPC | Authority | Authority | Not applicable; IFRS 15 construction contract | Not applicable |
| BOT-Toll | Concessionaire | Concessionaire | Intangible asset | Capitalised into the intangible |
| BOT-Annuity | Authority | Authority | Financial asset | Expensed |
| HAM | Authority | Authority | Financial asset | Expensed |
| TOT | Concessionaire | Concessionaire | Intangible asset, acquired for cash | Assess against IAS 23; typically expensed |
Airport Concessions
Indian airport concessions raise questions the highway models do not, principally because the revenue base is mixed and the regulatory framework covers only part of it.
The structure. Private airport operators hold long-term concessions, commonly structured as operation, management and development agreements with the Airports Authority of India, typically for thirty years with an extension option. The operator develops and operates terminal and airside infrastructure, and pays a revenue share to the authority.
The revenue streams divide into two categories.
Aeronautical revenue comprises landing and parking charges, user development fees, and passenger service fees. These tariffs are regulated by the Airports Economic Regulatory Authority, which determines charges through periodic tariff orders.
Non-aeronautical revenue comprises retail concessions, food and beverage, advertising, car parking, ground handling, cargo, and commercial property development. These are largely commercially negotiated and not tariff-regulated.
The Scope Question
IFRIC 12's first scope condition requires the grantor to control or regulate what services are provided, to whom, and at what price.
For aeronautical services, that condition is plainly satisfied. AERA determines the tariffs, the services are prescribed, and the users are defined. Grantor control over price is direct and observable.
For non-aeronautical activities, the position requires analysis. Retail rents and advertising rates are commercially negotiated, and the operator has substantial discretion over the commercial mix within the terminal.
The question is whether the arrangement should be assessed as a whole, on the basis that the terminal infrastructure is a single asset used to deliver a single integrated public service, or whether the commercial activities are separable.
The prevailing analysis treats the concession as a single arrangement where the infrastructure is indivisible and the non-aeronautical activity is conducted using infrastructure the grantor controls, with the residual interest in the whole terminal reverting to the authority. Where a discrete commercial asset is genuinely separable, such as a hotel or a commercial property development on land held under a separate arrangement, a different conclusion may follow.
The assessment is contract-specific and it is one of the more significant judgments in Indian airport accounting.
The Model Question
Where IFRIC 12 applies to an airport concession, the operator's remuneration comes from charging users, both airlines and passengers, with amounts contingent on traffic volumes.
Demand risk sits with the operator. Passenger and aircraft movements determine revenue, and the operator bears the consequence of underperformance.
This points to the intangible asset model for the construction and development activity, with the operator recognising a right to charge users, measured at the fair value of construction services, amortised over the concession period.
Where the concession includes any element of guaranteed payment from the authority, a mixed model arises and the residual approach applies.
The Revenue Share
Airport concessions typically require the operator to pay the authority a share of gross revenue.
This is not a levy under IFRIC 21. It is consideration payable under the concession contract, and it is accounted for as an operating cost recognised as the related revenue is earned. Where the revenue share obligation extends over the concession term and is contractually fixed as a percentage, no separate liability is recognised in advance; the obligation arises as revenue is generated.
The Tariff Framework Interaction
AERA determines aeronautical tariffs by reference to a regulated asset base, a permitted return, and projected traffic, with true-up mechanisms across control periods.
Two points follow for the accounting.
The regulated asset base is not the IFRIC 12 carrying amount. The regulatory construct and the accounting construct are computed differently and for different purposes, and they will not agree.
True-up mechanisms require assessment. Where a tariff order provides for recovery of a shortfall in a subsequent control period, the operator must assess whether an asset has arisen. A regulatory true-up receivable is not automatically recognisable, and the analysis depends on whether the operator has an enforceable right to the amount rather than an expectation of future tariff-setting behaviour.
The InvIT Dimension
Indian infrastructure assets are increasingly held through infrastructure investment trusts, and operating concessions are routinely acquired by InvITs from developers seeking to recycle capital.
A single recent transaction involved a portfolio of twelve road projects at an enterprise value of approximately Rs. 9,006 crore, comprising eleven hybrid annuity concessions from NHAI and one toll road concession from a state highways authority.
That composition illustrates the accounting consequence. The eleven HAM concessions produce financial assets; the single toll concession produces an intangible asset. The acquiring trust carries both models within one portfolio, and the reported revenue, finance income, and amortisation profile of the portfolio reflects that split.
For an acquirer, the classification is not inherited mechanically. Where an InvIT acquires a concession, it assesses the arrangement under IFRIC 12 on the basis of the rights and obligations it has acquired, and the measurement is at the acquisition-date fair value of the acquired asset rather than the transferor's carrying amount.
Obligations Common Across Models
Major maintenance and resurfacing. Every long-term highway concession carries periodic resurfacing obligations. As covered in Post 84, the obligation arises from use of the road during the operating phase and is recognised as an IAS 37 provision as that use occurs, not when the resurfacing is performed and not evenly over time.
Under HAM, where the authority makes separate operation and maintenance payments, the provision and the related revenue are recognised separately rather than netted.
Handback obligations. Concessions typically require the asset to be handed back in a specified condition. Where meeting that condition requires expenditure beyond routine maintenance, the obligation is assessed under IAS 37 and accrues as the condition deteriorates.
Upgrade obligations. Where the concession requires capacity expansion, that is a construction service generating additional consideration and additional asset recognition, not a provision.
What Big 4 Auditors Focus On
Contract-by-contract classification. Auditors test that each concession has been separately assessed, particularly for operators holding concessions awarded under different policy regimes. A single model applied across a mixed portfolio is a finding.
Borrowing cost treatment under HAM. Given the volume of HAM concessions and the two-year construction periods, auditors specifically test that construction period interest has been expensed rather than capitalised, since the financial asset is not a qualifying asset.
The implicit rate and finance income recognition. For financial asset concessions, auditors test the effective interest rate derived from the annuity profile and the split of receipts between principal and finance income.
ECL on concession receivables. Auditors test that the expected credit loss assessment has been performed on financial assets due from authorities, and that a government counterparty has not been treated as risk-free without analysis.
Airport scope and separability. Auditors test the assessment of whether non-aeronautical activities fall within the IFRIC 12 arrangement, and challenge any conclusion that carves out substantial commercial activity without a clear contractual basis.
Regulatory true-up recognition. For airports, auditors test whether amounts expected to be recovered through future tariff orders have been recognised as assets, and whether an enforceable right exists.
Resurfacing provisions. Auditors test that provisions accrue with usage rather than being recognised when the work is performed.
Dip IFRS Exam Angle
Indian PPP structures do not appear in Dip IFRS questions, but the classification analysis does.
Most tested areas:
Determining the model by identifying where demand risk sits, rather than by the label attached to the arrangement.
Recognising that a shortfall guarantee converts a usage-based arrangement into a financial asset.
Recognising construction revenue during the build phase under both models.
Applying the borrowing cost distinction between the two models.
Recognising resurfacing obligations as usage occurs.
Common traps:
Recognising the infrastructure as the operator's property, plant and equipment under any model.
Capitalising construction period borrowing costs under the financial asset model.
Assuming a government counterparty removes the need for an expected credit loss assessment.
Applying a single model to a portfolio of concessions with different risk allocations.
Treating a revenue share payable to the grantor as a levy under IFRIC 21 rather than as contractual consideration.
FAQ
Why is HAM a financial asset when the concessionaire builds and maintains the road?
Because the concessionaire has no right to charge users. NHAI collects the tolls and bears traffic risk entirely, and the concessionaire has an unconditional contractual right to receive determinable annuities. Building and maintaining are services provided; the remuneration is a receivable, not a licence.
Can a HAM operator capitalise interest during construction?
No. The asset being created is a financial asset, and a financial asset is not a qualifying asset under IAS 23. Construction period borrowing costs are expensed as incurred, which is a material difference from the BOT-Toll treatment many operators were accustomed to.
How is the forty per cent construction support from NHAI accounted for?
As consideration for construction services, received in cash through milestone payments. It reduces the financial asset that would otherwise build up, rather than being a grant or a reduction in construction cost.
Does IFRIC 12 apply to an airport's retail and advertising revenue?
The prevailing analysis treats the concession as a single arrangement where the terminal infrastructure is indivisible and the residual interest reverts to the authority, bringing non-aeronautical activity within the arrangement. Where a genuinely separable commercial asset exists under a distinct arrangement, a different conclusion may follow. The assessment is contract-specific.
Is the revenue share paid to the Airports Authority a levy?
No. It is contractual consideration under the concession agreement, recognised as an operating cost as the related revenue is earned. IFRIC 21 addresses levies imposed by government under legislation, not payments due under a negotiated contract.
Why does a HAM operator report large finance income rather than revenue?
Because under the financial asset model, annuity receipts are split between repayment of the receivable and finance income recognised using the effective interest method. Only the operation and maintenance element is revenue. The presentation reflects that the operator is, in substance, financing the authority.
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This is Post 91 of the Global Fin X IFRS Series. Previous: IFRIC 21 Levies in Indian Context: GST Prepayments and Regulatory Fees. Next: Post 92: How IFRS 15, IFRS 16 and IAS 12 Interact: Revenue, Leases and Tax Together.