Alternative Project Finance : Case studies

By Neeraj Agrawal *

SYNOPSIS
The execution of Viramgam -Mehsana GC project has been discussed in detail, the financing , execution and operational models. The writer has been involved in the execution of this project. He has compared financing and execution model of this project with those of Pipavav Railway Corporation Limited (PRCL) and Kutch Rail Corporation Limited (KRCL). He has critically mentioned some international experiences in PPP and highlighted the lessons learnt from his experience while the working on Viramgam -Mehsana GC project.

1.0 Introduction : Project finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project. Usually, a project financing scheme involves a number of equity investors, known as sponsors, as well as a syndicate of banks which provide loans to the operation. The loans are secured by the project itself and paid entirely from its cash flow, rather than from the general assets or creditworthiness of the project sponsors. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets. And they are able to assume control of a project if the project company has difficulties complying with the loan terms. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound. Traditionally, project financing has been most commonly used in the mining, transportation, telecommunication and public utility industries. More recently, particularly in Europe, project financing principles have been applied to quasiprivatizations of publicly-held infrastructure (e.g. schools, hospitals, light rail, prisons, government buildings, etc.) under so-called public-private partnerships (PPP) or, in the UK, Private Finance Initiative (PFI) transactions. Risk identification and allocation is a key component of project finance. A project may be subject to a number of technical, environmental, economic and political risks,
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particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable. To cope with these risks, projects in these industries (such as power plants or railway lines) are generally completed by a number of specialist companies operating in a network with each other that allocates risk in a way that is proportional to their exposure to the project. Once the project's risks are identified, the likelihood of their occurrence assessed and their impact on the project determined, the sponsor must allocate those risks. Briefly, its options are to absorb the risk, lay off the risk with third parties, such as insurers, or allocate the risk among contractors and lenders. The sponsor will be acting, more often than not, on behalf of a sponsor at a time when the equity participants are unknown. Nevertheless, each of the participants in the project must be satisfied with the risk allocation, the creditworthiness of the risk taker and the reward that flows to the party taking the risk. In this respect, each party takes a quasi equity risk in the project.The essences of project financing are: The essences of project financing are: (I) The lenders to the project look primarily at the earnings of the project as the source from which loan repayments will be made. Their credit assessment is based on the project, not on the credit worthiness of the borrowing entity. The security taken by the lenders is largely confined to the project assets. As such, project financing is often referred to as "limited recourse" financing because lenders are given only a limited recourse against the borrower. The debtor is a project company set up on ad hoc basis that is legally and financially independent from the sponsors.

(ii)

(iii)

*CE/TM/SWR

IRICEN JOURNAL OF CIVIL ENGINEERING

(Iv)

Project risks are allocated equitably between all parties involved in the transaction, with the objective of assigning risks to the contractual counterparties best able to control and manage them. Cash flow generated by the SPV must be sufficient to cover payments for operating costs and servicing the debt in terms of capital repayment and interest. Only the residual funds are allocated to pay dividend to sponsors. It is provided for a ring fenced project One which is legally and economically self contained Project is through a special purpose legal entity (company) Only business is the project

2.0 : Case I:International Example - Eurotunnel

Supplier

Contractor

(v)

Government

Project Sponsor

Sponsor

Customers

Lender

(vi)

Figure-1 Different Parties to Project Financing Commissioning of Eurotunnel is a pioneering example of project financing, involving two countries, with huge technological and economic risks. British and French governments signed concession on BOOT basis to CTG (Channel tunnel group) in UK and FM (France Manche) in france in Feb. 1986 for 55 years from the date of ratification. The project cost 9.5 bn. to build, about double of original estimate of 4.8 bn. The project was funded with debt of more than 8 bn. and rest with equity which was raised in phases with many perks to investors. The project was scheduled for completion in 1993 but got commissioned on 6th May 1994. Construction agreement had detailed clauses for variation, change in scope and specifications and damages on account of delays. It was expected that revenue would come from 1) Shuttle service, 2) Railway charges and tolls 3) ancillary revenue comprising catering and duty free sales and charges on conduit to cables. The revenue projections were based on considering certain economic growth, inflation levels, exchange rates and competition from ferry services and airways. The final benefit to cost did not work in favour of the project. Traffic projections were extremely optimistic and Eurotunnel faced stiff competition from airways and ferry services after commissioning. Construction cost also went up due to many technological changes not foreseen at initial stage e.g. requirement of air conditioning. Due to high debt servicing and operational cost, the project could not meet debt service obligations and filed for bankruptcy in 2006.In may 2007, restructuring of debt has been done as an out of court settlement and formed new company called groupe Eurotunnel with long term debt from consortium of banks and concession period of 80 years (2086). First time in 2007, Eurotunnel has shown small profit. In spite of so many difficulties Eurotunnel has become realty with involvement of project financing. In conventional financing, it is almost impossible to handle the projects of such magnitude. 3.0 : Case II: Indian Example: Ultra Mega Power Projects (UMPP): UMPP is a successful example of project finance in India. Power Finance Corporation floats the SPV or shell company with representatives from power distribution companies and state government as its 100% subsidiary. SPVs are responsible for carrying out various activities on
37

(vii)

Usually raised for a new project rather than an established business

(viii) High ratio of debt to equity: project finance debt may cover 70-90% of the cost of a project (ix) Main security to lenders is the project's contracts; Licenses or ownership of rights to natural resources Project company's physical assets are likely to be worth much less than the debt if they are sold off after a default on the financing Project has a finite life, based on such factors as the length of the contracts or licenses or the reserves of natural resources, and therefore the project finance debt must be fully repaid by the end of this life.

(x)

(xi)

One major drawback of project finance option is that the deal is much more costly than conventional corporate finance options. Impact is about 5 to 10% of the project cost. The various factors attributed to cost increase are The legal, technical and insurance advisors of the sponsors and the loan arranger need a great deal of time to evaluate the project and negotiate the contract. The cost of monitoring the project is high Lenders are expected to pay significant cost in exchange for taking on greater risks. On the other hand, although project finance do not offer cost advantage, there are definitely other benefits. Project finance allows for higher level of risk allocation among participant therefore higher debt to equity ratio. Off balance sheet item from accounting practices. Isolating sponsors in case project do not perform well. Reduces agency conflicts Most project finance structures are complex. The risks in the project are spread between the various parties.

behalf of its procurers (or successful bidder) to enhance investor's confidence and to allocate/mitigate the various risks. Some of the main activities undertaken by SPVs are:Appointment of consultants to undertake preparation of project report, preparation of environment impact assessment report etc. Appointment of consultants for International competitive bidding, documentation and evaluation. To finalise RFQ/RFP Acquisition of land for project Obtaining Coal linkages Getting clearances from state government for allocation of water Clearance from pollution boards, initiate forest clearance Obtain geological reports Tie up the sale of power.

ii) GPPL & (Others)

50%

The amount already spent by the Indian Railways on the proposed Broad Gauge Rail Connectivity has been reckoned towards the equity contribution of MOR. The land, station Buildings, MG formation, bridges and all other existing assets of the MG system will continue to be the property of IR. These assets have been made available to the SPV on lease at a pre specified rental after considering the capital- at-charge at historical cost. About Operation and Maintenance (O&M) Under this agreement signed between PRCL and Railways on 4-2-2003 operations and maintenance of the Broad gauge Rail Link between Pipavav and Surendranagar shall remain the responsibility of MOR. Ministry of Railways, will, however, be fully compensated for such services based on an agreed methodology. The revenue generated through operation of line shall be shared equally between GPPL and Railways and subtracting cost of operation and maintenance of line. About Transportation and Traffic Guarantee: It guarantees to PRCL the rolling stock from WR and rail Cargo from GPPL. GPPL has guaranteed one, two and three million traffic in first, second and third year respectively. The agreement has been signed on 10-12003 5.0. Case IV :Kutch Rail Corporation Limited (KRCL) : KRCL is first PPP initiative under the umbrella of RVNL. In order to expedite this important port connectivity project, between Kandla port and Palanpur, a special purpose vehicle was created by participation of RVNL, Government of Gujarat, Kandla port Trust (KPT), and Gujarat Adani Port Limited (GAPL). The SPV is called Kutch Rail Company Limited (KRCL). Before creation of the SPV the work was being done by Western Railway. Later on KRCL entered into a construction agreement with Western railway to execute the work on similar pattern of PRCL. The work was completed in two phases. The overall model is on same pattern as was in case of PRCL except the provision of traffic guarantee and variation in lease charges. 6.0. Case V : Viramgam Mehesana Gauge Conversion Project: Background of the Project : The Gauge conversion of Viramgam-Mahesana section was included in the Viramgam-Bhildi Gauge conversion cum new line project, which is a part of proposed Kandla Bhandita BG rail link project. This work was earlier taken in hand by Railways under BOLT (Built, Own Lease Transfer) Scheme in 1996-97. However, the agency fixed under this scheme could not execute the project. Railway decided to commence the work with own funds. Widening of embankment, strengthening of major and minor bridges, various platform and station building works were executed by the Railways. Later on (2000-01) Railway decided to take balance works under BOT scheme. The cost of balance works for the project was approximately Rs.70

Ministry of power plays a crucial role in development of shell companies and coordinating between various ministries/Agencies of central and state government. After formation of SPVs, the developer is selected on the basis of two stage competitive bidding. The successful bidder is selected on the basis of the lowest tariff. 4.0. Case III :Pipavav Railway Corporation limited The execution of gauge conversion between Surendranagar Rajula City (has been got done through Pipavav Railway Corporation limited (PRCL). The PRCL was formed on 13th March, 2003. PRCL is the first public private partnership in rail sector at the initiative of Ministry of Railways (MOR). It is joint sector of Ministry of Railways and Gujarat Pipavav Port Limited (GPPL). It is the first Non Government Railways, a Special Purpose vehicle (SPV) for transport of freight traffic originating from Pipavav Port. Railway line has been leased to PRCL for 33 years as per lease agreement. It is fundamentally, a MOR driven project for following reasons. 50 % equity by MOR Chairman being Member traffic /Railway Board at all times apart from four other directors from MOR. Construction carried out by MOR through WR. Operation and maintenance (O & M) carried out by MOR through WR. Revenue collection by MOR through WR apportionment to PRCL

The project has been funded in the following pattern:

l

66 % of the Project Cost has been funded through a share holding Equity. 33 % of the Project Cost has been funded through Debt.

Equity holding pattern: i) Ministry of Railways & its PSUs : 50%

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crores. These works were mainly procurement of P.Way materials and Ballast, linking of track, left over structure and level crossing works, signaling & telecom works, augmentation of power supply etc. In this scheme, the agency selected by Railway shall design, procure, execute and commission the project with its own investments. This project was lingering for a long period just to become a test case of privatization concept. The salient features of this scheme are as under: l l l l l The agency shall arrange for both financing and execution of the project. Railways through a `Tripartite Agreement secure the investments of lenders to the agency. The complete supervision of the work is through an `Independent Engineer (IE). The scheme has very clear bonus/ penalty clause so as to control project scheduling. The agency shall in turn get Access charges for a period of 12 years.

9 10 11 12

Concessionaire Letter of Award I.E. appointed SCOD to be achieved

: M/s VMPL, New Delhi : 27.12.2002 : 27.01.2003 : 26.06.2004 (18 months from LOA) : : : : 21.02.2003 23.05.2003 23.05.2003 04.06.2003

13 Performance security deposited 14 Signing of Agreement 15 Site lease Agreement 16 I.E. services started 17 Permission to start the work granted before FC 18 Tripartite Agreement 19 Possession of Land 20 Permission of work withdrawn 21 Again permission of work to be continued 22 Appointed Date / Financial Close 23 Provisional Certificate with Punch List Items, Issued by Independent Engineer (IE) 24 Goods Train Operation started by Railway

: 17.07.2003 : 31.07.2003 : 05.09.2003 : 01.10.2003 : 14.10.2003 : 30.10.2003

Details of Project : The balance works for the project were of approximately Rs.72 crores, which were under the scope of BOT scheme. These were mainly procurement of P.Way materials, Ballast, linking of track, left over structure and level crossing works, signaling & telecom works, augmentation of power supply etc.. This project was awarded to M/s. VMPL, New Delhi (A joint venture firm of M/s. D.S. Construction Co with Tantia Construction and Vogue Construction & Consultancy Pvt. Ltd.). It was expected that the project shall be completed under this scheme by June 2004 or even before. Important Events : 1. Name of Work : Viramgam-Mahesana Gauge Conversion Project On BOT basis : CPM/ADI/VMGC/BOT/2 : Rs. 70 Crore approximately. : 18 Months

: 25.10.2004 : 25.11.2004

2 3 4 5

Tender No. Estimated Cost Completion period Addendum/ corrigendum to RFP bidding documents issued Date of opening of offer (M/s D.S. Construction, New Delhi) Special purpose company formed Concessionaire Agreement No

: 14-02-2002, 25.02.2002, & 05.04.2002

25 CRS Inspection : 01.12.2004 to 02.12.2004 26 COD Achieved : 02.12.2004 27 Supplementary Punch List issued by IE : 06.12.2004 28 Handing over of Assets to Railway : 06.12.2004 29 Payment of Access Charges raised by M/s VMPL : 13.12.2004 30 Payment of Ist Installed released by ADI division : 31.12.2004 31 Issue of Performance Certificate by IE : 31.10.2005 32 Issue of Completion Certificate by IE : 19.03.2008 Role of Railways: As per essence and spirit of BOT agreement, role of railway should be minimal to avoid bureaucratic hurdles. As per agreement, Railway appointed Independent Engineer for overall management and day to day supervision of the work. RITES was selected to work as an independent Engineer. RITES is a subsidiary of Railways and manned by railway
39

: 13.05.2002 : M/s VMPL, New Delhi : C&S/1013 dated 23.05.2003

7 8

professionals on deputation. In this case, BOT meant Built own Transfer. Although the ownership of project vested with the concessionaire during the concession period but the project was not considered as a case of 'private railway'. All the plans and designs used to be approved by Departmental officials and they also conducted regular inspections. Therefore intended purpose of independent engineer could not be harnessed properly. Role of Independent Engineer: As per concession agreement broader role of the independent engineer was defined as under; - The Independent Engineer shall nominate a responsible and qualified person, who shall carryout the duties as specified in this agreement and any additional duties assigned by Railway, through a team of experts and shall be in the overall charge for the project management to discharge their duties, role and responsibility in accordance with the provisions of concession agreement. - The Independent Engineer shall obtain specific approval from the Railway, before exercising such authority, which has been specifically mentioned in this agreement or is outside the scope of his responsibility in concession agreement. - The Independent Engineer shall have no authority to relieve the Concessionaire of any of his duties, obligations or responsibilities under the Agreement. Any proposal inspection, examination, testing, consent, approval or similar act by the Independent Engineer (including absence of disapproval) shall not relieve the Concessionaire from any responsibility. - Unless it is legally or physically impossible, the Concessionaire shall comply with the instruction given by the Independent Engineer. Economics of Funding: The cost of work planned to be undertaken was estimated at Rs.70 crores in 2001. Considering debt equity ratio of 2.75, Rs 50 crore was planned as long term loan from bank and rest from promoter's equity. Considering cost of insurance, bank guarantee and profit on construction, a scenario was built with 12% interest rate, and project cost was computed at Rs.81.92 crore. Based on an IRR of 17%, six monthly access charges were internally worked out at Rs 8.225 crore. Bids were invited on the access charge. Lowest bidder asked the access charge of 7.9695 crore with IRR of 16.27% and accordingly was awarded the project. But considering inflation risk and additional liability of interest burden due to delay of six months in COD the Project cost went up to 92 Crore giving IRR of about 12% only. Even then, looking into assured annuity, IRR of 12% is considered as good return to SPC and at the same time, it is not a very high cost to railways. Risk Management: This type of project structure allows identification and allocation of various risks systematically. This project was
40

one of the initial experiments therefore in spite of proper due diligence there were conflicts and the project can be taken as a learning for risk management for future railway projects. Various risks, how they were managed are discussed as under. - Demand risk: Railway operation is a monopoly activity of railways. Private Player has a very little role in traffic movement except in case of captive lines. This project was a broken link having other alternative routes also. Inflow through traffic revenue would have exposed VMPL to uncertainty. This risk was mitigated by developing fixed annuity payment to SPC irrespective of usage of line. Thus entire risk was transferred to Railways. - Construction risk: Risk of successful completion was vested with the concessionaire. First they had to deposit performance guarantee of Rs 5 crore, second, completion period was linked with bonus and penalty clauses. - Supply risk: Most of the items and equipment required for railway project are not available off the shelf. For example Rails, sleepers, signal point machines are monopoly markets. Before using this material, inspection of RDSO is mandatory. Railway is the only consumer of these items; no supplier sells these items to private player without priority letter from Railways. There was big uncertainty about the supplies with the concessionaire. This risk needs more clarity. - Human resource risk: Railway projects are very technical in execution and trained man power is not available in the market. Therefore, the concessionaire depended on retired railway employees. This affected the performance of project. There is need to address this issue in future Contracts. - Design risk: This risk was allocated to the concessionaire, who transferred this risk by way of insurance The Concessionaire shall affect professional indemnity insurance, which shall insure his liability by reason of professional negligence in the design of the works. Such insurance shall be for Rs 25 Lakhs (Rupees twenty five lakhs) for a period of 5 years beyond the COD - Principal Agent conflict: To avoid the agency conflict Independent Engineer was appointed for day to day supervision of work and to arbitrate to some extant with railways. But due to complex nature of working involved, Independent Engineer was not competent to approve, allow, supervise and certify many activities. Therefore intended benefit could not be derived out of the Independent Engineer. Moreover the whole process became more complex and lengthy. - Project management risk: To ensure smooth execution of the project, detailed sequencing of project was done and intermediate mile stone were fixed jointly within eight weeks of signing of agreement. These mile stones were applicable for both the railway and SPC obligations. - Litigation risk: A detailed resolution mechanism has been specified in the concession agreement in case of any dispute.

- Inflation risk: The risk of inflation entirely rested with the concessionaire. In this case rates for major items had inflated between the date of RFP and real execution. For example Rail, Ballast, Sleeper had inflated from Rs.31000/MT, Rs1170/No., Rs.395/Cum to Rs 35458/MT, Rs 1300/No., Rs550/cum respectively. The impact of these items only works out to Rs 7.51 Crore for three components only (7500*4458+155*165000+130*125000). - Change of scope risk: This project was earlier partly executed with railway finances and some physical civil engineering works of earthwork, bridges, and platforms were partly executed. Balance works were quantified as requirement of railways under the concession agreement. This exact quantification hedged the concessionaire against any contingencies but exposed railway to the uncertainty of unforeseen requirement or leftover. Such quantification impeded the spirit of innovation by private sector. - Maintenance risk: Subsequent maintenance the project after COD lies with railways, there is tendency on part of concessionaire to follow only basic minimum level of design and execution standards. To hedge against it railway had clause Concessionaire shall be obliged to provide warranty in respect of the works carried out for a period of months from the date of issue of Performance Certificate. The Concessionaire shall be liable to the Railway under this warranty Article in respect of defective workmanship and material during the Warranty Period specified herein. But 12 month period is very short for judging the performance of railway project. For example defect in cable jointing is likely to surface after two to three monsoons. There is need to modify this clause for proper sharing of maintenance risk. - Regulatory risk: The risk has been shared between Railways and concessionaire as per force majeure clause. For tax revision also the risk has been shared if implication is beyond Rs.1 crore - Risk of obtaining clearances from other agencies: Railway had taken this responsibility with the clause The Railway shall have obtained required permissions as described in the Railways Requirements and shall indemnify and hold the Concessionaire harmless against and from the consequences of any failure to do so. - Future Cash flow risk: The agreement has ensured that the railway pays the access (annuity) on time. Failure to do so has been defined as Event of Default - Land Acquisition risk: The risk has been allocated to Railways by incorporating this activity in Railways obligations. - Force Majeure risk: The risk has been shared between Railways and concessionaire depending on type of force majeure i.e. political and non political.

Implications: This was the first BOT contract being handled in railway; therefore everyone was very apprehensive and careful while dealing the case. Railway project execution involves close coordination of at least five departments such as Engineering, Signaling, Electrical, Operating and Accounts. In traditional working, most of the projects get delayed due to non coordination among these departments. Although all these departments have common head at the level of General Manger but due to inherent strong parallel departmental culture it takes a long time for a matter to reach to top for decision. In this contract, Deputy Chief Engineer of engineering department was nodal officer from railway side to interact with concessionaire without having any control on other departments. Therefore against the basic essence of BOT type concept, the concessionaire had to run pillar to post for getting approvals and decisions pertaining to respective department. This rigidity of system led to a lot of correspondence and scope for disputes and conflicts such as; 1. 2. 3. 4. Delay in finalization of yard plans and its signal interlocking pans. Delay in grant of traffic blocks for movement of material and carrying out additions and alterations in existing running yards. Procurement of materials from RDSO approved sources. Availability of track machines and USFD equipments got delayed.

Comparison with traditional system of working: In traditional system of working such projects normally take three to four years if funds are not major constraints. Works are divided into many portions and tenders are finalized for each portion. Procurement of material is done separately. Tenders for signaling and electrical are also invited and finalized separately. Main danger in such working is failure of one or two contracts which are on critical path. BOT agreement is better in terms of ensuring consistent fund flow and it takes care of failure of other contracts. Comparison with other mode of private participation in Railway for similar works : Around Ahemedabad area two more projects have been executed involving equity partnership from other stakeholder forming special purpose vehicle (SPV). In this scheme execution remained with railway and railway acted as execution partner to SPV on actual cost. SPV was able to finalize the work tenders fast and was also able to procure material much faster because many departmental rigidities and rules are not applicable on these SPVs. Revenue generation model in such case is based on actual operational income where as in case of BOT it is fixed annuity. As far as speed of execution and easiness of fund flow is concerned both the concepts have same impact. In case of SPV risk of return is shared and in case of BOT it is entirely on the department.

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7.0. Comparison on Key issues: Comparison of various models on different key issues is listed below; S.N. 1 2. 3. 4. 5. 6. Item Project structure Length Cost of project Debt to Equity Year of COD Number of equity partner VMPL BOT 65 Km 70 cr. 2.75:1 2004(December) 3 (Initially DS construction, VCC, Tantia construction), Later only sole firm zleft i.e. DS Construction 12 years + CP From appointed date ( Finance Closure) But access charges from COD Negligible No Nominal (Rs.1000) PRCL BOOT 250.83 Km 362 cr. 0.63:1 2003(March) 2 MOR 50% GPPL 50% KRCL BOOT 300.81 Km 500 cr. 1.5:1 2006( May) 4 RVNL 50% GOG 4% GAPL 20% KPT 26% 32 years from appointed date ( Date of signing of CA) Significant Yes Nominal (Rs 1000)

7.

Concession period

33 years from appointed date ( Date of signing of CA) Significant Yes Significant, PLR on book value of assets (Rs.16.46 cr) (Rs 2 crore) Risk shared by GPPL ( Rs 105 cr. Due in 2007-08, have started Paying) Risk shared by MOR through construction agreement Risk borne by PRCL Risk shared by MOR Transferred to MOR Transferred to MOR

8. 9. 10.

Control of Government CAG audit Lease charges

11. a

Risk Management Demand risk

Risk transferred to MOR( annuity Based) Risk borne by VMPL PG Rs 5 Crore Risk borne by VMPL Risk borne by VMPL Shared with insurance company (25 lacs) Risk borne by VMPL And mitigated by employing retired railway personals Transferred to MOR

Risk borne by KRCL

Construction risk

c d e f

Inflation risk Supply risk Design risk HR risk

Risk shared by MOR through construction agreement Risk borne by KRCL Risk shared by MOR Transferred to MOR Transferred to MOR

Maintenance risk

PA conflict risk

Little scope

Project management Risk

Mitigated with the help of IE. Provision of bonus and penalty Transferred to MOR During construction borne by VMPL and after COD transferred to MOR Transferred to MOR

K l

Future cash flow Regulatory risk

Risk shared by MOR through O&M agreement Scope exist Container license Siding as a deposit work -Remuneration To Management Shared with MOR CPRB(Construction progress review Board) Borne by PRCL Mitigated with proper board structure. Borne by PRCL

Risk shared by MOR through O&M agreement Scope exist -Planning doubling on the section -25 lacs gifted to MOR relief funds Shared with MOR CPRB(Construction progress review board) Borne by KRCL Mitigated with proper board structure. Borne by KRCL

m
42

Change of scope risk

Litigation risk

Mitigated with arbitration clause Transferred to MOR as Railway's obligation ( event of default) Transferred to MOR as Railway's obligation ( event of default) Shared, based classification political, indirect political, non political Shared only upto implication of Rs.1 crore No restriction

o p q

Land acquisition risk Risk of clearance from other agencies Force majeure

Mitigated with arbitration clause and proper board Structure Shared between PRCL and MOR Shared between PRCL and MOR

Mitigated with arbitration clause and proper board structure Shared between KRCL and MOR Shared between KRCL and MOR

r 12

Tax risk Future Passenger operation by Railway

No such classification. No such Natural with PRCL and classification. Natural others are shared with KRCL and others are shared With PRCL With KRCL No restriction but with approval of PRCL free of charges After goods train opening by Chief Engineer MOR would buy the project assets at DRV(Depreciated replacement value) by straight line method Responsibility of MOR, PRCL would assist In case of accident damage by MOR In case of codal replacement by PRCL through MOR In case of force majeure By MOR chargeable to PRCL Private Railway No restriction with approval of KRCL but with access charges ( not yet fixed) After goods train opening by Chief Engineer MOR would buy the project assets at DRV(Depreciated replacement value) by straight line method Responsibility of MOR, KRCL would assist In case of accident damage by MOR In case of codal replacement by KRCL through MOR In case of force majaeure By MOR chargeable to KRCL Private Railway

13 14

COD On Termination

After CRS for passenger opening at 75 KMPH Lease terminated and assets reverts back to MOR

15 16

CRS inspection Replacement of assets

Responsibility of VMPL through IE and MOR Entirely with MOR

17

Status

Only ownership with private.

Issues with KRCL and PRCL: Discussions with Railway officials and SPV officials have revealed that both the parties have many issues having contradicting interests resulting into disagreement. There is need of more clarity in the agreements to have smooth functioning. Many in Railway circle believe that such project schemes are just management gimmicks and only profitable projects are getting executed through project finance. Some also believe that such financing has very high cost to Railways and profit is being channeled to private participants. On the other hand SPV officials believe that projects, which lingered with railways for many years due to lack of funds and delayed due to rigid procedures of Railways, have been executed very expeditiously. Railway has been able to deploy fund on other important social and traffic facility works. With early completion of projects, Railway attracted traffic which could have been lost to roadways and grabbed the emerging opportunity which could have been missed. List of some contentious issues; - Working of maintenance practices and payment of

fixed costs of Operation and Maintenance, - Codal life of assets - More autonomy to SPVs - Diversion of traffic from project railway Lessons Learnt . Over all concept of execution of projects on project finance is very successful with respect to timely completion and quality measures. To get most benefit and to attract more such projects following should be taken care of in future projects. 1. Railway should have dedicated and empowered team to deal with such projects. Traditional hierarchical organizational structure is not suited for such projects looking into the value of time. 2. Role of independent Engineer needs more elaboration in terms of responsibility and dealing with CRS. 3. There should be some fixed time frame to freeze design and drawings. Mid way alterations should not be allowed. 4. Quantum of work should be more clearly specified. More clarity is needed in terms of quantification of various items.
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5.

6.

7.

With development of Model Concession Agreements, the issues of basic nature are taken care of but department should be well supported by competent legal aid to handle such issues from initial stage. There is need to change perception in the department about such mega project and department need to be aware about the implications of non compliance of railway obligations in the concession agreement. Key lessons from global experience are; l Detailed policy for implementing PPP l Proper planning by government l Project development by government l Full support by government l Proactive public communication l Transparent bidding process l Clear policy on unsolicited proposals l Defined sources of revenue l Proper allocation of risk l Adequate protection for lenders l Robust and credible mechanism for dispute resolution.

The misconception that the private sector can do everything itself leads to a poor understanding of the Government's own role in project finance, which is critical. There is need to change the mind set. Another mistake is having unrealistic expectationsthinking that they provide free money or that they're the solution to all problems. 8.0 In Sum : As an experiment it can be concluded that Viramgam Mehesana project has been successful but such mechanism do not share the risk of revenue generation. Over all execution turned out like a turnkey contract with differed payment. To some extent, this project could use the efficiency of private sector in execution. Whereas other two models discussed above share the risk as well as efficiency of the private sector. Monopoly of railway operations leads to non transparency and only few players who know about internal information of Railway can have advantage of such opportunities. In my view this may lead to Crony capitalism. To have level playing field, there is need of proper information and suitable regulation otherwise profitable routes will go in private participation and unremunerative projects will be left with the public sector. Abbreviations : BOLT Built Operate Lease transfer BOT Built own Transfer/Built Operate Transfer COD Date of Commercial Operation CRS Commissioner of Railway Safety IE Independent Engineer KMPH Kilometer per Hour KRCL Kutch Rail Corporation Limited MCA Model Concession agreement MG Meter Gauge MOR Ministry of Railways PPP Public Private Partnership PRCL Pipav Rail Corporation Limited RDSO Railway Design Standards Organisation RFP Request for proposal
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8.

RFQ Request for Qualification RITES Rail India Technical Engineering Services Limited RVNL Rail Vikas Nigam Limited SPC Special Purpose Company SPV Special Purpose Vehicle UMPP Ultra Mega Power Project VMPL Viramgam Mehesana Project Limited References: 1. Conference Report, 'International Conference on Meeting India's Infrastructure Needs with Public Private Partnerships, The International Experience and Perspective ,New Delhi, February 5-6, 2007 2. Inputs from Shri Sanjay Gupta, Deputy Chief Engineer (Construction) /Planning and Design, Western Railway, Ahemedabad. 3. Inputs from Shri Praveen Kumar , Deputy Chief Engineer( Construction )/ GP, Western Railway, Ahemedabad 4. Inputs from Shri Pankaj Malviya, Managing Director, PRCL 5. Inputs from Shri Budh Prakash, Managing Director, KRCL 6. Inputs from Shri Rajesh Jaiswal, Sr DEN/PRCL, Bhavnagar 7. Inputs from Shri Vikas Kumar, Sr DEN/NW, Ahemedabad 8. www.pppinindia.com 9. www.indianrailways.gov.in 10. Montek S. Ahluwalia , Financing Private Infrastructure: Lessons from India 11. Concession Agreement of Viramgam Mehesana project. 12. Inputs from Shri R.K. Agrawal , Deputy Chief Engineer( Construction )/ BOT, Western Railway, Ahemedabad 13. Construction Agreement, Concession agreement, Shareholders agreement, Operation and Maintenance agreement, of Kutch Railway Corporation Ltd. 14. Construction Agreement, Concession agreement, Shareholders agreement, Operation and Maintenance agreement, Traffic guarantee agreement of Pipav Railway Corporation Ltd. 15. Anil Kumar Gupta, Director (PPP), Railway Board, Management Control Systems in SPVs for Infrastructure Projects 16. Anil Kumar Gupta, Shyamal Roy, Public- Private Partnerships in Railways: A New Approach, IIMB Management Review, March 2008 17. Gatti Stefano, Project Finance in Theory and Practice, Academic press. 18. www.pfcindia.com 19. Finnaty Jhon D., Project Financing 20. Wiki pages on Eurotunnel on net Academic press. 18. www.pfcindia.com 19. Finnaty Jhon D., Project Financing 20. Wiki pages on Eurotunnel on net