Financial Viability Analysis of the Road Sector Projects in

“Financial Viability Analysis of the Road Sector

Projects in India.”

SUBMITTED TO:

UNDER THE GUIDANC

PREPARED AND SUBMITTED BY

ABSTRACT:

As India continues to grow at more than 8%, a balanced increase in the gross capital

formation (GCF) in infrastructure as a proportion of the GDP emerges as the most

important key in sustaining high economic growth. Though recently there have been

investments in the infrastructure sector, the GCF as a proportion of GDP continues to be

lower at around 5%. As far as the physical infrastructure is concerned, there exists a huge

deficiency, in our view. Inadequate infrastructure is identified as one of the biggest

constraints of doing business in India. Therefore, to give proper direction to highway

development The Planning Commission of India has estimated an investment of INR

3118 billion under the Eleventh Plan versus the INR 1448 billion spent under the Tenth

Plan.

Further Private participation is crucial to meet the investment goal in infrastructure

because there are limitations to budgetary support from the Indian government. For this

purpose a proper framework is being put in place to enhance participation of the private

sector in various segments of infrastructure. So we can expect a strong private

participation in roads through BOT projects. BOT stands for "Built, Operate and

Transfer". BOT model uses private investment to undertake the infrastructure

development that has historically been the preserve for the public sector. In a BOT

project a private company is given a concession to built and operate a facility that would

normally be built and operated by the government. The facility might be a power plant,

airport, toll road, etc. But we are here concerned with the financial attractiveness of toll

road projects to the Private Infrastructure developers. For this purpose I have provided an

insight to the various opportunities available like the tax benefits and various aids and

grants announced by the Government. I have also tried to bring to notice all the major

risks involved and steps to mitigate such risks.

Further I have done a comprehensive financial analysis in which I have made certain

assumptions and calculated the BOT toll road project’s IRR and DSCR, which proves

the fact that such projects are, indeed, not only financially lucrative but also has a

dazzling future.

CERTIFICATE OF ORIGINALITY

The thesis “Financial Viability Analysis of the Road Sector Projects in India” submitted

by for his MBA program has been pursued and completed under my guidance. The same

has been upto my expectation and so I, hereby, approve the same.

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Thesis Topic Approval (Fin) SS/ 2006-08Thesis to me show details Apr 29 Reply

Dear Vijay,

This is to inform that the thesis topic “Financial Viability Analysis of the Road Sector Projects in

India”, as proposed by you, has been approved .This email is an official confirmation that you would be doing your thesis work under the guidance of. Make it a comprehensive thesis; the objective of a thesis should be value addition to the existing knowledge base.

Please ensure that the objectives as stated by you in your synopsis are met using the appropriate research design.

You must always use the thesis title as approved and registered with us.

You are required to correspond with us by sending atleast six response sheets to (format attached along with this mail) at regular intervals, before 31st May 2008 (the last date for thesis submission).

Regards,

ACKNOWLEDGEMENT

Guidance, assistance and cooperation of a lot of people is always involved in successfully completing a project, and so with great pleasure and privilege I wish to thank those people who have been actively supporting me in the project.

First of all, I would like to thank, for providing me an opportunity to work on this project. He constantly encouraged and guided me to streamline this project from conceptualization to finish.

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I am especially thankful to for guiding me through the project with valuable inputs and suggestions. He has been a source of constant support and encouragement.

The whole of has been immensely supportive and very helpful during course of the thesis.

Last but not the least, I would also like to thank from National Highways Authority of India for providing me documents pertaining to the subject under study.

Table of Contents

Chapter I: Introduction. 11.1 Study Background. 11.2 Scope. 2

Chapter II: An Overview of Indian Road Sector. 32.1 Classification of Roads. 32.2 National Highway Network. 52.3 Trend in Road Traffic. 52.4 Deficiencies in the Road Sector - mismatch between demand for road

transport and road space.7

2.5 Revenue from road transport and expenditure on roads. 72.6 Economic losses due to poor conditions of roads. 82.7 The dwindling Public Sector Outlay on Transport. 82.8 Agencies involved in Road Sector Development in India. 102.9 Road Development Plans. 13

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2.10 Current status. 14

Research Methodology 15

Chapter III: Trends in Road Sector Financing. 163.1 Traditional Financing Mechanism. 16

3.1.1 Budgetary Allocations. 163.1.2 Central Road Fund. 163.1.3 Octroi. 163.1.4 Foreign Aid to Road Sector. 17

3.1.4.1 Historical Background. 173.1.4.2 World Bank Aided Projects. 173.1.4.3 Asian Development Bank Aided Projects. 203.1.4.4 OECF/JBIC Aided Projects 23

3.2 Alternative Financing Mechanism. 243.2.1 Market Borrowings. 243.2.2 Private Sector Participation. 26

3.2.2.1 Government of India initiatives. 263.2.2.2 Implementation Models. 27

BOT (Toll Based). 27 BOT (Annuity). 31 Govt. owned SPV. 32 MOU (Negotiated Deal). 33 Govt. to Govt. Cooperation. 34

3.2.2.3 The Route Map already followed – A Data Base on India’s Road Sector Privatization Efforts.

35

Chapter IV: Critical Issues – Private Sector Road Financing. 37

4.1 Stages in development of Road Sector Projects. 37

4.2 Financial Structuring of BOT Road Projects. 39

4.2.1 Project Financing. 39

4.2.2 Means of Financing. 40

4.2.3 Components of Project Costs. 43

4.3 Procurement Issues and Selection of Concessionaire. 44

4.3.1 Bidding Criteria. 44

4.4 Governments Role in facilitating BOT Projects. 45

4.4.1 Supportive Legal Framework. 45

4.4.2 Administrative Framework. 46

4.4.3 Govt. incentives and other form of support. 47

4.5 Contract Package and Project Agreements. 48

4.6 Identification of Risks Matrices and Instruments for Mitigation. 51

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4.6.1 Risks involved in Road Sector Projects. 51

4.6.2 Instruments for mitigating risks. 53

Chapter V: Lessons from International Experience. 65

5.1 International Practices. 65

5.2 Advantages & Disadvantages of common Govt. support measures for Toll Road development.

66

5.3 Examples of Toll Adjustment Procedures. 70

Chapter VI: The Way Forward – Opportunities for PSP in Road Sector Development & Conclusion.

73

6.1 Opportunities. 73

6.2 Findings. 73

6.3 Recommendations/Suggestions. 74

6.4 Conclusion – The Middle Path. 74

Chapter VII: Model: Financial Viability Analysis. 76

7.1 Description. 76

7.2 Sensitivity Analysis. 77

7.3 IRR & DSCR 78

Bibliography. 79

Appendix A: Model Excel Sheets. 80

Appendix B: Model of Concession Agreements 84

Response Sheets 94

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1. Introduction

1.1 Study Background

The road sector has been, and will be for a long time, the dominant form of transport for

freight and passenger movement throughout the world. In India the decade of 90s

witnessed a series of economic reforms. The government since then is committed to

second generation reforms aimed at achieving an annual growth rate of 7 to 8 percent.

Such acceleration in growth is bound to create a massive demand for infrastructure

services such as power, telecom, roads, ports, railways and civil aviation.

Over the last few years, the road development scenario has changed rapidly. Until 1991,

government was exclusively responsible for the development and maintenance of the

road sector. In the absence of user charges, the road sector in India has relied entirely on

the budgetary allocation and funding by multilateral agencies, which stagnated at about 3

percent of the total plan expenditure during the seventh and eighth five-year plans.

The major initiative taken in the road sector was the constitution of the “Central Road

Fund” with the introduction of a cess on fuel. Over the years this has become the major

source of financing highways development programme. The revenue from the cess has

increased from Rs. 2000 crores at time of its inception to Rs. 5000-6000 crores per

annum.

The era of 90s also witnessed major changes in the policies. To facilitate & induct the

capital from private sector into road development, policies were amended and several

incentives were introduced. Further to give proper direction to highway development, the

National Highways Authority of India was made operational. A clear mandate was set for

NHAI. A concrete plan of development was announced for National Highways and Rural

Roads in the form of NHDP and “Pradhan Mantri Gramin Sadak Yojana”. It has thrown

excellent Business opportunities for contractors, equipment manufacturers and suppliers,

consultants, road developers, investors and managers. It is also expected to give a boost

to the economy through increased demands for raw materials and job opportunities.

However, it has also thrown challenges. Challenges, not to garner resources, but to ensure

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optimum utilization of available resources, challenges to domestic contracting industry to

modernize and upgrade to meet international competition, challenges to domestic

equipment manufacturers to compete with multinational companies in the liberal import

regime and finally challenges for the government to keep the momentum high as also to

mobilize private sector participation.

1.2 Scope

o Study of the past trends in financing of the road sector projects in India with a

special emphasis on terms of financing, institutions involved in financing of the

road sector projects, role of World Bank, ADB, etc.

o Risks perceived by lenders in financing of the road sector projects and ways to

mitigate these risks.

o Public Private Partnership: Role of the private sector in the development of the

road projects in India.

o Also prepare a Model to show the Financial Viability of the Road Sector Project.

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2. An Overview of Indian Road Sector

2.1 Classification of Roads

India has the second largest road networks in the world totaling more than 3.3 million km

at present. For the purpose of management and administration, roads in India are divided

into the following five categories:

1. National Highways (NH).

2. State Highways (SH).

3. Major District Roads (MDR).

4. Other District Roads (ODR).

5. Village Roads (VR).

The National Highways are intended to facilitate medium and long distance inter-city

passenger and freight traffic across the country. The State Highways are supposed to

carry the traffic along major centers within the State. Other District Roads and Village

Roads provide villagers accessibility to meet their social needs as also the means to

transport agriculture produce from village to nearby markets. Major District Roads

provide the secondary function of linkage between main roads and rural roads.

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Indian Road Network

CATEGORIES LENGTH (KMS)

National Highways 58,112*

State Highways 1,37,119

Major District Roads 4,70,000

Village & Other Roads 26,50,000

Total Length 33,15,231

(As we can see from the above bar chart that NHs are less than 2% but carry more than

40% of traffic)

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2.2 National Highway Network

The National Highways are the primary arteries of the country’s traffic, connecting to

nation’s capital to the various State capitals, major ports and centres of industries. The

national Highway system is owned by Central Government. The legal status is given by

National Highways Act, 1956. When the era of planning started in India (in 1956), the

length of National Highway system was 19,811 kms. This has now increased to 58,112

kms. The additions to National Highway System have been made after careful evaluation

of various demands or needs arising from time to time. National Highways constitute less

than 2% of the total road network, but carry nearly 40% of the total road traffic.

2.3 Trend in Road Traffic

The roads and highways in India account for about 87 per cent of the total passenger

traffic and about 65 per cent of the total freight traffic in the country.

Traffic Movement (%)

Freight Passengers

Year Road Rail Road Rail

1951 11 89 28 72

1961 28 72 42 58

1971 35 65 59 41

1991 53 47 79 21

2000 65 35 87 13

2015

(estimated)

80 20 92 8

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Traffic Movement in Bar Chart

(The Blue And Red bars are for Freight Traffic and Green and Purple for Passenger Traffic)

It’s evident from above that the Freight transport by road has risen from 6 billion tonne

km (BTK) in 1951 to 400 BTK in 1995 and 800 BTK in 2001. Passenger traffic has risen

from 23 billion-passenger km (BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The

annual growth of road traffic is expected to be 9% to 10%. Current boom in the

automobile sector may even increase the future growth rate of road traffic. While the

traffic has been growing at a fast pace, it has not been possible to provide matching

investment in the road sector, due to the competing demands from other sectors,

especially the social sectors, and this has led to a large number of deficiencies in the

network. Many sections of the highways are in need of capacity augmentation, pavement

strengthening, rehabilitation of bridges, improvement of riding quality, provision of

traffic safety measures, etc. There are congested road sections passing through towns

where bypasses are required. Many old bridges are in need of rehabilitation/replacement

along with capacity augmentation.

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2.4 Deficiencies in Road Sector

Road development has been ignored in most of the development plans of India. There has

been no matching growth of the main road network comprising of National and State

Highways as seen from the table given below:

Category 1951 2007 % Change

National Highways 22,255 58,112 161%

State Highways 60,000 1,37,119 128%

Major District Roads & Other Roads 3,18,000 31,20,000 881%

Total 4,00,255 33,15,231 728%

The main roads have not kept pace with traffic in terms of quality also. Out of the total

1,95,231 km. Length of National and State Highways only 2% of their length is four-

lane, 34% two-lane, and 64% single lane. As far as NHs are concerned, only 5% of

their length is four-lane, 80% two-lane and the balance 15% continues to be single

lane.

Thus the road sector, in spite of its high priority is adversely affected by the poor quality

and service levels. The poor quality of Indian roads is highlighted by congestion, old

fatigued bridges and culverts, railway crossings, low safety, no bypasses and slow traffic

movement.

2.5 Revenue from road transport and expenditure on roads

The entire revenue received by the Government by road transport taxation is not

ploughed back on the roads. Presently the total allocations, central and state, available for

road development are to the tune of Rs.11,000 crore, which is just 42% of total

transportation revenues received by the government. This implies the inefficiency of our

system, which consumes 58% of the total revenues received by the transportation sector.

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2.6 Economic losses due to poor conditions of roads

The poor condition of roads has a telling effect on the economy. Movement of traffic on

poor and congested roads increases the cost of operation of vehicles as well as loss of

valuable time and also contributing to high rate of road accidents. Our commercial

vehicles are able to make only 250-300 kms in single day against 500-600 kms in

developed countries. It has been roughly estimated that a saving of Rs. 25,000 crores per

year could be brought about by road improvements. These savings would be in the form

of reduced fuel consumption, lower wear and tear of vehicles and less damage to tyres.

These can be avoided by modernizing the roads.

2.7 The dwindling Public Sector Outlay on Transport

In the successive Five Year Plans, the public sector outlay on transport has been

declining.

Plan (Year) Total Outlay or

Expenditure

Expenditure on

Road Sector

% age of Total

Plan

Expenditure

1st Plan (1951-56) 1968 135 6.7%

2nd Plan (1956-61) 4672 224 4.8%

3rd Plan (1961-66) 8577 440 5.1%

4th Plan (1966-69) 6625 309 4.6%

5th Plan (1969-74) 15778 862 5.5%

6th Plan (1974-79) 39426 1701 4.1%

7th Plan (1980-85) 109292 3807 3.5%

8th Plan (1985-90) 179277 6335 3.5%

Annual Plan (1990-92) 137034 3779 2.8%

9th Plan (1992-97) 341000 13210 3.0%

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Ninth & Tenth Five Year Plan:

The following goals and objectives are defined for the Road Sector in the 9th & 10th Plan.

1. Phased removal of deficiencies in the existing NH network in the tune with traffic

needs for 10-15 years with emphasis on high-density corridors for four laning.

2. Bring in highway-user oriented project planning in identifying package of projects

section wise rather than isolated stretches.

3. Greater attention to rehabilitation and reconstruction of weak/dilapidated bridges for

the safety of the traffic.

4. Modernization of road construction technology for speedy execution and quality

assurance.

5. Engineering measures to improve road safety and conservation of energy.

6. Continued emphasis on Research f& development.

7. Integrating the development plans with Railways and other modes of transport.

8. Integrating the development plans with Railways and other modes of transport.

9. Providing employment opportunities to the labour force in rural areas.

10. Special attention for development of roads in the North-Eastern Region.

11. Encouraging private sector participation in development of roads.

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2.8 Agencies involved in Road Sector Development in India

Ministry of Road Transport & Highways (MORT&H)

Ministry of Road Transport & Highways is responsible for the formulation and

implementation of policies and programmes for the development and maintenance of

Roads & Highways. All roads other than National Highways in the various states fall

within the jurisdiction of respective State Governments. Ministry being an Apex

Organization in the Highway Sector makes specifications placed down on codes of

practice for all items and activities related to construction of roads and bridges. The

Ministry has basically been divided in two wings i.e. Roads & Highways and Transport.

The various associated agencies under the ministry are:

o NHAI

o CRRI

o IRCC

o NITHE

o IRC

o IABSE

NHAI (National Highways Authority of India)

The execution of National Highway projects were either handled by State or Central

Governments so there was a problem in fixing the responsibility between the between the

two. Moreover, dual control of the Central and State Government often led to delays in

decision-making. The Central Government realized a need of central agency that could

directly facilitate the matter so, The National Highways Authority of India that was

constituted under National Highways Authority of India Act, 1998 and made operational

in February 1995.

The Authority is an Autonomous Body with executive responsibility for the development,

maintenance and operation of those National Highways and associated facilities vested in

it by the Ministry of Surface Transport. The Authority has been entrusted with the

projects under National Highways Projects (ADB loan, OECF, World Bank). In addition,

NHAI is also responsible for the maintenance and development of Golden Quadrilateral,

North South & East West corridors, providing port connectivity and some selected

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projects like Naini Bridge, Hapur Bypass, Durg Bypass etc. NHAI is also responsible for

implementation of the policy of privatization in highway sector.

CRRI (Central Road Research Institute)

Road research has played an important role in India’s road development. The problems of

planning, design construction and maintenance of roads in India is unique and

challenging and the ready made solutions from other countries are not found feasible and

economical. Indigenous solutions have to be devised to suit the country’s local needs and

resources. This task has been carried out by Central Road Research Institute (CRRI),

Delhi, established in 1950, as one of the chain of the major laboratories under the council

of Scientific and Industrial Research. The CRRI has many divisions, dealing with the

diverse areas such as flexible pavements, rigid pavements, geotechnical engineering,

roads, bridges, pavements performance, traffic and transportation, environment and road

safety.

IRCC (Indian Road Construction Corporation Limited)

IRCC is a public sector enterprise under the Ministry of Road Transport and Highways. It

was incorporated during 1976 as a specialized commercial enterprise in the field of

construction of roads, bridges, airfield pavement and allied civil works both in Indian and

abroad.

NITHE (National Institute of Training For Highways Engineers)

NITHE was established in 1983 for training of Highway engineers in Central & State

Government Departments as well as private sector. It is a society under the administrative

control of the Ministry of Road Transport & Highways. NITHE organizes foundational

training programmes refresher courses and specialized courses for the in service Highway

Engineers of Central & State Governments.

IRC (Indian Roads Congress)

The Indian Roads Congress (IRC) was set up by the Government of India in consultation

with the State Governments in December, 1934. It is the premier body of Highways

Engineers in India. The Principal objectives of the India Roads Congress are to provide a

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national forum for regular pooling of experience and ideas on all matters concerned with

the construction and maintenance of highways, to recommend standard specifications and

to provide a platform for the expression of professional opinion on matters relating to

roads and road transport including those of organizations and administration. It is also

publishing Journals, monthly magazines and research bulletins. IRC is a registered

society under the Registration of Society Act and is financed by contribution from

Central Government, various State Governments and also contributions from its

Members and sale of Publication.

IABSE (Indian National Group of the International Association for

Bridge and Structural Engineering)

The International Association for Bridge and Structural Engineering (IABSE) was

founded in 1929 in Zurich by Engineers from 14 countries, who recognized both the

necessity for a closer human collaboration and exchange of information, knowledge and

discoveries across all national borders. The Government of India, Ministry of Road

Transport and Highways in consultation with various State Governments set up the

Indian National Group (ING) of IABSE in May 1957.

The goals of the Association are, promotion of international collaboration between

engineering and researchers and particularly representatives of science, industry and

public authorities. It also encourages the members for promotion and exchange of

technical and scientific knowledge. The Indian National Group deals with all aspects of

planning, design, analysis, detailing, construction, management, operation, maintenance,

repair and rehabilitation of structures of all kind including Bridges.

Public Works Department (PWD):

In India PWD was first established in the Punjab Presidency in mid of the 19th Century

out of Military Board. It is an institution now 150 years old and is firmly in saddle in all

the States of the country. This institute i.e. State Public Works Department is the premier

body responsible for delivery of developmental works, be it building, roads or bridges. In

the Road Sector the road connectivity of villages, construction and maintenance of State

Highways, Major District Roads, Other District Roads along with maintenance and

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construction of National Highways as an agent of Government of India is the

responsibility of the State PWD’s.

2.9 Road Development Plans

The country prepares a long term Road Development Plan once in every 20 years. The

first was the Nagpur Plan (1943), which set the blue print for the period upto 1961. The

second was the Bombay Plan, which was for the period 1961-1981. Next plan was the

Lucknow Plan covering the period 1981-2001. The recent plans that are going on is the

National Highway Development Plan & Pradhan Mantri Gramin Sadak Yojana.

National Highway Development Plan: For augmenting the capacity of National

Highways, sequel to Prime Ministers announcement, Central Government with National

Highway Authority of India (NHAI) as its nodal agency is undertaking National Highway

Development Project (NHDP). The plan envisages four and six laning of the following

roads:

o Golden Quadrilateral: Delhi-Mumbai-Chennai-Kolkata-Delhi.

o North-South Corridor: Srinagar to Kanyakumari with spur from Salem to Cochin.

o East-West Corridor: Silchar to Porbunder.

o Port Connectivity to Major Ports.

Pradhan Mantri Gramin Sadak Yojana: Under the Pradhan Mantri Gramin

Sadak Yojana, two lakh villages with over 1,000 population will be connected to the

nearest highway by 2008. All villages with a population above 500 will be connected by

2009. The cost is estimated at Rs. 60,000 crores. Indian villages need roads which serve

for decades without maintenance, are hard enough to withstand iron-tyred bullock carts

and can be used even monsoons.

National Highways Development Project (NHDP)

In order to improve the road network on a country wide level, the National Highway

Development Project was set up by the PMO. The project aims to develop the Golden

Quadrilateral, the North-South and East-West Corridor and other work including Port

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Connectivity, as these are the high volume sectors carrying the substantial portion of the

road traffic in India.

The total length of Golden Quadrilateral is 5952 kms, North-South-East-West Corridor is

7300 kms and that of Port Connectivity 400 kms. The project envisages a total

investment of Rs 58,000 crores spread over a nine-year period. Golden Quadrilateral is

scheduled for completion by the end of 2003 and North-South-East-West Corridor by the

year 2009.

2.10 Current Status

1. Of the 58,112 kms of National Highways in India about 33 per cent are single lane

and only about 2 per cent of the total road network is four lane. The poor quality of

Indian roads is highlighted by congestion, old fatigued bridges and culverts, railway

crossings, low safety, no bypasses and slow traffic movement.

2. Considering the importance of the road sector in the country, the government has

embarked on the ambitious National Highway Development Project covering 14,000

km with a cost of Rs. 58,000 crore and the projects have already started rolling.

3. The Indian construction industry that had been experiencing a slowdown witnessed a

growth of 9 per cent and 8.5 per cent for the periods Financial Year 2000 and

Financial Year 2001 (1st half) respectively. This was possible due to the increased

spending in infrastructure and the actual taking off of some of the Road Sector

projects.

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Research Methodology:

The research design which I have planned for my thesis will be of the following nature.

Research : Analytical & Exploratory.

Data Source : Secondary data.

Research approach : Survey method.

Research instrument : Personal interviews & Financial Model.

Type of questionnaire : Structured non-disguised.

Type of questions : Open ended.

I would be working on secondary data because of the fact that the various financial

aspects of the projects like the Projects Initial Investment, the Payment Pattern, duration

of the project, Project IRR, etc. have to be analysed to show the viability of such projects.

For this purpose I will have to indepth and exhaustive study of all the available secondary

data like journals, websites and other related documents.

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3. Trends in Road Sector Financing

3.1 Traditional Financing Mechanism

3.1.1 Budgetary Allocations: Roads are primarily funded through budgetary

allocations. Central government provides funds for National Highways and State

Government for other roads. Further to give proper direction to highway development

The Planning Commission of India has estimated an investment of INR3,118 billion

under the Eleventh Plan versus the INR1,448 billion spent under the Tenth Plan.

3.1.2 Central Road Fund: The Central Road Fund derives its revenues out of the

duty on customs and excise levied on petrol and diesel. It is expected to provide Rs.

6,000 crore annually for National Highway Development Program. The states are also

getting Rs. 1962 crore for development of state roads. A dedicated road fund has been

created by the central government. It is expected that the total collections in the fund will

be to the tune of around Rs. 10,000 crore.

The allocations from the fund would be as shown:

o 50% of the proceeds from additional excise duty on diesel would be allocated for

development of rural roads.

o Of the remaining balance, 57.5% would be provided for national highways, 27%

for state roads, 3% for development of roads of interstate and economic

importance and 12.5% for railway safety works such as rail roads over bridges,

manning of level crossings etc.

3.1.3 Octroi: Octroi is the fees collected by the local authorities of towns and cities

from the trucks, which carry goods. It is one of the major avenues of resource generation

of municipalities. The fund collected by octroi is generally used to develop the other

district roads and village roads. Since the collection of octroi results in long detention of

trucks on the roadside and entails waste of time and fuel, so central Government is

pressurizing to abolish this mode of taxation.

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3.1.4 Foreign Aid to Road Sectors:

3.1.4.1 Historical Background: The first major external aid for roads was for the

development of certain National Highway Section in Maharashtra, Bihar, Bengal started

in 1960’s. This was funded by International Development Association (IDA), an affiliate

of World Bank. Though efforts were made in the seventies to continue external aid for

the roads by the World Bank, but were unsuccessful because of the differences on two

issues:

a. Inviting Global tenders

b. The engagement of consultants.

Negotiations were again revived in the mid-eighties, when the Government of India

agreed to the World Bank’s condition that tenders should be called on the basis of

International Competitive bidding. Since then there have been a number of externally

aided highway projects, both in Central Sector for National Highways and in the State

Sector for State Highways and Rural Roads.

3.1.4.2 World Bank Aided Projects: Various projects that have been funded by world

bank are:

1. India: State Highways Project

Date: June 20, 1997

LOAN AMOUNT: IBRD-US $ 70 million

PROJECT DESCRIPTION: The project will help relieve traffic congestion and

reduce travel times by widening and upgrading priority roads, enhancing road

maintenance, and strengthening the state road agency's ability to manage its road

programs and assets. The main components of the project are: (i) civil works for

widening and strengthening of about 1,400 kms of high-traffic volume State

Highways and Major District Roads; (ii) reduction in the backlog of periodic

maintenance work on 2,000 kms of state highways and major district roads and

twenty kilometers of national highway damaged by a recent cyclone will receive

emergency maintenance; and (iii) the Institutional Development Plan of the Roads

and Buildings Department (RBD) will be supported through corporate strategy

development, studies and/or pilot projects, training and staff development.

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2. India: Third National Highways Project

Date: June 6, 2000


TERMS: Grace period=5 years, maturity=20 years

PROJECT DESCRIPTION: This project will help bring down transport costs by

increasing highway capacity, reducing traffic jams and road accidents, separating

local and through traffic in towns, and improving pavements. The project will support

the National Highway Authority of India (NHAI) in the development and

maintenance of the 6,000 km "golden quadrilateral" between Delhi, Calcutta,

Chennai, and Mumbai, and the development of the strategically important North-

South and East-West corridors and access to key ports. Specifically, the project will

finance civil works for widening and strengthening about 475 kms of national

highway from two lanes to four, six lane divided carriageways. It will also cover

environmental management, including tree plantation, and a program of road work to

introduce alternative maintenance contracting methods and improve traffic

management and safety.

3. India: Gujarat State Highway Project

Date: September 6, 2000


TERMS: Grace period=5 years; maturity=20 years

PROJECT DESCRIPTION: The project will strengthen and widen about 800-900

kms of state highways while implementing periodic maintenance of an additional

1,000 kms of state highways. It will also finance technical assistance, training, and

equipment needed to meet increasing demands on road services and infrastructure.

The resulting reduction in transport bottlenecks is expected to help support the long-

term economic growth needed to reduce poverty.

4. India: Karnataka State Highways Improvement Project

Date: May 24, 2001

LOANS AMOUNT: IBRD-US $ 360 million equivalent

Terms: Grace period=5 years; maturity=20 years

18

PROJECT DESCRIPTION: This project will finance road widening and

strengthening, and technical assistance for improved management of road resources

and road safety. The project will enhance and expand the core road network through

institutional strengthening of Karnataka's main road agency and support for a pilot

road safety program. Specifically, the project will upgrade and widen about 1,000

kms and repair an additional 1,300 kms of state roads. The project will also invest in

Karnataka's road agency -- the Public Works Department -- to provide training for

staff and modernize equipment and systems of strategic importance in improving

state roads.

5. India: Grand Trunk Road Improvement Project

Date: June 22, 2001

CREDIT AMOUNT: IDA—US $ 589 million equivalent

TERMS: Grace period = 5 years; Maturity = 14 years

PROJECT DESCRIPTION: The project will fund the upgrading of this New Delhi-

Calcutta highway, a 1,300 kms stretch which suffers from major traffic congestion.

The project will cut travel time and boost safety on. It will also help highway

agencies improve management and delivery of highway services, including the

management of a growing number of private sector contracts for road maintenance.

The project will specifically upgrade 420 kms of national highway sections through

Bihar, Jharkhand and Uttar Pradesh; implement road safety works; and pilot

initiatives to foster private sector involvement in road financing.

6. India: Kerala State Transport Project Loan

Date: March 14, 2002

AMOUNT: IBRD – US $ 255 million


PROJECT DESCRIPTION: Kerala State, on India’s southwest coast, has the highest

rate of road accidents of any state in India. The Kerala State Transport Project will

address the rapid increase in demand for road services that has contributed to this low

level of road safety. The project will enhance road capacity and provide targeted

safety programs designed to boost both safety and efficiency of Kerala’s roads.

19

7. India: Mizoram State Roads Project

Date: March 14,2002

CREDIT AMOUNT: IDA- US $ 60 million


PROJECT DESCRIPTION: The credit will improve road capacity, quality, and safety

through rehabilitation and maintenance. Specifically, the Mizoram project will

expand or rehabilitate over 700 kms of the state’s core road network - nearly three-

fourths of the state’s total network over the next five years. These physical

improvements will benefit an estimated 70 percent of the State’s largely poor

population that relies on the road network on a daily basis.

3.1.4.3 Asian Development Bank Aided Projects:

The Bank's policy focuses on alleviating constraints to economic development and

attracting private sector participation to develop and maintain an efficient and dynamic

multimodal transport system. Assistance is given to develop roads, railways, and

ports. Bank support for roads is focused on policy reforms, and attracting private sector

participation for the development of national highways and expressways, as well as state

highways. Having helped support the establishment of the National Highway Authority,

the Bank has strengthened its efforts in promoting reforms of the institutional and

regulatory framework. It encourages improved efficiency in public sector operations and

removal of bottlenecks in highdensity corridors. The promotion of environmental and

safety standards are carefully examined during project preparation. There have been three

loans from the Asian Development Bank to the Highway Sector and four other State

Level loans.

1. Loan No. 918-IND: Road Improvement Project

This project consists of improvement of Roads Equipment: Procurement of quality

control, pavement evaluation and maintenance equipment for the PWD’s of the five

states concerned.

o Consulting Services: Provision of consulting services to (a) assist the Executing

agencies in construction supervision of the Project; (b) undertake a study for the

20

development of a long-term plan for expressways; and (c) carry out a study for the

updating of road user cost data.

o Incremental Operation and Administration: Incremental operation and

administration costs for the implementation of the Project.

2. Loan No. 1041-IND: Second Road Improvement

This project comprises:

o Improvement of Roads: Procurement of equipment for traffic counting, weighing

and pavement evaluation.

o Consulting Services: Provision of consulting services to assist the Executing

Agencies in the implementation of the Project.

3. Loan No. 1274-IND: National Highways Project

The Project comprises:

o Highway Improvement: This component of the Project will cover improvement of

the five national highway sections, totaling about 330 km in the five states. The

improvements will include widening to four lanes (234 km) and strengthening of

the existing pavements with asphaltic concrete surfacing. The five sections of the

Project are:

o Consulting Services: Consulting services for construction supervision of civil

works under the Project are envisaged to be carried out by an appropriate

combination of international and domestic consultants.

4. Loan No. 1279-IND: Bombay-Vadodara Expressway Technical Assistance

Project

The Project was formulated to assist the Government, through the provision of

consulting services, with the preparation of detailed designs and contract

documentation required for the implementation of the construction projects to

develop an expressway between Bombay and Vadodara.

21

5. Loan No. 1747-IND: Surat-Manor Tollway Project

The Project will improve the 180 km stretch between Surat and Manor of National

Highway 8 linking the states of Gujarat and Maharashtra, including strengthening of

the highway's pavements. Thus ease congestion in freight and passenger traffic

between the industrial and agricultural areas of Gujarat and the west coast ports,

including Mumbai.

The objectives of the project are to remove capacity constraints and improve road

safety on critical sections of the western transport corridor from Delhi to Mumbai.

The completed project highway will be operated and maintained by the private sector

through a toll concession. The commercialization of the operation and maintenance of

the project represents a significant step in increasing private participation in national

highway development in India and is expected to have a demonstration effect on the

management of other national highway sections.

6. Loan No. 1839-IND: Western Transport Corridor Project

The project will upgrade the 259-km Tumkur-Haveri section of the Western

Transport Corridor (WTC) from a two-lane, single-carriage highway to a four-lane,

divided highway. The safety features will include a dual carriageway to prevent head-

on collisions and service roads to separate slow-moving and fast-moving traffic. They

will also include overbridges for pedestrians, bypasses to separate through traffic

from local traffic, and fences to prevent unlawful crossing and reduce noise pollution

in populated areas.

7. Loan no. 1870-IND: West Bengal Corridor Development Project

The project will upgrade India's national and state highways that link West Bengal's

southern ports of Kolkata and Haldia with eastern India, Bangladesh, Bhutan and

Nepal. Specifically, the project will improve:

o 370 km of National Highway 34, which was identified for priority assistance

because of its strategic importance and its impact on poverty reduction.

o 150 km of connecting state highways that link the corridor to Bangladesh.

o 100 km of rural roads, giving poor communities easier access to markets, schools,

and hospitals and thus improving their job and income opportunities.

22

3.1.4.4 OECF/JIBC Aided Projects:

Five National Highway Projects have been so far funded by Overseas Economic

Cooperation Fund of Japan/Japan Bank for Inrenational Cooperation so far. The total

loan is of the order 37.557 billion Japanese Yen. Four of these projects are for four-laning

and one is for major bridge across River Yamuna at Allahabad.

Project NameDate of

Approval

Amount of

approval

Interest

Rate

Repayment

Period

Grace

Period

National Highway-2

Improvement Project9 Jan, 1992

4855

million Yen

2.6% 30 years 10 years

National Highway-5

Improvement Project24 Jan, 1994

11,360

million Yen


National Highway-24

Improvement Project

28 Feb 1995 4,827

million Yen


National Highway-5

Improvement Project

28 Feb 1995 5,836

million Yen


Calcutta Transport

Infrastructure

Development Project

25 Feb 1997 10,679

million Yen


23

3.2 Alternative Financing Mechanism

3.2.1 Market Borrowing:

1. Issuing of Infrastructure Bonds by NHAI guaranteed by Government: In

financial year 2006, the authority issue raised Rs.7,500 crore and in financial year

2007, Rs.8,100 crore from the issue of Infrastructure Bonds. The authority is going to

raise Rs.10,200 crore in the financial year 2008-2009.

Specifications:

The Authority / Issuer /

NHAI

National Highways Authority of India, Authority

incorporated under the National Highways Authority of

India Act, 1988.

Issue / Offer / Private

Placement

Private Placement of Non-Convertible Redeemable

Taxable Bonds (with benefits under section 54EC of

Income Tax Act 1961for Long Term Capital Gains).

Bond(s) Non-convertible redeemable taxable bond(s) in the

nature of debentures with benefits under section 54EC of

Income Tax Act 1961for Long Term Capital Gains, also

referred to as NHAI Bonds(s).

Category Non-Financial Public sector unit.

Amount Offered On tap

Put/Call Option 3 Years

Credit Rating AAA

Rating Agency Crisil

24

2. Issuing of Infrastructure Bonds by Maharashtra State Road Development

Corporation (MSRDC):

Specifications

Nature Secured, Non-Convertible, Redeemable, Taxable Bonds

Guaranteed by State Government of Maharashtra for

timely payment of interest and repayment of principle.

Rating CARE “(A+SO)”

Rating Agency CARE

Tenor 7/10/12/15 years

Amount Offered 250 crores.

Put/Call option 5/7/10/none respectively.

Coupon Rate 11/11.25/11.50/11.72% respectively.

Category Non-Financial SLU

3. Issuing of Infrastructure Bonds by Roads and Bridges Development

Corporation of Kerala Ltd. (RBDCK):

Specifications

Nature Secured, Non-Convertible, Redeemable, Taxable Bonds

Guaranteed by State Government of Kerala for timely

payment of interest and repayment of principle.

Tenor 7 years.

Amount Offered 25 crores.

Put/Call option 5 years.

Coupon Rate 12.25% annually.

Category Non-Financial SLU

25

3.2.2 Private Sector Participation:

Public Private Partnerships (PPPs) are characterized by the sharing of investment, risk,

responsibility and reward between the partners. The reasons for establishing such

partnerships vary but generally involve the financing, design, construction, operation and

maintenance of public infrastructure and services. The underlying logic for establishing

partnerships is that both the public and the private sector have unique characteristics that

provide them with advantages in specific aspects of service or project delivery. The most

successful partnership arrangements draw on the strengths of both the public and private

sector to establish complementary relationships. The roles and responsibilities of the

partners may vary from project to project. As the roles and responsibilities of the private

and public sector partners differs on individual servicing initiatives, but the overall role

and responsibilities of government do not change. Public private partnership is one of a

number of ways of delivering public infrastructure and related services. It is not a

substitute for strong and effective governance and decision making by government. In all

cases, government remains responsible and accountable for delivering services and

projects in a manner that protects and furthers the public interest.

Public private partnerships can vary in:

o The degree of risk allocated between the partners.

o The amount of expertise required on the part of each partner to negotiate

contracts.

o The potential implications for user fee payers.

3.2.2.1 Government of India Initiatives:

The following measures have been implemented by the Government.

o Road sector has been declared as an industry. This facilitates borrowing on easy

terms.

o Provisions of Monopolies and Restrictive Trade Practices Act have been relaxed

to enable firms to enter the highway sector.

o National Highways Act has been amended to enable levy of fee on National

Highways, Bridges and Tunnels.

o The Road Sector has been declared as an infrastructure to permit floating bonds.

26

o The establishment of the “Infrastructure Development Finance Company

(IDFC)”.

o The establishment of “National Highway Authority of India – NHAI”.

o Permitting upto 100% foreign equity participation for the projects set up by

foreign private entrepreneurs.

o Significant import duty concessions available on equipment and raw material

being imported by projects in various Infrastructure Sectors.

3.2.2.2 Implementation Models

o BOT (Toll Based)

o BOT (Annuity)

o Govt. owned SPV

o MOU (negotiated deal)

o Govt. to Govt. Cooperation

Built, Operate and Transfer (BOT-Toll Based)

BOT stands for "Built, Operate and Transfer". BOT model uses private investment to

undertake the infrastructure development that has historically been the preserve for the

public sector. In a BOT project a private company is given a concession to built and

operate a facility that would normally be built and operated by the government. The

facility might be a power plant, airport, tollroad, tunnel or water treatment plant. The

private company is also responsible for financing and designing the project. At the end of

the concession period the private company returns ownership of the project to the

government. The concession period is determined primarily by the length of the time

needed for the facility revenue stream to pay off the company's debt and provide a

reasonable rate of return.

The various variants of BOT scheme are:

o Build, Own and Operate (BOO): The Government either transfer ownership and

responsibility for an existing facility or contracts with a private partner to build,

own and operate a new facility in perpetuity. The private partner generally

provides the financing.

27

o Build, Own, Operate and Transfer (BOOT): The private developer obtains

exclusive franchise to finance-build, operate, maintain, manage and collect user

fees for a fixed period to amortize investment. At the end of the franchise, title

reverts to a public authority or Government.

o Build, Lease/Rent and Transfer BLT/BRT): The Government contracts with

the private partner to build a facility to provide a public service. The private

partner then leases the facility to the Government for a specified period after

which ownership vests with the Government. This approach can be taken where

Government requires a new facility or service but may not be in a position to

provide financing.

o Build, Transfer and Operate (BTO): The Government contracts with a private

partner to finance and build a facility. Once completed, the private partner

transfers ownership of the facility to the Government. The Government then

leases the facility back to the private partner under a long term lease during which

the private partner has an opportunity to recover its investment and a reasonable

rate of return.

o Modernize, Own/Operate and Transfer (MOT): The private partner takes a

facility from the Government, expands or modernizes it, then operates the facility

under a contract with the Government. The private partner is expected to invest in

facility expansion or improvement and is given a specified period of time in

which to recover the investment and realize a return.

o BOR: Build, Operate and Renewal of the concession.

o DBFO: Design, Build, Finance and Operate.

o DCMF: Design, Construct, Manage and Finance.

o ROO: Rehabilitate, Own and Operate.

o ROT: Rehabilitate, Own and Transfer.

In a BOT project, the Government decides the need of the project and its scope. The

design, performance and maintenance of the project is tailored to the objectives of the

country and the private sponsors are selected by appropriate bidding or evaluation

process in order to arrive at the price that is fair to both the Government and the sponsors.

28

A properly drafted agreement limits the private sponsors to a reasonable rate of return

and ensures that the project serves the country's national interest and economy.

Advantages of BOT Scheme:

o Cost savings: With BOT Scheme, Government is able to realize cost savings for

both the construction of capital projects as well as the operation and maintenance

of services. For example, construction cost savings can often be realized by

combining design and construction in the same contract. The close interaction of

designers and constructors in a team can result in more innovative and less costly

designs. The design and construction activity can be carried out more efficiently,

thereby decreasing the construction time and allowing the facility to be put to use

more quickly. Private partners may be able to reduce the cost of operating or

maintaining facilities by applying economies of scale, innovative technologies,

more flexible procurement and compensation arrangements, or by reducing

overhead.

o Risk sharing: With public private partnership, Government can share the risks

with a private partner. Risks could include cost overruns, inability to meet

schedules for service delivery, difficulty in complying with environmental and

other regulations, or the risk that revenues may not be sufficient to pay operating

and capital costs.

o Improved levels of service or maintaining existing levels of service: Public

private partnerships can introduce innovation in how service delivery is organized

and carried out. It can also introduce new technologies and economies of scale

that often reduce the cost or improve the quality and level of services.

o Enhancement of revenues: BOT scheme may set user fees that reflect the true

cost of delivering a particular service. BOT scheme also offer the opportunity to

introduce more innovative revenue sources that would not be possible under

conventional methods of service delivery.

o More efficient implementation: Efficiencies may be realized through combining

various activities such as design and construction, and through more flexible

contracting and procurement, quicker approvals for capital financing and a more

efficient decision-making process. More efficient service delivery not only allows

quicker provision of services, but also reduces costs.

29

o Economic benefits: Increased involvement of Government in BOTs can help to

stimulate the private sector and contribute to increased employment and economic

growth. Local private firms that become proficient in working in BOTs can

“export” their expertise and earn income outside of the region.

Project Structure

Disadvantages of BOT Scheme:

In the absence of historical traffic data, there is uncertainty involved in achieving the

estimated traffic on the new road facility based on a diversion analysis. The up-front

capital grant, which may be upto 25% of the project cost and will have to be matched by

at least an equal amount of equity contribution by the PD will provide enough confidence

to the private developers to bid for the project. The private participant will bid for the

grant amount on the basis of his perception of the various project risks viz. construction,

operations & maintenance, financing and revenue (traffic volume and toll collection).

30

BOT (Annuity Scheme)

In this option, a private developer is responsible for design, development, construction,

operation, maintenance and financing of the project. It is a kind of a BOT scheme in

which the prospective bidder for the road project submit their estimates of the annual

payment they expect from the Sponsors for taking up the project. The sponsors would

award the project to the bidders asking the lowest annuity payments. Revenue to the

concessionaire accrues from annuity payments to be made by the governmental agency,

which reduces the revenue risk for the concessionaire. In this type the governmental

agency may or may not retain the right for collecting the tolls from the users of the

facility.

Project Structure

Advantages

o Selection of the private developer is through an international competitive bidding

process wherein the bidders asking for the lowest annuity amount is awarded the

BOT contract. This leads to induction of private party on the most competitive

terms.

31

o As the revenue (traffic volume and toll collection) risk is substantially mitigated,

financing for the project can be arranged on the most competitive commercial

terms.

Disadvantages

o The entire revenue risk will be fully borne by the Government.

o Impose a high financial burden on the Government is for a long period.

Govt. Owned Special Purpose Vehicle (SPV)

In this case the Promoter shall be responsible for the development and implementation of

the Project and form a Special Purpose Vehicle (SPV) as the implementing agency. In

this approach, a Private Developer (PD) shall be selected through an International

Competitive Bidding process. The Project shall be awarded to the PD on BOT basis for a

fixed concession period. The PD shall be responsible for design, development,

construction, operation, maintenance and financing of the Project. Promoter has to

provide a one-time capital grant to cover a part of the revenue shortfall risk.

The PD shall domicile the Project and all the activities related thereto in a Special

Purpose Vehicle (SPV). The investments made in the Project by the SPV and returns

thereon shall be recovered by way of revenues generated from the operation of the

project. The SPV shall be entitled to collect tolls from the users of the Project road at

rates to be specified in the Concession Agreement. The toll rates shall be indexed to

inflation (WPI, CPI, etc.) and may undergo annual revision.

Advantages

The advantages in this model are:

o As the SPV would be promoted by a Sovereign body, this will be looked upon

favourably by lenders / investors thereby facilitating financing on commercial

terms.

32

Project Structure

Disadvantages

The disadvantages in such a strategy could be:

o It would be detrimental to the achievement of overall policy of public-private

partnership for infrastructure development.

o It would create a significant burden on the budget of Government/Promoter for a

long period.

Memorandum of Understanding (MoU negotiated deal)

As per this structure, the Project shall be awarded to a private Project Developer (PD) on

a Build-Operate-Transfer (BOT) basis based on negotiated terms for a pre-determined

(fixed/variable) concession period. The PD and Government shall enter into a

Memorandum of Understanding (MoU) for this purpose. The PD shall be responsible for

design, development, construction, operation, maintenance and financing of the Project.

33

O & M Contractor

Advantages

o This structure allows for harnessing the efficiencies (operational and financing) of

private sector

o Reduces financial burden on Government as only a one-time capital grant will be

required to be given to the project.

Disadvantages

o Selection of the private developer is not through a public/open process. Hence

issues of transparency may arise.

o As this would be a negotiated deal, this transaction may lead to price distortions

in the absence of a competitive mechanism for selection of the private participant.

Government to Government Cooperation

In this case a Memorandum of Understanding may be signed between Government of

India and Government of interested countries (e.g. Malaysia, Korea, Japan, Canada etc.)

or their nominated company/companies. The SPV will be formed by companies from the

country with whom the MoU is signed. The Project implementation shall be on BOT

basis, which will encompass design, engineering, financing, procurement, construction,

operating, maintenance and tolling of the Project highway.

Example

NHAI has signed an agreement with Government of Malaysia promoted ‘Swarna

Tollway Limited’ in order to implement certain sections of two National Highways in the

State of Andhra Pradesh.

Advantages

The SPV implementing the project will have the backing of both the Government of

India and its own Government.

The structure allows for introduction of international experience in similar projects.

Disadvantages

34

The satisfactory conclusion of Government-to-Government negotiations may take

excessively long time.

As this would be a negotiated deal, this transaction may lead to price distortions in the

absence of a competitive mechanism for selection of the concessionaire.

Project Structure

3.2.2.3 The Route Map already followed – A Data Base on India’s Road Sector

Privatization Efforts

For realizing India’s ambitious growth plans, it is critical that this invaluable asset of road

network must be substantially upgraded to maximize the effectiveness. Towards this

capacity enhancement of the road network, both in qualitative and quantitative terms, the

NHDP and Pradhan Mantri Gramin Sadak Yojana are the major initiatives. These

projects have the vast potential in creating the employment. The Government in

collaboration with Private Sector has already awarded and completed various projects by

35

using different implementing models like BOT (Toll Based / Annuity), SPV, MOU and

Govt. to Govt. cooperation to ensure unobstructed mobility and accessibility and serving

the need of a modern India.

Private Sector participation through BOT (Toll Based / Annuity) and SPV Projects

Stretch NH No. Length (km) Status

BOT (Toll Based) Projects

Satara – Kagal 4 133 Completed

Tumkur – Neelmangla 4 32 Completed

Nellore – Tada 5 111 Under Implementation

ROB at Kishangarh 8 1 4 Laned

Jaipur – Kishangarh 8 90.38 Awarded

Delhi – Gurgaon 8 27.7 Completed

BOT (Annuity) Projects

Palsit – Dankuni 2 65 Under Implementation

Panagarh – Palsit 2 65 Under Implementation

Maharashtra – Belgaum 4 77 Under Implementation

Ankapalli – Tuni 5 59 Under Implementation

Nellore Bypass 5 17.2 Approved for Award

SPV Projects

Jaipur Bypass 8 34.7 Completed

Ahmedabad Vadodara

Expressway

8 50 Completed

Moradabad Bypass 24 18 Completed

(The project details are given in the annexure)

36

4. Critical Issues – Private Sector Road Financing

4.1 Stages in development of Road Sector Projects

1. Identification:

o Identify Project.

o Define Form of Financing.

o Preliminary Feasibility Study.

o Assign Project Manager and Team.

o Government.

2. Government Preparation for Tendering:

o Procurement Procedure.

o Prequalification.

o Project Agreement.

o Tender Documents

o Bid Evaluation Criteria.

3. Sponsor's Preparation to Bid:

o Form Consortium / Possibly Project Company.

o Feasibility Study

o Identification of Project Potential.

o Submit Bid Package.

4. Selection:

o Evaluate Bids.

o Clarifications / Adjustments.

o Project Award.

5. Development:

o Form Project Company.

o Equity Contributions.

37

o Loan Agreement.

o Financial Closing.

o Construction Contract.

o Supply Contract.

o Off-take Contract.

o Insurance Contract.

o Operation & Maintenance Agreement.

6. Implementation:

o Construct facility and Install Equipment.

o Testing.

o Acceptance.

o Technology Transfer and Capability Building.

o Evaluation.

7. Operation:

o O&M during the Concession Period.

o Inspection.

o Training.

o Technology Transfer and Capability Building.

8. Transfer:

o Transfer Procedures.

38

4.2 Financial Structuring of BOT Road Projects

The various types and sources of capital are available for financing the BOT Road

Projects. As each type of capital bears different level of risks so by means of various

financing techniques and legal instruments different types of capital are matched to

different project risks. Financial Structuring is done to establish the appropriate mix of

debt, equity and mezzanine capital and also to ensure that funds are arranged from

appropriate sources. This process is also referred as assembling the financial package.

4.2.1 Project Financing: In BOT projects financing is done through "Project Finance"

technique. Lender seeks finance either through limited recourse basis or a non-recourse

basis. The lender in a non-recourse financing arrangement will look only to the project's

asset and revenue stream for repayment, not to the additional sources of security, such as

the total assets or balance sheet of the project sponsors. But most of BOT projects are

financed on a limited recourse basis rather than Non-recourse basis because in this

recourse is available against the project company and its assets, including real estate,

plant and equipment, contractual rights, performance bonds, insurance, government

guarantees and other commitments the project company has obtained. The rate of return

of a BOT project must be sufficient not only to repay the lenders but also to reward the

sponsors for committing their equity and know-how and for assuming the risks involved

in such projects.

In such financing, a separate project company is established by the project sponsors to

implement the project. This type has several advantages for sponsors:

o It allows the sponsors to borrow funds to finance a project without increasing

their liabilities beyond their investment in the project. On the sponsor’s balance

sheet, therefore, their exposure to the project is the amount of their equity

contribution to the project and nothing more.

o Lenders to the project assume a part of project risks, since they are lending

without full recourse and primarily on the basis of the project assts.

BOT financing is a specialized form of project financing. Some of the common features

of BOT financing are as follows:

39

o It involves the financing of a discrete venture that is more often defined by its

revenue stream than by its products or markets.

o It involves several interrelated contracts with third parties, such as suppliers,

purchasers and Government agencies, which are crucial to the credit support for

the project.

o Project loan repayments are secured by project cash flows, as specified in

contractual agreements or as indicated by demand forecasts, rather than project

assets.

o Project sponsors will rely primarily on guarantees to minimize their exposure to

project risks and uncertainty.

4.2.2 Means of Financing

Financing or capital is required for the implementation of all the projects. The types of

funds available for the projects are:

o Equity Capital.

o Debt Capital.

o Mezzanine Capital.

o Institutional Investors.

o Capital Market Funding.

o International Financial Institutions.

o Support by Export Credit Agencies.

o Combined Public and Private Finance.

Each type of capital plays a specific role in the project financing and has its own risk

characteristics so the return on each type of capital depends on the risk characteristics of

each type.

1. Equity Capital:

Equity is the lowest-ranking capital of all in terms of its claims on the assets of a

project. It represents the funds injected by the owners of the project. In this all the

project obligations are to be met before any distributions made to the equity investors.

If a project fails, all other claims must be met before any claims made by equity

40

investors. Equity investors therefore bear a higher risk than any other provider of the

capital so, equity capital is also referred as risk capital. However, if a project is

successful, then the surplus after all obligations are met will entirely accrue to the

shareholders and results in the capital gains. In BOT project, the fixed assets are

transferred to the Government at no cost, so the equity investors return on investment

will come only from the revenues generated during that period so these investors

must be fairly compensated for being the highest risk takers.

2. Debt Capital:

Project's senior debt has the highest ranking of all the capital. Senior debt has first

claim over all the assets of a project and must be repaid first. Only after the claims of

senior debt are satisfied, the claims of other capitals are considered. As the senior

debt bears the limited risk so the returns are limited just to the payment on the loans,

irrespective of the profitability of the projects. Equity investors prefer a high debt-

equity ratio, while creditors prefer a low debt-equity ratio because a higher debt-

equity ratio leads to lower cost of capital and vice-a-versa. Generally the BOT

projects financed in India are at debt-equity ratio of 70:30.

3. Mezzanine Capital:

It is a more flexible instrument than either pure equity or debt, as it has characteristics

of both the debt and equity capital. So the risk involved is between debt and equity

capital. Examples of mezzanine financing are subordinated loans and preference

shares. The subordinated loans and preference shares both have the characteristics of

the debt as the regular payment of interest and capital is to be made, but the payments

are subordinated to senior debt and to be made only when the project funds are

available. For project sponsors, the advantage of mezzanine financing is that it

enables projects to be financed with more debt and less equity.

4. Institutional Investors:

In addition to subordinated loans provided by the project sponsors or by

Governmental financial institutions, subordinated debt can be obtained from

financing companies, investment funds, insurance companies, collective investment

41

schemes and other institutional investors. The institutions normally have large sums

available for long-term investment and may represent an important source of

additional capital for infrastructure projects. The main reasons for accepting the risk

of providing capital to infrastructure projects are the prospects of remuneration and

interest in diversifying investment.

5. Capital Market Funding:

Funds may be raised by the placement of preferred shares, bonds and other negotiable

instruments on a recognized stock exchange. The public offer of negotiable

instruments requires regulatory approval and compliance with requirements of the

relevant jurisdiction.

6. International Financial Institutions:

International financial institutions also play a significant role as the provider of loans,

guarantees or equity to privately financed infrastructure projects. A number of

projects have been financed by World Bank, Asian Development Bank, International

Finance Corporation or by other development banks.

7. Support by Export Credit Agencies (ECA's):

Export credit agencies provide support to the projects in form of loans, guarantees or

a combination of both. The participation of export credit agencies may provide a

number of advantages, such as lower rate of interest than commercial banks and

longer-term loans.

8. Combined Public & Private Finance:

The public funds originate from Government Income and sovereign borrowing. They

are combined with private funds as initial investment or as long-term payments, or

may take governmental grants or guarantees. Infrastructure projects are sponsored by

the Government through equity participation in the concessionaire, thus reducing the

amount of equity and debt needed from private sources.

42

4.2.3 Components of Project Costs

While deciding the type of capital and sources of finance to be used, it is important to

first identify the main components of project costs, so that the needs and risk

characteristics of each can be matched by the appropriate funding. The main components

of project costs are as follows:

o Pre-investment Costs.

o Bidding & Procurement Costs.

o Project Development Costs.

o Construction Costs.

o Operating Costs.

o Termination Costs.

1. Pre-investment Costs: These are the costs incurred by the project sponsors in

developing the project concept and preliminary project design.

2. Bidding & Procurement Costs: A project concession can be awarded through either

competitive bidding or direct negotiation with sponsors. In both the cases, the

government agency responsible for awarding the concession has to carry out an

outline study of the project to collect information needed for the bidding documents

and prepare themselves for negotiations with sponsors. The bidders and sponsors also

have to undertake extensive design and analysis work to prepare their bids and to

have meaningful negotiations with the government.

3. Operating Costs: These are the costs involved while operating the facility upon

completion of construction.

4. Project Development Costs: On the basis of the preliminary project design, the

project sponsors have to further develop and refine the BOT scheme during the

bidding and the post-concession award period.

43

5. Construction Costs: This is the main expenditure in any project. It includes the

construction of the entire facility, including the purchase and installation of

equipment.

6. Termination Costs: At termination the costs may or may not be involved. If the

project agreement requires the facility to be transferred it may involve a cash payment

by the government agency taking-over that facility.

4.3 Procurement Issues and Selection of Concessionaire

An adequate procurement strategy or procedure must be in place before a BOT policy can

be carried out. The success of a BOT project will depend to a large extent on what has

occurred before the sponsor group was selected. Procurement procedures are influenced

by various factors like the business environment, the infrastructure policy and the nature

of the particular BOT project. There are two approaches for procurement are:

o Competitive Tendering

o Negotiated System

Following objectives should be satisfied before choosing a particular procurement

procedure:

1. Satisfy the needs of the particular BOT project.

2. Ensure procedural clarity, fairness and transparency.

3. Promote competition.

4. Encourage private sector innovation and alternative solutions.

5. Assure investors, lenders and other parties that government has selected the right

BOT proposal.

6. Strengthen public confidence in the BOT approach to infrastructure development.

7. Promote an early award of an project.

8. Minimize the cost of developing BOT projects.

4.3.1 Bidding Criteria

The selection process of the Project Developer shall be based on technical competence of

the bidder and a financial bid. While the parameters of technical competence are only

qualifying in nature, the financial bids shall form the criteria of selecting the Project

Developer. In the financial bid, the criteria for selection may be one of the following:

44

o Bidding on the basis of least grant sought from the Government with pre-specified

toll rates and concession period.

o Bidding on the basis of length of the concession period with pre-specified grant

element and toll rates. However NHAI had finally adopted the bidding criteria on

the basis of grant.

o Bidding on the basis of least toll rates with pre-specified concession period and

grant.

o Returns (IRR / NPV basis) expected by the bidder as calculated on the basis of a

pre-specified formula. In this case, the concession period shall be flexible and

shall expire once the pre-specified returns are achieved. The toll rates shall be pre-

specified.

4.4 Governments Role in facilitating BOT Projects

One of the advantage of the BOT concept for the Government is that a considerable

workload, including responsibility for financing, designing, construction and operation of

the projects, is transferred from the Government agencies and ministries traditionally

responsible for infrastructure projects to the private sector. However, this does not imply

that Government’s role is limited to supervision and monitoring of BOT projects. BOT

infrastructure projects require that the Government play an active role, in preconstruction

and pre-investment phases of a project. It is the Government that initially approves the

use of the BOT concept in connection with the infrastructure projects. It decides the

procurement process, manages the procurement proceedings and defines the criteria for

the selection of BOT sponsors.

The various facilities that the Government should provide to BOT projects are:

4.4.1 Supportive Legal Framework for a BOT projects: The attractiveness of a BOT

project to the private sector depends to the large extent on the way the Government

address the fundamental legal issues, such as enforcement of contracts, private

ownerships, security arrangements, taxes, remittance of foreign exchange and profits.

Inadequate legal framework can undermine the strength and effectiveness of contracts for

BOT projects. The elements of a legal and regulatory framework for implementing a

successful BOT projects are:

45

o The basic legislative authority for awarding BOT projects: It includes

designating the individual ministries, government agencies authorized to procure

and implement BOT project. It also includes passing regulations that define the

responsibilities of the government agencies and ministries for the development

and implementation of the projects, issuance of licenses and permits and central

Government approvals.

o Enabling public legislation: The Government may have to enact legislation

authorizing the acquisition of land for the project, the transfer of public assets to

the project and provision of work permits or other necessary government input.

o Adequate security legislation: The creation and protection of security interests,

mortgages and liens in respect to project assets in favour of the lenders and

enforcement of remedies under the security package should be assured by

country’s legal system.

o Legislation to promote foreign investment: Various incentives should be given

to the sponsors like the right to exchange local currency into foreign currency,

simplified import licensing and custom procedures, right of foreign investors to

establish companies in the country, tax regime for foreign investment etc.

o Protection of contract rights under the governing law and by adequate legal

institutions.

4.4.2 Administrative Framework for BOT projects:

The Government must establish a credible and efficient administrative framework to

successfully implement the BOT projects. The potential sponsors and lenders will

evaluate the organization, experience and procedures of the procuring administrative

entity, an efficient administrative framework will accelerate private sectors investment in

BOT projects.

o Planning and coordinating: The governmental agency helps the private sector in

doing the proper economic and financial analysis of BOT projects. It also helps by

drafting the model or standardized project agreements and provides consultancy

services for examining the implementation of BOT projects.

o Administration for BOT projects: As a BOT project requires approvals, permits

and licenses from several ministries, agencies and local authorities the

46

Government helps the private sector in getting clearances to avoid costly and

unnecessary delays.

o BOT training programmes for administrative personnel: The Government

should train its administrative staff personnel to understand and appraise BOT

projects thus, helping in meeting the Government’s objective.

4.4.3 Government incentives and other forms of support

The Government recognizes the need to provide incentives and some direct or indirect

support to BOT projects. The extent and type of support varies considerably, depending

on other things like force majeure risks, the feasibility of the project, the country’s need

for the project etc.

o Tax incentive and concessions: Private sector investors in BOT projects enjoys

tax concessions, like exemption from corporate tax, exemption from income tax

for foreign project staff, reduction from real estate tax, reduction of import duties

on equipment, raw materials etc.

o Land and other Logistical facilities: Government provide the land on which the

project is to be built, constructs the associated infrastructure facilities, including

access roads, transmission lines and communications.

o Contribution of existing assets by the Government: In this the Government

gives the right to the sponsor to operate and earn revenues from existing assets

like toll roads etc.

o Government guarantees and stand-by financing: The Government provides

various guarantees like protection against the loss of expected revenues due to

competing projects, provides with the subsidy support to cover the difference

between the full commercial price and the actual user charges. It also provides the

protection against currency exchange risk and uninsurable force majeure events.

o Loans and Equity contributions: Government provides direct loans and direct

equity investment from Government assures the private sector the Government’s

involvement in the project and thus helping in bringing down the cost of the

project.

o Attractive risk-reward provisions: The Government allows the project company

to earn a certain return on their equity investment and after that to distribute the

47

excess revenue between the company and the Government entity according to the

pre-arranged formula.

4.5 Contract Package and Project Agreements

A BOT project involves a number of important contractual arrangements among the

participants. In a BOT project, the agreements are used to define the respective rights,

obligations and risks of each party. The various contracts or agreements involved in

Contract Package and Project Agreements are:

o Consultant Agreement.

o Preliminary Consortium Agreement.

o Project Company Agreement.

o Concession Agreement.

o Construction Agreement.

o Equipment Supply Contracts.

o Operation and Maintenance Contracts.

o Insurance Contracts.

o Financing Contracts.

o Security Package.

1. Consultant Agreement: As the Government lack expertise in the field of BOT

agreements and related matters so it needs to recruit outside consultants to help in

identifying and defining the project and putting together its request for the proposal.

This includes three types of expertise:

o Technical expertise in Road Sector.

o Financial Consultancy, for knowledge about potential sources of funding,

financing structures and instruments, foreign exchange, capital markets,

feasibility studies etc.

o International Business legal counsel to help the Government draft or review

necessary documentation, and help establish the contractual documents with

project sponsors.

2. Preliminary Consortium Agreement: It is the first contract between the initial

sponsors referred to as preliminary consortium agreement or joint venture agreement.

48

The initial sponsors enter into this agreement in order to respond to a government

request for proposals. The agreement among sponsors provide terms for initial

sharing of the substantial costs required to do the feasibility studies, to hire outside

advisers, to prepare tenders and to do other preliminary development work.

3. Project Company Agreements: In a BOT scheme, the project company includes

a number of active and passive sponsors, such as contractors, equipment and material

suppliers, government agency, operators and investors so, the contractual agreements

among the final consortium members will expand and will establish long term

binding commitments among the parties.

4. Concession Agreement: The project agreement is central to the BOT projects.

The project agreement sets forth the rights and obligations of the Governmental

agency and the project company.

The obligations of the Government are as follows:

o Authorize the project company to be engaged in the project for the period of

concession.

o Provide the land, rights etc. required for the project.

o Provide access roads and utilities for the project.

o Agree not to authorize competing projects.

o Provide for inflation adjustment, foreign exchange convertibility and

exchange rate protection to the degree necessary.

The obligations of the Concessionaire are:

o Design, develop, finance, construct, complete, test, commission, operate and

maintain the project according to specific design and performance criteria.

o Protect the environment through appropriate use of pollution control

equipment and environmentally sound construction and operation techniques.

o Provide periodic reports to the supervising government agency and give it

access to the project for inspection purposes.

o Provide insurance coverage for the project, pay liquidated damages to the

government for delay or failure to complete the project or to meet the

expected performance.

49

o Transfer the project in a good working condition to the Government at the

transfer date.

5. Construction Agreement: It is the agreement that is signed between the project

company and the contractor for the construction of the facility, it puts the project

company, the equity investors and lenders and the Government at risk. This

agreement ensures that the project construction is completed timely and within the

budget and it meets the standards of performance.

6. Equipment Supply Contracts: If the project requires substantial heavy

equipment in addition to the construction itself, the project company will sign a

contract with equipment supplier for the supply of such equipments.

7. Operation and Maintenance Contracts: In many BOT projects, the project is

not operated and maintained by the project company itself but is contracted out to a

firm experienced in the operation and maintenance of the facility. The O&M contract

will define parameters for operating efficiency, it includes penalties for failure to

meet the efficiency level.

8. Insurance Contracts: A BOT project requires extensive insurance coverage,

including casualty, third-party liability and business interruption insurance.

9. Financing Contracts: These are the contracts between the project company and

the lenders for the commitments of the loans or principle debt amount or the standby

loans or bank guarantees to cover cost overruns or delays during construction or

revenue shortfall during operations.

10. Security Package: The lenders to the BOT project requires fairly elaborate

security arrangements. Like the project revenues are usually paid not to the project

company but in the escrow accounts maintained by an escrow agent. The escrow

agent is one of the banks hat are acting as lenders to the project. Payments are made

from the escrow account according to the stipulated priorities. The lenders insist that

escrow accounts are to be maintained in order to pay debt service for a minimum

period before any distributions are made to the equity investors. The benefits of the

various contracts entered into by the project company as well as the other assets of

the company are assigned to a trustee for the benefit of the lenders. Numerous

policies insuring against a variety of risks are secured. Lenders requests the

50

Government support to protect lenders against the risks which are out of control and

causes the project to fail.

4.6 Identification of Risk Matrices and Instruments for

Mitigation

4.6.1 Risks involved in Road Sector Projects

Choosing among the options for private participation depends on the particular needs of

the country and the nature of risk sharing between the public and private sectors. The risk

to which each party is committed through the contract is to be clearly defined as well as

understood so that disputes may not occur and the responsibilities will be based on the

assignment spelled out in the contract.

The rule of thumb is that private road infrastructure projects work best when project risks

and responsibilities are assigned to the party that can best bear them. The private sector is

generally better managing commercial risks and responsibilities, such as those associated

with construction, operation and financing. In contrast, toll roads may also depend on

public participation in areas such as acquisition of right-of-way, political risk and in some

cases, traffic and revenue risk. The government considers giving financial support or

guarantees if traffic levels in the early years are insufficient.

The main risks involved in road sector projects are:

o Political Risks

o Construction Risks

o Market and Revenue Risks

o Finance Risks

o Legal Risks

o Operating Risks

In addition, contracts commonly address Force Majeure and legal liability because they

have proven to be the serious sources of cost overruns in the sector.

1. Political Risks:

51

Political risk concerns government actions that affect the ability to generate earnings.

These could include actions that terminate the concession, the imposition of taxes or

regulations that severely reduce the value to the investors, restrictions on the ability to

collect or raise tolls as specified in the concession agreement etc. Many projects are

delayed because of the difficulties of acquiring right-of-way or environmental

clearances that both the governments and the operators underestimate. Government

generally agrees to compensate investors for political risks, although in practice,

governments may cite justifications for their action to delay or prevent such

payments. Thus, private investors generally assume the risks that are associated with

the dispute resolution and the ability to obtain compensation if the government

violates the concession agreement.

2. Construction Risks:

A common cause of cost overrun stems from design changes and unforeseen weather

conditions during the construction phase. The private sector typically bears primary

responsibility for the construction uncertainties and attempts to cover it through

insurance. The public sector may assume responsibility for risks under its control

such as competing complementary facilities or allowing cost increases associated

with major design changes.

3. Market and Revenue Risks:

Demand uncertainty continues to be a major factor in most of the projects. Traffic and

toll levels may not be sufficient to cover all costs, including construction, operation

and maintenance. The private sector fully depends upon the government for the

handling of the traffic and revenue risks.

4. Financial Risks:

Financial risk is the risk that project cash flows might be insufficient to cover debt

service and then pay an adequate return on sponsor equity. Financial constraints like

lack of long-term debt capital hinder the road development projects. Non-availability

of local or domestic finance markets may lead to the higher risks for road sector

projects which need long-term financing.

52

Currency risks involve the impact of exchange rate fluctuations on the value of

domestic currency. It can subject to the convertibility as the operator may not be

allowed to convert the local currency into the foreign currency.

Financial risks are best borne by the private sector but a substantial government risk

sharing is required either through revenue or debt guarantees or through participation

by state or multilateral development institutions.

5. Legal Risks:

Regulatory risk stems from the weak implementation of regulatory commitments built

into the contracts and the laws or other legal instruments that are relevant to the value

of the transactions as it was originally assessed. The major risk lies on the part of the

concessionaire like lack of power and capacity.

6. Operating Risks:

Operating risks are the risks that emerge at the time of the operations of the project on

the part of operator’s default. It can also involve the risks like force majeure risks that

are beyond the control of both the public and private partners, such as floods or

earthquakes, or other non-political factors such as strikes and industrial disturbances

that impair the project’s ability to earn revenues. Sometimes private insurance is

becoming available for catastrophic risks but generally public sector faced with the

need to restructure the project if such disaster or problem occurs.

4.6.2 Instruments for Mitigating Risks:

1. Equity Guarantees: These provide a concessionaire with the option to be bought out

by the government at a price that guarantees a minimum return on equity. Although

the liability is contingent, the government effectively assumes project risk and

reduces the corresponding private sector incentives.

53

2. Debt Guarantees: These guarantee that the government will pay any shortfall related

to principal and interest payments. Sometimes, the government also guarantees the

scheduled refinancing. This creates significant government exposure and reduces

private sector incentives, although it may decrease the cost or increase the amount of

debt available to the project.

3. Exchange Rate Guarantees: These are the guarantees where the government agrees

to compensate the concessionaire for increases in financing costs due to exchange rate

effects on foreign financing. Exchange rate guarantee helps in increasing the

incentive to use foreign capital.

4. Grants/Subsidies: Government can furnish grants or subordinate loans at project

inception, which helps in buying down the size of the project that needs private

finance. Generally these grants or subsidies have no provision for repayment.

5. Subordinated Loans: These can fill up a gap in the financing structure between

senior debt and equity. These types of loans have attractive features that they can be

repaid with a return if the project is successful. Subordinated loans improve

feasibility by increasing the debt service coverage ratio on senior debt and by

reducing the need for private equity that needs higher return.

6. Minimum Traffic and Revenue Guarantees: In these types of loans government

compensates the concessionaire if traffic or revenue falls below a minimum threshold,

which is generally set 10 to 30 percent below the expected volume. Traffic and

revenue guarantees help in retaining the financial incentives in the project.

7. Shadow Tolls: In this the government contributes a specific payment per vehicle to

the concessionaire as toll, rather than the user. These are the ongoing revenue stream

from the government in lieu of an up-front grant or loan and as these are paid over

time, these leads to a less burden on the public on the public budget.

8. Concession Extensions and Revenue Enhancements: These provide financial

support that involves limited public sector risk, but they do little to support or

enhance private financing. A government can firstly extend the concession term if

54

revenue fall below a certain amount and can restrict the competition from the

ancillary services.

1. Political Risks.

Potential Risk Exposure of

Concession

Company &

Project Lender

Risk Mitigation Measures.

Lack of power and capacity

of Grantor

Obligations of

Grantor to bind the

State, and to pay

compensation

(and/or pay

operating charges),

are void

Legal due diligence

Nationalization;

discriminatory changes in

law; political force majeure

event; abandonment of

Project by Grantor; default

by Grantor

Project is lost or is

not viable

Obtain right for Company to

compensation from Grantor for

project loans, equity and lost

profits; exclude right of Grantor to

terminate in these circumstances;

obtain political risk insurance

Change in law not specific

to the Project; increase in

taxes

Returns to Sponsors

are less; debt

service may be

Obtain right for Company to

increase tariff; require Sponsors to

put in new money; otherwise a

55

jeopardized project risk

Breach by the Grantor of

exclusivity obligation;

failure by the Grantor to

meet undertakings to assist

Users may use

competing

concession

facilities; viability

of the Project is

threatened

If serious enough and not cured

obtain right for Company to

terminate; otherwise obtain right

for Company to claim damages

from the Grantor

Approval of tariff increases

is not given

Project is not viable Obtain right to appeal tariff

decision; obtain right to

compensation of the Company by

the Grantor for cash deficiency;

require Sponsors to put in new

money; otherwise a project risk

2. Construction Risks.


Concession

Company &

Project Lender


Cost overruns; unanticipated

variations, time extensions

Delays, increased

project debt

Require a lump sum, fixed time

construction contract with little

scope for variations; claim

damages; call performance bonds;

draw on standby loans; require

Sponsors to put in new money;

otherwise a project risk

56

Contractor is an investor in

the Company

Contractor has a

conflict of interest

and construction

contract may be too

easy on Contractor

Ensure independent Sponsors and

Project Lenders are involved in the

negotiation of Construction

Contract;

Contractor/Supplier defaults

or goes bankrupt

Delays Due diligence on Contractor/

Supplier; claim damages call

performance bonds

Site acquisition problems;

problems with removing

squatters

Delays Ensure there is expropriation

legislation

Access problems to adjacent

areas

Delays Ensure that Grantor obtains access

rights for Company

Adverse site conditions Delays, increased

costs

Obtain a comprehensive site

survey; pass this risk on to the

Contractor; require adequate

insurance

Existing environmental

damage/

Archeological remains

Delays Obtain agreement by the Grantor

for compensation payments to the

Company, and right to extend the

57

concession period

Change in law or Grantor

unilaterally requires design

changes

Project cost is

increased; Project

may not be viable;

new loans may not

be able to be raised;

Delays

Obtain agreement of Grantor to

accept responsibility for payment

of design changes or to authorize

tariff to be increased to pay

additional finance costs

Variations and changes in

design requested by

Company, Contractor or

third party

Increased finance

costs and delays

Ensure that the Company, the

Grantor and the Contractor agree

to “back to back claims” principle;

require Sponsors to put in new

money in the required amount

Environmental damage and

force majeure events

Delays, increased

costs

Require adequate insurance; claim

on insurance; obtain right for the

Company to terminate the

concession or to be granted an

extension to concession period

3. Market and Revenue Risks.


Concession

Company &

Project Lender


Inadequate traffic or Deficiency in debt Due diligence - require sound

58

tolls/fares are inadequate service and

inadequate returns

to Sponsors

traffic studies; try to have right to

increase tariff; try to have

deficiency guarantee or subsidy

from Government; increase

concession period and refinance

loan facilities; Sponsors required

to put in subordinated loans;

otherwise project risk.

Consumers do not accept

tariff levels and traffic drops

off

Deficiency in debt

service and

inadequate returns

to Sponsors

Require Grantor to compensate

Company for cash deficiency

where due to breach by Grantor of

its obligations; otherwise a project

risks.

Concession fees and

Grantor’s profit shares, are

too high

Deficiency in debt

service and

inadequate returns

to Sponsors

Ensure fees and profits are

subordinated to debt service

payable to Project Lenders

Authorization for tariff

increases is not granted by

the Grantor

Deficiency in debt

service and

inadequate returns

to Sponsors

Require Grantor to compensate

Company for shortfall (by

reference to debt service

coverage); require Sponsors to put

in new money; otherwise a project

risk.

59

4. Finance Risks.


Concession

Company &

Project Lender


Borrowings in local

currency carry high interest

rates and/or loans with long

tenors are unavailable

and/or there is limited

ability to enter into swaps

Increase in debt

service

Raise loans in foreign currency;

structure with balloon payment at

end of loan term repayment of

which is guaranteed by

multilateral; refinance at end of

loan term

Loans are raised in foreign

currency and there is a

devaluation of local

currency

If foreign currency

is borrowed, when

converted, there is

insufficient money,

to pay debt service

Require that Company hedges its

forex exposure; obtain right for

Company to increase tariff by a

percentage related to the rate of

devaluation

Increase in interest rates Increase in debt

service

Fix interest rates; enter into swaps;

obtain right to increase tariff by a

percentage related to interest rate

increase; drawdown of standby

loans; require Sponsors to make

subordinated loans

60

Increases in operating costs

due to inflation

Decrease in funds

available for debt

service

Obtain right to increase tariff

based on CPI basis or based on

rate of increase in prices of

component costs

Foreign currency is not

available

Foreign currency

debt is not able to

be repaid in foreign

currency

Obtain agreement from Central

Bank to procure foreign currency;

obtain agreement from Project

Lenders to accept equivalent value

in local currency

5. Legal Risks.


Concession

Company &

Project Lender


Concession Company does

not have ownership or rights

of use of key assets

Security is

worthless; viability

of Project may be

in doubt

Site inspections and legal due

diligence; make this an event of

default under Loan Agreement

Concession Company not

able to satisfy conditions

precedent in Concession

Agreement

Concession

Contract may be

terminated by the

Grantor; Sponsors

and possibly

Project Lenders

Ensure that conditions precedent

are within Company’s control

61

lose their upfront

costs and expenses

Concession Company

breaches Concession

Contract

Concession

Contract may be

terminated by the

Grantor; Project

Lenders risk loss of

principal and

interest

Obtain grace periods and step-in

rights for the Project Lenders in

Concession Contract; obtain debt

assumption agreement or

obligation to repay the project

loans from the Grantor; Sponsors

lose their equity

Concession Company is

bankrupt, insolvent or

another event of default

occurs under Loan

Agreement

Concession

Contract may be

able to be

terminated by

Grantor; Project

Lenders risk loss of

principal and

interest

Obtain grace periods under

Concession Contract; Ensure that

Project Lenders have right to

enforce security; obtain right for a

Substituted Entity to take over the

Concession

Security is not enforceable

or is deficient

Project Lenders risk

loss of principal

and interest

Legal due diligence; obtain

guarantees from Sponsors

6. Operating Risks.


Concession

Company &

Project Lender


Lack of exclusivity to Inadequate traffic Obtain traffic studies and get an

62

prohibit competing

concessions

which may lead to

a debt service

deficiency

exclusivity agreement from the

Grantor/other Governmental

Agencies

Lack of interconnection and

contribution of existing

infrastructure

Inadequate traffic

which may lead to

a debt service

deficiency

Analyze interconnection

requirements and get Grantor /

Transport Authority to implement

them

Force majeure events Interruption in

operations which

may lead to the

Grantor being

entitled to

terminate the

concession and to a

debt service

deficiency

Ensure there is adequate

insurance; require the Company to

claim on insurance and/or draw on

standby loans to pay for the

damage repairs; obtain grace

periods and right for extension to

the concession period in the

Concession Contract

Operator default, or

becomes bankrupt

Interruption in

operations;

Concession

Contract may be

terminated

Claim on performance bonds;

claim damages from Operator;

ensure there are grace periods in

Concession Contract; terminate

O&M Contract; appoint new

Operator

Default by Concession

Company under O&M

Contract

Operator may claim

damages;

Concession

Ensure there are grace periods in

O&M Contract; obtain step-in

rights for the Project Lenders

63

Contract may be

terminated

Strikes and industrial

disturbances

Interruption to

operations;

Concession

Contract may be

terminated

Ensure that Company obtains the

agreement for the Operator to be

responsible for this and ensure

there is a right to claim damages;

obtain grace periods in Concession

Contract; obtain step-in rights for

the Project Lenders

Operating costs are too high Reduction in cash

available for debt

service

Ensure that there are controls in

the O&M Contract; ensure there

are termination rights for the

Company in the O&M Contract if

costs remain high

Failure of “technology” Interruption to

operations;

Concession

Contract may be

terminated

Due diligence; obtain technology

feasibility reports; ensure there is

a right for the Company to claim

damages from technology

providers

64

5. Lessons from International Experience

5.1 International Practices

The principle countries pursue four different approaches or forms of entities for

construction and operation of Road Sector Projects. The four approaches are as follows:

o Government Agency

o Public Corporation

o Private Concessions

o Public-Private Partnerships

All of these approaches have their on advantages and disadvantages.

1. Government Agency: In case of a government agency as entity, which is a case in

Indonesia, Malaysia, the Philippines, Thailand and United States, the advantage is the

potential for comprehensive, systematic and uncontradictory network planning and

extension. The disadvantages are the need for prioritization of competing fund usage

because public funds are often not enough to meet network development needs timely

and the difficulties often faced to improve cost effectiveness and operational

efficiency.

2. Public Corporations: The Public Corporations as entities are employed in countries

like Japan, Indonesia, Thailand, France and the Philippines. The advantages in this

case are their stronger impact in pursuing in a coherent manner government road and

expressway network development goals, but the potential for cross subsidizing among

routes in a network. Disadvantages of Public Corporations are normally that they lack

incentives to respond timely and efficiently to changing market conditions and they

lack incentive for cost reductions and they are generally less efficient than private

entities.

3. Private Concession: Private Concession entities are widely pursed now in Argentina,

Brazil, Chile, Colombia, France, Hungary, Mexico, Spain, Hong Kong, SAR(China)

and the United States. The advantage in this type is that they are more efficient and

they show a stronger tendency to respond quickly to changing market conditions. The

65

main disadvantage of this type is that they can lead to difficulties in overall network

planning and extension realization.

4. Public-Private Partnerships: Public-Private Partnerships as entities are employed in

countries like Hungary, Columbia, SAR(China), Indonesia, and Philippines. The

advantages of this type are that they bring additional resources to the project and

complete in a shorter time, leads to increase in efficiency in construction and project

operation, through market discipline, assuring the project is completed on schedule

and within the budget.

5.2 Advantages and Disadvantages of Common Government

Support Measures for Toll Road Development

Support Measures Contents Advantages Disadvantages

Comfort Letter

China

A legally non-binding

letter issued by

government to give

support to certain

actions not clearly

stated in contractual

agreement such as

performance of a

public corporation as a

grantor of concession

Can provide

financiers and

sponsors a

minimum level of

assurance when

no implicit

government

support is

attainable.

Not legally

binding

Land Acquisition

China, Thailand,

United States

Expropriation of right

of way for toll road

construction. Cost of

land acquired maybe

borne either by the

government or the

concessionaire.

Helpful for the

concessionaire

because the right

of expropriation

usually resides

with the

government. This

support usually

improves "project

economics" to a

Delays

66

great extent when

implemented at

no cost to the

sponsors.

Extension of

Concession Period

Indonesia and others

Measure to provide

compensation for the

loss of profit due to

circumstances caused

by the government

Improves project

economics.

Effect on current

cash flow is

small.

Construction of

Related Facilities

United Kingdom,

Thailand and others

Construction of

connecting roads,

access ramp, etc.

Contributes

significantly to

the project since

connecting roads

and other

facilities are

critical elements

for

commencement

of operation.

Construction

delays may

critically impair

the

commencement

of operation.

Revenue Support

Malaysia, China

(SAR)

Revenue support is

usually done with a

minimum threshold for

compensation paid by

the government.

Facilitation of the

finance closing

and the project.

Weak design

may impose a

large contingent

liability on the

government.

Revenue Sharing

with Existing

Facilities

Malaysia, Thailand,

United Kingdom and

others

Deriving revenue from

an existing toll road

facility; can take the

form of taking over the

complete facility

including employees

and assets as well as

debts.

Possible

mitigation of

revenue shortfall

risk in the startup

years.

Revenue sharing

formula requires

careful design.

Possible burden

when all assets,

debts, and

employees are to

be transferred.

67

Shadow Toll

United Kingdom and

Argentina

Toll is paid by

government according

to the vehicle-km of the

traffic counted

automatically.

Facilitation of

private financing

without

stimulating

resistance to

tolling.

Possible financial

burden/fiscal

inflexibility in

the later years;

may hinder

transition to real

tolling.

Provisions of

Development and

Third-Party Revenue

Malaysia and China

(SAR)

Right of commercial

development along the

toll road to supplement

project economics.

Enhancement of

project

economics.

Excessive

dependence on

this measure may

impair project

economics.

Subsidies/Grants

Chile, Colombia and

Spain

Government support

both in cash and in

kind such as land and

facility.

Enhancement of

project

economics.

Arrangement

may be time

consuming and

implementation

may be delayed;

possible risk of

undue

governmental

intervention,

"moral hazard,"

etc.

Subordinated Loans

Malaysia and others

A type of loan for

which repayment is

subordinated to the

senior loan (ordinary

loan). Government,

parent company and, in

some cases,

institutional investors

are providers of the

Facilitation of

finance closing

because it is

treated as equity;

could be used as

stand-by facility

to mitigate risks

such as cost

overrun and

Possible

deterioration of

project

economics due to

higher interest

cost.

68

loan. The intersect rate

is higher than for a

senior debt.

revenue shortfall.

Foreign Exchange

Guarantees

Indonesia, Philippines

and Spain

Compensation for

impact caused by

devaluation of local

currency. It could be

built into the tariff

formula.

Facilitation of

finance closing in

foreign currency

when country risk

in this respect is

high.

Possible large

contingent

liability for the

government in

the event of large

currency

devaluation.

Loan (Bond)

Guarantees

China and others

Guarantee on

repayment of loan and

on redemption of bond

Facilitation of

finance closing.

Possible large

contingent

liability for the

government;

moral hazard for

concessionaire

and lenders.

Equity Guarantees Guarantee of equity

investment.

Facilitation of

project proposals

and

implementation.

Possible large

contingent

liability for the

government;

moral hazard for

concessionaire

and other

investors.

69

5.3 Examples of Toll Adjustment Procedures

Country Example Description of Approach

France Government

discretion.

Toll rate adjustments are at the discretion of the

Ministry of Finance, which tends to approve larger

increases for less profitable companies. The French

approach avoids unnecessarily high returns to

investors, but at the risk of sacrificing efficiency by

undermining incentives to make exceptional efforts

to control costs or improve productivity.

Japan Use of an advisory

committee to the

Prime Minister.

The Japanese toll revenue pooling system requires a

reexamination of total cost redemption every time

there is an expansion of the expressway network (i.e.

when the Minister of Construction issues a

construction order for a network addition). When the

cost of constructing a network expansion or other

significant improvement requires a toll rate

adjustment and/or an extension of the toll collecting

period, the proposal goes through official

government procedures involving a review and

examination by a “Toll Committee” and approval by

MOC and MOTC reflecting public hearings.

Spain Use of formula

linked to inflation.

Spain’s approach to regulating the toll rates of

concessionaires is based on a formula linked to price

inflation. The Spanish approach has the merit of

promoting new investment and efficiency, and it has

only limited risks of unnecessarily high returns to

investors, since “excess” profits are moved to a

Special Reserve.

Hong Kong

SAR

A sophisticated yet

straightforward toll

adjustment

formula(TAM)-“be

If traffic and therefore revenue falls below a forecast

volume, the TAM will allow the operator to advance

the prespecified date of a toll increase. Conversely,

if the amount of revenue received by the operator is

70

st Practice”. above the forecast, resulting in a rate of return that

exceeds a specified range, a toll increase will be

deferred.

Philippines An advanced toll

adjustment

procedures.

Mandated by Presidential Decree No. 1894, it is

based upon a parametric formula that takes into

account prevailing local and foreign interest rates,

the consumer price index, currency values, and a

construction materials price index. However, if toll

road investors happen to receive a windfall, there is

no profit-sharing clause—the investors keep all of

the reward.

Indonesia Uncertainty in

adjustment

procedures.

Under Law No. 13/1980, the designation of a road

section as a toll road and the determination of initial

toll tariffs require Presidential approval of proposals

made by Minister of Public Works. The concession

company proposes tariff adjustments every two or

three years based on a formula incorporating the

consumer price index, but approval cannot be

guaranteed by the government. Uncertainty over the

toll adjustment procedure may discourage private

investors.

Mexico Uncertainty in

adjustment

procedures.

Both toll increases and decreases typically require

approval of the Secretariat of Communications and

Transport, which restricts most concessionaires’

abilities to responsively adjust pricing to optimize

revenues once the roads were open to traffic.

Malaysia An approach for

addressing

uncertainty- similar

to that of Hong

Kong SAR.

The proposed new method is to annex the forecast

traffic volume to the concession agreement. If the

actual traffic level is more than the forecast level at a

specified time, the Government could request either

the deferral of a toll rate increase or lowering of the

level of toll rate increase; but if the actual traffic is

71

less than forecast, the concessionaire could request

to bring forward the timing of toll rate increases.

72

6. The Way Forward – Opportunities for PSP in Road

Sector Development

6.1 Opportunities exist in

o Highway construction.

o Widening of about 38 percent of National highway from single to double lanes.

o Strengthening of about 60 percent of the two lane roads.

o Highway related on route activities like restaurants, motels and rest/parking areas

as may be decided by the Implementing Agency.

6.2 Findings

o Private sector is still reluctant to invest in the infrastructure projects because of

the high risk of traffic volume and long gestation period.

o In the annuity projects the entire revenue risk is fully borne by the government

and it imposes a high financial burden on the government for a long period.

o Government departments have abundant technical expertise but there is a lack in

financial management.

o Infrastructure financing is in its recent stage, only few projects have been

completed under these implementing models, the agreements or documents

related to these have not been scrutinized in the court of law or no judgements

have been passed yet.

o Undeveloped Domestic Capital Markets, lack of proper instruments to meet the

requirements for the infrastructure projects.

o No foreign funding in infrastructure projects.

o No single window clearances: Lengthy procedures for getting clearances.

73

6.3 Recommendations / Suggestions

o Government should try to remove the bottlenecks in the financing of

infrastructure projects and ease the legal procedures and formalities.

o Single window clearances for the projects, like environmental clearances, land

acquisition problems etc.

o Government should try to provide as many incentives as it can like tax incentives

and concessions, loans and equity contributions, land and other logistical

facilities, risk rewards etc.

o Need to develop innovative mechanisms / products for private sector participation

like securitization, annuity model, assured returns etc.

6.4 Conclusion – The Middle Path

The country is poised to take up infrastructure projects comprising huge road network of

expressway standard and other similar roads. Adoption of private financing for such

projects is an almost inevitable course of action. However, it appears that the private

sector is not yet ready to handle all these projects, particularly the mega projects costing a

few hundred crores for various reasons. Conscious efforts must be made by the

Government to nurture the private sector to acquire the competence to handle this

mammoth job. Building up of conducive environment for private participation should

also be task on hand. However in the intervening period, the execution of such projects

through the medium of Government corporations acting as BOT entrepreneurs

seems to be the most appropriate option, this can be termed as the contemporary

middle path. The maturing of the investing community in course of time will result in

the emergence of lenders and investors with different risk profiles and the capacity to

assess and assume risks of varying types and degrees. As most infrastructure projects

have long gestation periods, entirely different set of investors may be associated with the

project during their development, construction and operation phases depending on their

risk appetite.

74

Mobilization of resources on the scale required for appropriate road infrastructure

development would be possible only in the environment which protect the interests of the

road users and also assures a reasonable rate of return to the investors. In this context, the

need for strengthening the institutional setup as well as adopting new financial

instruments is self-evident and needs no reiteration. Innovative application of new

financing modalities would, perhaps, provide the required impetus for attracting large

private investment flows in road infrastructure projects.

75

Model

7.1 Description

This is a BOT (Toll Based) model of a four lane, 53 km long road project. A BOT (Toll

Based) project involves private party bidders who invest in the project and get returns

from the tolls collected during the operations. The total project cost is Rs. 322.60 crores

and the construction period is 30 months beginning from 1st April 2008. In the model, the

expenditure phasing has been done for a typical road project. The impact of financing

pattern on expenditure phasing and thus on the overall cost of the project can be easily

analyzed in this exercise. Also taken into account is the tax holiday afforded to the

infrastructure projects in the Union Government Budget to compute the tax provisioning

requirements.

In this project EPC cost, traffic volume and phasing of the cost is provided by the

Governmental agency and is given to make the project financial feasible by using the

various mix of the finance options available for the project in order that the project can

attract the private investors with a good rate of return. In the end the sensitivity analysis

has been done to study the impact of changes in the interest rate and financing pattern on

the Project IRR and the total Project Cost.

The model is prepared in Excel Sheet and involves the calculation of Toll Revenues

expected, DSCR i.e. Debt Service Coverage Ratio.

(see appendix B)

76

7.2 Sensitivity Analysis

BOT (Toll Based) Model

CASE - I CASE - II Case III

No Grant 10% Grant 20% Grant

DEBT 70% 60% 50%

EQUITY 30% 30% 30%

GRANT 0% 10% 20%

GEARING 2.33 2 1.67

Equity Amount 99.75 98.25 96.78

Debt Amount 232.76 196.51 161.3

Grant Amount 0 32.75 64.52

Project IRR 11.39% 11.42% 11.25%

Cost of Capital 13.40% 12.00% 10.60%

Avg. DSCR 1.17 1.19 1.37

(Amounts in crores)

(see appendix B)

77

7.2 Internal Rate of Return & Debt Service Coverage Ratio

The IRR is that discount rate that makes the net present value of the expected returns of a

project zero. The advantage of IRR is that it can be used even when the discount rate is

unknown. Here we have calculated IRR based on the cash flows generated from the toll

collected and then its compared with the total investment of the project. Further the IRR

is compared with the cost of capital to get a clearer picture w.r.t. the financial

attractiveness of the project.

As we know that if the IRR > cost of capital then accept that project and if IRR < cost of

capital then reject the project.

Here we can see that the IRR of the project is 11.25% which is greater than the cost of

capital of the project which stands at 10.60%.Hence, we can clearly judge that the project

is an attractive project.

Further to measure the monthly debt payment ability of the project we have calculated the

DSCR i.e. Debt Service Coverage Ratio because it refers to the amount of cash flow

available to meet annual interest and principal payments on debt, including sinking fund

payments.

This ratio should ideally be over 1. That would mean the property is generating enough

income to pay its debt obligations and the higher this ratio is, the easier it is to borrow

money for the enterprises’ property.

If DSCR is less than 1 then it would mean a negative cash flow. A DSCR of less than 1,

say .95, would mean that there is only enough net operating income to cover 95% of

annual debt payments

In general, DSCR = Net Operating Income / Total Debt service.

As we can see that after making necessary calculations the DSCR comes to 1.37, which is

greater than 1, so, we can comfortably conclude that the project is a lucrative one and the

interested entrepreneurs should not hesitate to bid for such toll based BOT projects, but

only after one follows the method prescribed here in this research.

78

(see appendix B)

Bibliography

Reports & Other Publications

1. Seminar on Financing, Implementation and Operation of Highways in 21st Century

(New Delhi, 24 – 25 March, 2008.)

2. A Report on Road Sector in India, IIM Ahmedabad.

3. The Feasibility Study on the construction of Expressways in the NCR in India: Final

Report, IL&FS.

4. Guidelines for Infrastructure Development through BOT Projects, NHAI.

5. Privatization and Regulation of Transport Infrastructure, World Bank Institute.

6. National seminar on Road Development, “The Emerging scenario”, 14 March 2008,

New Delhi held by Confederation of Indian Industry.

7. Brochure of NHAI.

8. India Today July 24 2007 edition.

Concession Agreements:

I. Moradabad Bypass Project.

II. Delhi – Noida Project.

Websites / Weblinks

I. www.nhai.org

II. www.nic.in

III. www.worldbank.org

IV. www.indiainfoline.com

V. www.ciionline.org

VI. www.ficci.org

VII. www.jkr.gov.my

79

http://www.jkr.gov.my/

http://www.ficci.org/

http://www.ciionline.org/

http://www.indiainfoline.com/

http://www.worldbank.org/

http://www.nic.in/

http://www.nhai.org/

APPENDIX: A

80

Model of Concession Agreements under BOT scheme

Moradabad Bypass Project:

Details Construction of 4-Lane Expressway along an 18.22 km stretch from 148.43 to166.65 on NH-24 in Uttar Pradesh

Promoter NHAIMethod of Financing

Special Purpose Vehicle (SPV) on BOT basis.

Concessionaire Moradabad Toll Road Company, incorporated underthe provisions of the Companies Act 1956

Concession Period 30 yearsAgreement Date 22 Feb 1999.Financial Package Project Cost 103.5 crores.

Debt-Equity Ratio 70:30.Debt 72.45 crores: 40 crores from IDFC @ 13.25% : 32.45 crores from SBIEquity 31.05 crores : 26.55 crores by NHAI : 4.5 crores by EPC Contractor

EPC Contractor UP State Bridge CorporationRepayment Schedule

Borrower has to repay the principal amount of loan in 36 quarterly installments commencing from September 15, 2004.

Repayment Pattern

Backended.

Financial Risk & Mitigation Framework

The project has been funded through non-recourse project financing, thus no claims on NHAI’s balance sheet.

NHAI has provided a debt service coverage of Rs 5 crores, until the debt service revenue is build up.

Demand / Market Risk & Mitigation Framework

The need to the project is well established by the congestion levels in the city thus alleviating the non usage risk by the users.

NHAI levies uniform toll rates thus alleviating the non usage risk by the users.

Legal / Regulatory Risk & Mitigating Framework

NHs Act has been amended thus enabling the Government to offer concession to the private party to finance, design, construction, operate, maintain the facility and collect toll from the users.

Construction Risk & Mitigating Framework

The EPC contractor owns the design risk by constructing the project as per his own design.

Contractor’s equity has been adjusted against payments due to them for construction work

81

completed.Operating Risks & Mitigating Framework

Incase cost overruns in maintenance, it would be directly funded byNHAI.

Incase, minimum revenue is not achieved NHAI has agreed to take the residual risk by providing revenue shortfall loan to the project company.

Delhi Noida Project:

Details Project involves construction of 552.5 m long 8-lane bridge across river Yamuna in Delhi with about 5 km long approach roads, grade seperated interchanges to ease the traffic movement and semi-automatic toll plaza.

Promoter / Sponsor

Sponsored by: Government of Uttar Pradesh, NOIDAPromoted by: IL&FS

Method of Financing

Special Purpose Company (SPC / SPV)

Concession Agreement

NOIDA & NTCBL.

Concessionaire Noida Toll Bridge Company Limited (NTBCL) incorporated under the provisions of the Companies Act 1956.

Concession Model Fixed Return and Variable Period.Return on Investment

20% p.a.

Concession Period 30 years and extendable till assured returns achieved.Financial Package Project Cost 408 crores.

Debt-Equity Ratio 70:30.Debt 288 crores: Raised from IL&FS, World BankEquity 120 crores: Participants NOIDA, IL&FS, IFCI, AIG Sectoral fund, Prudential fund.

EPC Contractor NTBCL and EPC Contractor (Marubeni and Mitsui, JAPAN). Contract based on item rate contract and least project cost.

O & M Agreement NTCBL & Inter-toll.

Delivery of Project sites

Unencumbered and vacant possession of the project sites to be delivered by the respective state governments to NTBCL as a condition precedent.

The cost of land to be borne by Government and cost of rehabilitation and relocation of displaced people to be borne by NTBCL.

82

Transfer On conclusion of the Concession Period, the bridge hal be transferred to NOIDA and ashram Chowk Flyover, part of the project, to be handed over to Delhi Government.

Lender’s Rights Other than the security of the assets of the project, additional rights as follows granted: Right to cure a Concessionaire event of default if the

Concessionaire is unable to resolve the problem within the cure period provided.

If NOIDA moves to terminate the agreement after the Concessionaire and lender’s inability to cure the event of default, Lender has the right to a substitute Entity to replace the Concessionaire.

Technology Risk Mitigation plan

Performance Bond from the EPC Contractor – post construction 18 months

Strict construction monitoring by the Project engineerRisk of shortfall in traffic Mitigating Plan

Provision to extend Concession agreement incase of non-achievement of 20% return over the 30 year period.

A debt service reserve to be maintained to ensure that servicing does not get adversly affected in the short run.

Concession Agreement provides for the land development rights upon the certification by independent auditor, incase of inadequacy of Project revenues from tolls

Risk of competing traffic routes mitigating plan

Concessionaire assured of exclusivity till the bridge achieves rated capacity.

Poor Maintenance of the facility

O&M contract has strict maintenance standards with performance based compensation package to the Contractor and penalties for non-compliance.

Risk of O&M Costs being higher than anticipated

O&M Contract is a fixed price contract with the risk of cost overruns being borne by the O&M contractor

Force Majeure Risk Mitigating Plan

Comprehensive Insurance Coverage.

Political and Social Risk mitigating plan

NOIDA to atleast pay a compensation to meet the outstanding liabilities of NTCBL towards lenders, incase of termination.

83

APPENDIX: B

84

Financing ParametersLength of Highway 53 Kms

Total Project Cost (incl. development, financing costs etc.) 322.60 Equity Brought upfront 0.50Debt as % of Project Cost 50%Equity as % of Project Cost 30%Debt /Equity Ratio 50 : 30Gearing 1.67Grant as % of Project Cost 20%

Equity % of total

Equity CostRupee Equity 96.78 100% 12%Forex Equity 0 0%Total Equity 96.78 100%

Economic Assumptions

Date of Base EPC Cost 01-Sep-07WPI 6.25%Toll Escalation Rate 6.25%Date of Base Toll Rates 01-Apr-08

Expenditure ParametersAnnual O&M Expenses - for Original Capex 0.50% of Original Project Cost - for Insurance 0.50% of Original Project CostResurfacing after every 5 years 18.20 crores (as on COD)Escalation Rate for O&M 6.00% p.a.

Book Depreciation Rate (SLM Basis) 5.59% (95% of COD)

Tax Depreciation Rate (WDV Basis) 10%

Lenders Upfront Fee 1.05%Corporate Tax Rate 35.70%

85

Traffic Assumptions 1

Vehicle Type Traffic Volume Growth

Rate

As on Toll Plaza 1 1-Apr-01 COD 1992-99 2000-05 2006-20102011-2015 After 2015

Cars 850 1114 7.00% 7.50% 7.50% 7.20% 6.80%LCV 375 482 6.50% 7.50% 7.00% 6.80% 6.30%MAV 100 129 6.50% 7.50% 7.00% 6.80% 6.30%Bus 600 772 6.50% 7.50% 7.00% 6.80% 6.30%HCV 2000 2573 6.50% 7.50% 7.00% 6.80% 6.30%Total PCUs 9663 12451 5.97%*Leakage may occur because of incomplete journeys/purely local traffic.Leakage may have to be provided for based on traffic study/survey. 2.68 17.00 5.97%

Traffic Assumptions

Vehicle Type Traffic Volume Growth

Rate

As on Toll Plaza 2 1-Apr-01 COD1996-2000

2000-2005 2005-2010

2010 - 2015 After 2015

Cars 700 918 7.00% 7.50% 7.50% 7.20% 6.80%LCV 200 257 6.50% 7.50% 7.00% 6.80% 6.30%MAV 150 193 6.50% 7.50% 7.00% 6.80% 6.30%Bus 400 515 6.50% 7.50% 7.00% 6.80% 6.30%HCV 1500 1930 6.50% 7.50% 7.00% 6.80% 6.30%Total PCUs 7375 9505

Toll Rate AssumptionsVehicle Type Unit Rate (Rs./km)

As on 1-Apr-97 1-Apr-05Cars 0.40 0.65LCV 0.70 1.14Multi Axle Vehicles 1.40 2.27Bus 1.40 2.27HCV 1.40 2.27

86

EPC COST 247.00

Quarter Beginning1-Oct-

081-Jan-

091-Apr-

091-Jul-

091-Oct-

091-Jan-

101-Apr-

101-Jul-

101-Oct-

101-Jan-

111-Apr-

11

0.53% 5.03% 11.83% 16.65% 9.91% 11.50% 20.23% 19.49% 4.63% 0.21% 100.00%Total Cost 1.30 12.43 29.23 41.11 24.47 28.40 49.96 48.15 11.44 0.51 247.00Retention Money Repayment 0.00 0.00Escalation 0.11 1.25 3.44 5.53 3.72 4.82 9.36 9.90 2.56 40.69Contingency 0.03 0.25 0.58 0.82 0.49 0.57 1.00 0.96 0.23 0.01 4.94Vehicles(Ambulance, crane, jeeps etc) 0.2 0.20Supervision Charges 0.00 0.39 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.14 1.79Preliminary Expenses 0.86 0.44 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.35Preoperative Expenses 0.04 0.05 0.06 0.05 0.05 0.05 0.05 0.06 0.06 0.02 0.49Mobilisation Advance 0.00 0.00Interest During Construction 0.00 0.00 0.00 0.48 1.28 1.98 2.95 4.22 5.15 5.54 21.60System for Toll Plaza 1.00 1.00Lenders Fee 1.69 1.69Insurance Charges 0.00 0.02 0.06 0.11 0.15 0.19 0.26 0.33 0.36 0.37 1.86

Total Project Cost 3.92 13.68 31.40 46.19 32.16 35.09 59.22 63.27 27.32 10.35 322.60

Retention Money 0.00% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Adjustment of Mobilisation Advance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Balance Mobilisation Advance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net Project Cost 3.92 13.68 31.40 46.19 32.16 35.09 59.22 63.27 27.32 10.35 322.60

Funds Drawdown ScheduleTotal Equity 3.92 13.68 30.79 8.17 5.69 6.21 10.47 11.19 4.83 1.83Loan Drawdown 27.23 18.96 20.69 34.91 37.30 16.11 6.10 161.30Equity Initial Upto 50% 3.92 13.68 30.79 0.00 0.00 0.00 0.00 0.00 0.00 0.00 48.39Equity Final 8.17 5.69 6.21 10.47 11.19 4.83 1.83 48.39Grant Drawdown 0.61 10.79 7.51 8.20 13.83 14.78 6.38 2.42 64.52Total Funds Drawdown 3.92 13.68 31.40 46.19 32.16 35.09 59.22 63.27 27.32 10.35 322.60

87

Projection of Average Daily Traffic Volume

Year Beginning 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15 1-Apr-16 1-Apr-17 1-Apr-18

Cars 947 1018 1094 1177 1265 1360 1462 1571

LCV 410 441 474 509 548 586 627 671

MultiAxle Vehicles 109 118 126 136 146 156 167 179

Bus 656 705 758 815 876 938 1003 1073

HCV 2187 2351 2527 2717 2921 3125 3344 3578

Total PCU's 10583 11377 12231 13148 14134 15130 16195 17336


Cars 780 838 901 969 1042 1120 1204 1294

LCV 219 235 253 272 292 313 334 358

MultiAxle Vehicles 164 176 190 204 219 234 251 268

Bus 437 470 505 543 584 625 669 716

HCV 1640 1763 1896 2038 2190 2344 2508 2683

Total PCU's 8079 8685 9336 10037 10789 11550 12364 13235

Total Traffic 18662 20062 21567 23184 24923 26679 28559 30572

1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27

1689 1816 1946 2087 2237 2398 2571 2745 2932

718 768 820 876 936 999 1067 1134 1206

191 205 219 234 250 266 285 303 322

1149 1229 1312 1402 1497 1599 1708 1815 1929

3828 4096 4375 4672 4990 5329 5692 6050 6432

18558 19865 21223 22674 24225 25881 27650 29405 31272


1391 1495 1603 1718 1842 1975 2117 2261 2415

383 410 437 467 499 533 569 605 643

287 307 328 350 374 400 427 454 482

766 819 875 934 998 1066 1138 1210 1286

2871 3072 3281 3504 3743 3997 4269 4538 4824

14168 15167 16204 17313 18497 19762 21114 22454 23880

32726 35032 37428 39987 42721 45643 48764 51860 55152

Projection of Toll Rates (in Rs.)

88

Year Beginning 1-Apr-07 1-Apr-08 1-Apr-09 1-Apr-10 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15

Cars ( 1 PCU) 34.43 36.58 38.87 41.30 43.88 46.62 49.54 52.63 55.92

LCV 60.26 64.02 68.02 72.28 76.79 81.59 86.69 92.11 97.87

MultiAxle Vehicles 120.51 128.05 136.05 144.55 153.59 163.18 173.38 184.22 195.73

Bus 120.51 128.05 136.05 144.55 153.59 163.18 173.38 184.22 195.73

HCV 120.51 128.05 136.05 144.55 153.59 163.18 173.38 184.22 195.73

Actual Toll Rates (in Rs.)

Year Beginning 1-Apr-07 1-Apr-08 1-Apr-09 1-Apr-10 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15

Cars ( 1 PCU) 35.00 35.00 40.00 40.00 45.00 45.00 50.00 55.00 55.00

LCV 60.00 65.00 70.00 70.00 75.00 80.00 85.00 90.00 100.00

MultiAxle Vehicles 120.00 130.00 135.00 145.00 155.00 165.00 175.00 185.00 195.00

Bus 120.00 130.00 135.00 145.00 155.00 165.00 175.00 185.00 195.00

HCV 120.00 130.00 135.00 145.00 155.00 165.00 175.00 185.00 195.00

1-Apr-16 1-Apr-17 1-Apr-18 1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27

59.42 63.13 67.08 71.27 75.73 80.46 85.49 90.83 96.51 102.54 108.95 115.76

103.98 110.48 117.39 124.72 132.52 140.80 149.60 158.95 168.89 179.44 190.66 202.57

207.97 220.97 234.78 249.45 265.04 281.61 299.21 317.91 337.77 358.89 381.32 405.15

207.97 220.97 234.78 249.45 265.04 281.61 299.21 317.91 337.77 358.89 381.32 405.15

207.97 220.97 234.78 249.45 265.04 281.61 299.21 317.91 337.77 358.89 381.32 405.15

1-Apr-16 1-Apr-17 1-Apr-18 1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27

60.00 65.00 65.00 70.00 75.00 80.00 85.00 90.00 95.00 105.00 110.00 115.00

105.00 110.00 115.00 125.00 135.00 140.00 150.00 160.00 170.00 180.00 190.00 205.00

210.00 220.00 235.00 250.00 265.00 280.00 300.00 320.00 340.00 360.00 380.00 405.00

210.00 220.00 235.00 250.00 265.00 280.00 300.00 320.00 340.00 360.00 380.00 405.00

210.00 220.00 235.00 250.00 265.00 280.00 300.00 320.00 340.00 360.00 380.00 405.00

89

Projection of Annual Toll Revenues (In Rs. cr.)


Cars 1.71 1.84 2.26 2.43 2.93 3.15 3.77 4.45

LCV 1.14 1.32 1.53 1.65 1.90 2.17 2.46 2.79

MultiAxle Vehicles 0.84 0.98 1.09 1.26 1.45 1.65 1.87 2.11

Bus 3.83 4.46 4.98 5.75 6.61 7.53 8.54 9.66

HCV 13.17 15.34 17.12 19.77 22.72 25.88 29.37 33.22

Total Toll Revenue 20.69 23.94 26.98 30.85 35.61 40.37 46.01 52.24


4.79 5.61 6.52 6.99 8.07 9.27 10.60 12.02 13.60

3.32 3.73 4.17 4.66 5.41 6.24 6.91 7.87 8.92

2.38 2.75 3.07 3.51 3.98 4.51 5.09 5.80 6.57

10.90 12.56 14.05 16.03 18.21 20.62 23.27 26.50 30.05

37.47 43.17 48.30 55.11 62.61 70.88 79.99 91.10 103.29

58.86 67.82 76.12 86.29 98.28 111.51 125.85 143.29 162.43


90

Net Toll Revenue 20.69 23.94 26.98 30.85 35.61 40.37 46.01 52.24

Less : O & M Expenses for initial 2 lane 3.23 3.43 3.64 3.87 4.11 28.51 4.64 4.93

Profit before Depn., Interest and Tax 17.46 20.51 23.34 26.99 31.50 11.87 41.37 47.31

Less : Book Depreciation @ 5.59% 18.03 18.03 18.03 18.03 18.03 18.03 18.03 18.03

: Interest on Rupee Debt 22.58 22.58 22.58 22.32 21.49 20.31 18.75 16.77

Profit before Tax -23.15 -20.10 -17.27 -13.36 -8.02 -26.47 4.59 12.51

Less : Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Profit after Tax -23.15 -20.10 -17.27 -13.36 -8.02 -26.47 4.59 12.51

Cumulative Profit After tax -23.15 -43.25 -60.52 -73.88 -81.90 -108.37 -103.77 -91.26

Dividend 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Dividend Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Retained Earnings -23.15 -20.10 -17.27 -13.36 -8.02 -26.47 4.59 12.51

Cumulative Retained Earnings -23.15 -43.25 -60.52 -73.88 -81.90 -108.37 -103.77 -91.26


58.86 67.82 76.12 86.29 98.28 111.51 125.85 143.29 162.43

5.24 5.57 38.60 6.28 6.68 7.09 7.54 8.01 8.51

53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 153.92

18.03 18.03 18.03 18.03 18.03 18.03 18.03 18.03 18.03

14.30 11.19 7.40 2.96 0.00 0.00 0.00 0.00 0.00

21.29 33.04 12.09 59.02 73.58 86.39 100.28 117.25 135.90

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 36.97

21.29 33.04 12.09 59.02 73.58 86.39 100.28 117.25 98.92

-69.97 -36.93 -24.84 34.18 107.76 194.15 294.44 411.69 510.61

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

21.29 33.04 12.09 59.02 73.58 86.39 100.28 117.25 98.92

-69.97 -36.93 -24.84 34.18 107.76 194.15 294.44 411.69 510.61

91

Year Beginning 1-Oct-08 1-Apr-09 1-Apr-10 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15 1-Apr-16

Total outflow excl. IDC 17.60 141.11 142.29 0.00 0.00 0.00 0.00 0.00 0.00

Inflows

PBDIT 17.46 20.51 23.34 26.99 31.50 11.87

Less Tax 0.00 0.00 0.00 0.00 0.00 0.00

Net Inflow -17.60 -141.11 -142.29 17.46 20.51 23.34 26.99 31.50 11.87

Project IRR 11.25%

Cost of Capital 10.60%

1-Apr-17 1-Apr-18 1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

41.37 47.31 53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 153.92

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 36.97

41.37 47.31 53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 116.95

92


Profit before Depn., Interest but after Tax 17.46 20.51 23.34 26.99 31.50 11.87 41.37 47.31

Add fresh inflows through unsecured loans 8.51 5.46 0.00 4.43 0.00 22.99 0.00 0.00

Sub-total 25.97 25.97 23.34 31.42 31.50 34.85 41.37 47.31

Interest Payment on first loan 22.58 22.58 22.58 22.32 21.49 20.31 18.75 16.77

Interest Payment on second loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Debt Repayment for first loan 0.00 0.00 0.00 5.00 7.50 10.00 13.00 16.00

Debt Repayment for second loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Sub-total for first loan 22.58 22.58 22.58 27.32 28.99 30.31 31.75 32.77

Sub-total for second loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Repayment 22.58 22.58 22.58 27.32 28.99 30.31 31.75 32.77

DSCR for the loan 1.15 1.15 1.03 1.15 1.09 1.15 1.30 1.44

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00


53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 116.95

0.00 0.00 6.07 0.00 0.00 0.00 0.00 0.00 0.00

53.62 62.26 43.59 80.01 91.61 104.42 118.31 135.28 116.95

14.30 11.19 7.40 2.96 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

20.50 25.00 30.50 33.80 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

34.80 36.19 37.90 36.76 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

34.80 36.19 37.90 36.76 0.00 0.00 0.00 0.00 0.00

1.54 1.72 1.15 2.18 n.a. n.a. n.a. n.a. n.a.

0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00

0.00 0.00 0.00 1.37 0.00 0.00 0.00 0.00 0.00

93

94

RESPONSE SHEETS

95

Thesis Response sheet

Response sheet number: 1 (one)

Thesis Topic: “Financial Viability Analysis of the Road Sector Projects in India.”

Date: 22/05/08

Name: Vijay GarodiaBatch: SS/ 06-08 Alumni Id: DS68-F181Phone No: 9971619555Email Id: [email protected]

Progress of the work : I have collected data that is required for my thesis but still preparing the questionnaire. I have also met my guide to help me out for the same, as of now I am sending the introduction of my thesis.

Introduction

The road sector has been, and will be for a long time, the dominant form of transport for freight and passenger movement throughout the world. In India the decade of 90s witnessed a series of economic reforms. The government since then is committed to second generation reforms aimed at achieving an annual growth rate of 7 to 8 percent. Such acceleration in growth is bound to create a massive demand for infrastructure services such as power, telecom, roads, ports, railways and civil aviation.

Over the last few years, the road development scenario has changed rapidly. Until 1991, government was exclusively responsible for the development and maintenance of the road sector. In the absence of user charges, the road sector in India has relied entirely on the budgetary allocation and funding by multilateral agencies, which stagnated at about 3 percent of the total plan expenditure during the seventh and eighth five-year plans.

The major initiative taken in the road sector was the constitution of the “Central Road Fund” with the introduction of a cess on fuel. Over the years this has become the major source of financing highways development programme. The revenue from the cess has increased from Rs. 2000 crores at time of its inception to Rs. 5000-6000 crores per annum.

The era of 90s also witnessed major changes in the policies. To facilitate & induct the capital from private sector into road development, policies were amended and several

mailto:[email protected]

96

incentives were introduced. Further to give proper direction to highway development, the National Highways Authority of India was made operational. A clear mandate was set for NHAI. A concrete plan of development was announced for National Highways and Rural Roads in the form of NHDP and “Pradhan Mantri Gramin Sadak Yojana”. It has thrown excellent Business opportunities for contractors, equipment manufacturers and suppliers, consultants, road developers, investors and managers. It is also expected to give a boost to the economy through increased demands for raw materials and job opportunities. However, it has also thrown challenges. Challenges, not to garner resources, but to ensure optimum utilization of available resources, challenges to domestic contracting industry to modernize and upgrade to meet international competition, challenges to domestic equipment manufacturers to compete with multinational companies in the liberal import regime and finally challenges for the government to keep the momentum high as also to mobilize private sector participation.

Scope of thesis:-o Study of the past trends in financing of the road sector projects in India with a special

emphasis on terms of financing, institutions involved in financing of the road sector projects, role of World Bank, ADB, etc.

o Risks perceived by lenders in financing of the road sector projects and ways to mitigate these risks.

o Public Private Partnership: Role of the private sector in the development of the road projects in India.


An Overview of Indian Road Sector

Classification of Roads:













97



Indian Road Network







(*NHs are less than 2% but carry more than 40% of traffic)

National Highway Network









Trend in Road Traffic




Freight Passengers


1951 11 89 28 72

1961 28 72 42 58

1971 35 65 59 41

98

1991 53 47 79 21

2000 65 35 87 13

2015

(estimated)

80 20 92 8

Freight transport by road has risen from 6 billion tonne km (BTK) in 1951 to 400 BTK in

1995 and 800 BTK in 2001. Passenger traffic has risen from 23 billion-passenger km

(BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The annual growth of road traffic is

expected to be 9% to 10%. Current boom in the automobile sector may even increase the

future growth rate of road traffic. While the traffic has been growing at a fast pace, it

has not been possible to provide matching investment in the road sector, due to the

competing demands from other sectors, especially the social sectors, and this has led to a

large number of deficiencies in the network. Many sections of the highways are in need

of capacity augmentation, pavement strengthening, rehabilitation of bridges,

improvement of riding quality, provision of traffic safety measures, etc. There are

congested road sections passing through towns where bypasses are required. Many old

bridges are in need of rehabilitation/replacement along with capacity augmentation.

Deficiencies in Road Sector






State Highways 60,000 1,37,119 128%


Total 4,00,255 33,15,231 728%




99


lane.




movement.

Revenue from road transport and expenditure on roads






Economic losses due to poor conditions of roads









Comments from internal/external guide:

My thesis guide pointed out that some of the figures was not updated and were not the latest ones. Thus I tried my best to get those updated and some are left, for which I am still working and will be updated soon.

Signature of the external guide: Signature of the internal guide:

Signature of the Student:

Vijay Garodia

100


Response sheet number: 1 (one)


Date: 22/05/08

Name: Vijay GarodiaBatch: SS/ 06-08 Alumni Id: DS68-F181Phone No: 9971619555Email Id: [email protected]

Progress of the work : I have collected data that is required for my thesis but still preparing the questionnaire. I have also met my guide to help me out for the same, as of now I am sending the introduction of my thesis.

Introduction

The road sector has been, and will be for a long time, the dominant form of transport for freight and passenger movement throughout the world. In India the decade of 90s witnessed a series of economic reforms. The government since then is committed to second generation reforms aimed at achieving an annual growth rate of 7 to 8 percent. Such acceleration in growth is bound to create a massive demand for infrastructure services such as power, telecom, roads, ports, railways and civil aviation.

Over the last few years, the road development scenario has changed rapidly. Until 1991, government was exclusively responsible for the development and maintenance of the road sector. In the absence of user charges, the road sector in India has relied entirely on the budgetary allocation and funding by multilateral agencies, which stagnated at about 3 percent of the total plan expenditure during the seventh and eighth five-year plans.

The major initiative taken in the road sector was the constitution of the “Central Road Fund” with the introduction of a cess on fuel. Over the years this has become the major source of financing highways development programme. The revenue from the cess has increased from Rs. 2000 crores at time of its inception to Rs. 5000-6000 crores per annum.


101

The era of 90s also witnessed major changes in the policies. To facilitate & induct the capital from private sector into road development, policies were amended and several incentives were introduced. Further to give proper direction to highway development, the National Highways Authority of India was made operational. A clear mandate was set for NHAI. A concrete plan of development was announced for National Highways and Rural Roads in the form of NHDP and “Pradhan Mantri Gramin Sadak Yojana”. It has thrown excellent Business opportunities for contractors, equipment manufacturers and suppliers, consultants, road developers, investors and managers. It is also expected to give a boost to the economy through increased demands for raw materials and job opportunities. However, it has also thrown challenges. Challenges, not to garner resources, but to ensure optimum utilization of available resources, challenges to domestic contracting industry to modernize and upgrade to meet international competition, challenges to domestic equipment manufacturers to compete with multinational companies in the liberal import regime and finally challenges for the government to keep the momentum high as also to mobilize private sector participation.

Scope of thesis:-o Study of the past trends in financing of the road sector projects in India with a special

emphasis on terms of financing, institutions involved in financing of the road sector projects, role of World Bank, ADB, etc.

o Risks perceived by lenders in financing of the road sector projects and ways to mitigate these risks.

o Public Private Partnership: Role of the private sector in the development of the road projects in India.


An Overview of Indian Road Sector

Classification of Roads:













102



Indian Road Network







(*NHs are less than 2% but carry more than 40% of traffic)

National Highway Network









Trend in Road Traffic




Freight Passengers


1951 11 89 28 72

1961 28 72 42 58

1971 35 65 59 41

103

1991 53 47 79 21

2000 65 35 87 13

2015

(estimated)

80 20 92 8

Freight transport by road has risen from 6 billion tonne km (BTK) in 1951 to 400 BTK in

1995 and 800 BTK in 2001. Passenger traffic has risen from 23 billion-passenger km

(BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The annual growth of road traffic is

expected to be 9% to 10%. Current boom in the automobile sector may even increase the

future growth rate of road traffic. While the traffic has been growing at a fast pace, it

has not been possible to provide matching investment in the road sector, due to the

competing demands from other sectors, especially the social sectors, and this has led to a

large number of deficiencies in the network. Many sections of the highways are in need

of capacity augmentation, pavement strengthening, rehabilitation of bridges,

improvement of riding quality, provision of traffic safety measures, etc. There are

congested road sections passing through towns where bypasses are required. Many old

bridges are in need of rehabilitation/replacement along with capacity augmentation.

Deficiencies in Road Sector






State Highways 60,000 1,37,119 128%


Total 4,00,255 33,15,231 728%




104


lane.




movement.

Revenue from road transport and expenditure on roads






Economic losses due to poor conditions of roads










My thesis guide pointed out that some of the figures was not updated and were not the latest ones. Thus I tried my best to get those updated and some are left, for which I am still working and will be updated soon.



Vijay Garodia

105


Response sheet number: 2 (Two)


Date: 1/06/08

Name: Vijay GarodiaBatch: SS/ 06-08 Alumni Id: DS68-F181Phone No: 9971619555Email Id: [email protected] Progress of the work : Research Methodology:The research design which I have planned for my thesis will be of the following nature.

Research : Analytical & Exploratory.

Data Source : Secondary data.

Research approach : Survey method. Research instrument : Personal interviews & Financial Model.

Type of questionnaire : Structured non-disguised.

Type of questions : Open ended.

I would be working on secondary data because of the fact that the various financial aspects of the projects like the Projects Initial Investment, the Payment Pattern, duration of the project, Project IRR, etc. have to be analysed to show the viability of such projects.For this purpose I will have to indepth and exhaustive study of all the available secondary data like journals, websites and other related documents.

Comments from internal/external guide:The guide offered me a lot of support in the preparation of the above and showed me the right path to be taken in-order to carry out my analysis.



Vijay Garodia


106


Response sheet number: 3rd (Third)


Date: 05/06/08

Name: Vijay GarodiaBatch: SS/ 06-08 Alumni Id: DS68-F181Phone No: 9971619555Email Id: [email protected] Progress of the work : Opportunities exist in- Highway construction.Widening of about 38 percent of National highway from single to double lanes.

Strengthening of about 60 percent of the two lane roads.

Highway related on route activities like restaurants, motels and rest/parking areas as may

be decided by the Implementing Agency.

Findings- Private sector is still reluctant to invest in the infrastructure projects because

of the high risk of traffic volume and long gestation period.

Government departments have abundant technical expertise but there is a lack in financial

management. Infrastructure financing is in its recent stage, only few projects have been

completed under these implementing models, the agreements or documents related to

these have not been scrutinized in the court of law or no judgements have been passed

yet.

Limited foreign funding in infrastructure projects.

Comments from internal/external guide: I have shown the above work to my external guide and she has given her approval for the same.



Vijay Garodia


107

Thesis Response sheetResponse sheet number: 4th (Fourth)


Date: 6/06/08Name: Vijay GarodiaBatch: SS/ 06-08 Alumni Id: DS68-F181Phone No: 9971619555Email Id: [email protected]

Progress of the work : Structure of the thesis: Introduction- Study Background, Scope, Limitations. An Overview of Indian Road Sector.

Classification of Roads, National Highway Network, Trend in Road Traffic.

Deficiencies in the Road Sector Economic losses due to poor conditions of roads, The dwindling Public Sector Outlay on Transport, Agencies involved in Road Sector Development in India, Road Development Plans, Current status.

Trends in Road Sector Financing- Traditional Financing Mechanism, Budgetary Allocations, Central Road Fund, Foreign Aid to Road Sector, Private Sector Participation, Government of India initiatives,

Implementation Models- BOT (Toll Based), BOT (Annuity), Govt. owned SPV, MOU (Negotiated Deal).

Critical Issues – Private Sector Road Financing.Stages in development of Road Sector Projects, Financial Structuring of BOT Road Projects.

Opportunities & Findings. Recommendations/Suggestions & Conclusion – The Middle Path. Financial Viability Analysis.

Sensitivity Analysis, Details of some of the successfully undertaken projects. Bibliography.




Vijay Garodia


108


Response sheet number: 5th (Fifth)


Date: 09/06/08Name: Vijay GarodiaBatch: SS/ 06-08 Alumni Id: DS68-F181Phone No: 9971619555Email Id: [email protected]

Progress of the work : Recommendations / Suggestions

Government should try to remove the bottlenecks in the financing of infrastructure

projects and ease the legal procedures by single window clearances for the projects, like

environmental clearances, land acquisition problems etc.

Government should try to provide as many incentives as it can like tax incentives and

concessions, etc. and also need to develop innovative mechanisms for private sector

participation like securitization, annuity model, assured returns etc.

Conclusion – The Middle Path

The country is poised to take up infrastructure projects comprising huge road network of

expressway standard and other similar roads. Adoption of private financing for such

projects is an almost inevitable course of action. However, building up of conducive

environment for private participation should also be task on hand. In the intervening

period, the execution of such projects through the medium of Government corporations

acting as BOT entrepreneurs seems to be the most appropriate option, this can be termed

as the contemporary middle path. As most infrastructure projects have long gestation

periods, entirely different set of investors may be associated with the project during their

development, construction and operation phases depending on their risk appetite.



Vijay Garodia
