A Project Report on

Case Study of Mumbai-Pune Expressway

And
Coimbatore Bypass
submitted
in partial fulfillment of the requirements of the course
Infrastructure Development and Financing
to

Prof. G. Raghuram
by :
Harish Diwakar
Ramasamy
Maharnav Patir
L.Sridhar
Vinod Kumar R.S
on
24th August 2001

Indian Institute Of Management

Ahmedabad

Executive Summary

The case of MSRDC and Coimbatore Bypass shows that the present policy of attracting
private participants has many caveats. Chief among them is the financing schemes of the
projects where the government has gone for a BOT contract and has allowed the private
participant to recover their investment through toll collection. At present toll collection in
India is not a viable proposition due to various socio economic problems. Private
companies are unwilling to invest due to the perceived risk due to problems in estimating
traffic density and willingness to pay. There is also the issue of bundling in making
certain projects financially viable. There is also no clarity as to the sharing of risk in such
projects and as to that is responsible if the project turns out to be financially unviable at a
later stage. There is also the issue of project structuring to reduce the overall risk and
make the project attractive for private investor. This project has looked into the various
alternate financing schemes for road sector projects and has recommended the use of both
BOT and the Central Road Fund in India. The government should go for BOT projects
with private players where the private participants feel the project is financially viable
and their investment could be recovered through tolling. The Central Road Fund should
be used in projects which government feels is important for uniform dispersal of
development but there are no takers from the private sector. Government should not
bundle these projects, which have no takers along with other financially viable projects
and complicate the project structure. The identification of feasible projects should be left
to the private sector rather than government going with a set of projects and asking
private sector to choose one among them. The report also suggests certain procedures
regarding the managing of the central road fund, which could be followed for efficient
utilisation of the fund.

Introduction................................................................................................................................. 5
Public private partnership in the road sector: .......................................................... 6
Objective of the project:................................................................................................. 8
Mumbai Pune expressway ......................................................................................................... 8
Introduction.................................................................................................................................... 8
Feasibility study............................................................................................................................. 9
MSRDC.......................................................................................................................................... 9
Project management consultants............................................................................................... 11
Award of contract ........................................................................................................................ 11
Facilities to contractor................................................................................................................. 11
Financing of the project .............................................................................................................. 12
Organizational structure and operational characteristics of MSRDC ....................................... 12

Coimbatore bypass project ...................................................................................................... 14

Introduction:................................................................................................................................. 14
Issues: ......................................................................................................................................... 16

Learning from the above two cases ................................................................ 17

Issues concerned with toll roads: ...................................................................... 19
Alternatives to toll roads: ........................................................................................... 20
Criteria for selection: .................................................................................................................. 20
Shadow tolling: ............................................................................................................................ 21
Annuity based scheme .............................................................................................................. 22
Road Fund and BOT Scheme ................................................................................................ 23
Quasi public-private enterprise:.............................................................................................. 24

RECOMMENDATIONS ............................................................................................... 24
CENTRAL ROAD FUNDS ....................................................................................................... 25
Managing road fund: .................................................................................................................. 26

Conclusion:............................................................................................................................... 27
3

Bibliography ............................................................................................................................. 28
Exhibit 1: Government policy initiatives ...................................................... 31
Exhibit II: Construction details of Mumbai pune expressway 31
Exhibit III: Special features of construction (Mumbai Pune
Expressway)............................................................................................................................ 33
Exhibit IV: Special features of the contract (Mumbai pune
expressway) ............................................................................................................................ 34

Introduction
The importance of the road sector in India cannot be underestimated. It is one of the key
factors in the economic and social development of the nation. India with 33,00,000 km of
roads has the third largest network of roadways in the world half of which are unsurfaced
roads. As per economist 1% growth in infrastructure leads to an equivalent growth of 1%
in the GDP. We are aiming for a GDP growth rate of 9 % in the future. Hence the
infrastructure sector should also grow at this rate. But the figures have so far been
disappointing. Road transportation in India carries 80% of the passenger traffic and 60%1
of the goods traffic. Due to the cross subsidization in the railway sector (the cost of
subsidy on passenger travel being loaded on the freight transportation), more freight
traffic is being diverted to the road sector. Moreover the state and national and state
highways, which carry 70% of all passenger and freight traffic in India, constitute a mere
1,80,000 km or just 6 percent of this total network and of these the national highways
constitute only 2 per cent but carries 40 per cent of total traffic. 2Moreover the vehicular
traffic in India is growing at a rate of 10% while the road sector in India is growing at
6%. Compounding the problem of under capacity in the physical infrastructure of
transportation has been the perceived inability to finance, manage and create new
infrastructure. The inadequacies and deficiencies in the road sector affect the global
dispersal of development and affect global competitiveness. In light of the growing
evidence of such shortcomings the transportation sector was declared a priority sector for
privatization. This was seen as the best strategy for addressing deficiencies and to:
??Minimize the ever-increasing gap between demand and supply for investment
capital, technological know how and human capital in the infrastructure sector
through private participation.
??Eliminate bureaucratic delays and other administrative bottlenecks so that that the
time frame between conceptualization and completion of a project is reduced.
??Optimal utilization of funds that are available as well as private sector finance
companies and international funding agencies like Asian Development Bank and
International Finance Corporation.
1

National Highway Authority of India Official website. Article http://www.nhai.org/road network-htm

The road sector was declared an industry in 1994 and it was decided to amend the
National Highway Act. This declaration if of great importance because this now allows
companies to generate revenues through bonds, levy tolls and allow the private sector to
participate in infrastructure construction on a BOT basis. It has also allowed 100 per cent
foreign equity participation and given the rights to the private sector to develop services
and rest areas along the roads. Companies involved in BOT projects can avail of a 100
per cent tax holiday for five years and a 30 per cent tax holiday for another five years.
The financing mechanism will mainly involve enhanced budgetary allocation from the
government (by levying cess on petrol, diesels and through tolls on major trunk roads),
through external funding from ADB, World Bank etc., by setting up its own companies
(as for e.g., MSRDC in Maharashtra) and allowing then to borrow from the market,
through BOT schemes, setting up SPVs (special purpose vehicles) and annuity. The key
government policy initiatives are summarized in Exhibit 1

Public private partnership in the road sector:

The spiraling cost of infrastructure investment is growing beyond government resources.
Hence only a partnership of private and public capital can help bridge the infrastructure
gap, particularly in cash strapped developing countries like India. Public Private
Partnerships (PPPs) are essentially partnerships between public sector organizations and
private sector investors and businesses for the purpose of designing, planning, financing,
constructing and operating infrastructure projects. Here the government stops being the
owner of assets and becomes the procurer of services. A project is typically defined as a
public-private partnership or venture when the private participant takes up two or more
phases of the overall project. These phases may be planning, financing, design,
construction, supervision, maintenance, service or project management. The Government
of India embarked upon an ambitious plan for attracting private sector involvement in the
road sector in 1990. Since independence India relied heavily on the public sector for

National Highway Authority of India Official website. Article http://www.nhai.org/road network-htm

economic development funding its activities with budget allocations through national and
state planning. Public sector companies were owned by the state and national
governments. Thus the new policy to privatize represents a significant departure. The role
of the government is till significant in this regard. Before the reforms took shape the
government was responsible for raising the capital for any infrastructure development.
The management of these companies undertaking the development and operational issues
of the roads were answerable only to the government and all.
At present the structure that currently exist for the road sector development is of public
private partnership where every aspect of the project is equitably divided between the
government and the private company. The salient characteristics of this new structure are
??The companies in this sector are formed and promoted through the initiative of
government.
??The government provides the seed capital and key management personnel are
selected from existing government organizations/ departments.
??Funds are raised through public bond issues, as and when required for specific
projects, which are traded on the stock market. Investments are attracted from
private financial institutions as well as the general public. Governments provide
the necessary guarantees for such bond issues. The public corporation is entrusted
with responsibility for overall management of the projects.
??Most of the functions related to construction, operation and maintenance are
contracted out to large and small companies, which could be from private or
public or even cooperative sector.
??These joint sector companies have some popular support, from consumers as well
as investors. Involvement of people in the public companies can generate
relatively greater accountability towards consumers as well as investors.
??These joint sector companies have relatively more independence, flexibility, and
dynamism than the conventional public sector. They are similar to private sector
companies in their management approach and work in a networked relationship
with other participating companies.

Objective of the project:

This project mainly aims to study the efforts of the government in resolving longstanding issues relating to the viability and feasibility of private sector investment in the
road sector through two case studies
??The Mumbai pune expressway in Maharashtra
??The Coimbattore bypass in Tamilnadu
Efforts will be taken to bring in the learnings from these two cases for future reference in
the public and private involvement in road sector financing in India. Also we intend to
analyze the various alternatives that are available for financing road sector development
in India and give recommendation after evaluating all these alternatives.

Mumbai Pune expressway

Introduction
The need for the Mumbai-Pune expressway was established by a study conducted by the
ministry of surface transport (MOST) during the seventh five-year plan (1985-90) which
identified this corridor as amongst the three most congested national highway corridors
and proposed it to be developed, as a part of the "National Expressway System".
Accordingly, it was decided to explore the possibility of providing a new expressway
between Pune and Mumbai.The need for constructing the Mumbai Pune express highway
was borne by the fact that Mumbai was commercial capital of India and pune was
developing into a major industrial and commercial center. The vehicular traffic in the
Mumbai thane pune belt was 60755 PCU in the year 1996 and is expected to reach
100000 PCU by the year 2004 requiring a ten-lane corridor between Mumbai and pune.3
This belt also contains 72 per cent of factories, provides 77 per cent of industrial
employment, control 88 per cent of working capital, and yielded 86 per cent of total state
industrial output. More recently this link between Pune and Mumbai has become crucial

for the development of the computer and information sector that is perceived to be a key
element in facilitating globalization and international business linkages. The distance
between the two cities is some 180 km and it takes about four and a half to five hours to
cover it under good traffic conditions. However due to flooding and landslides in the
Western Ghats the roads get frequently and unpredictably paralyzed by accidents, which
block the narrow and winding curves of the two-lane highway. These increase the
traveling time to somewhere around 10 to 15 hours. At present 400 persons are killed due
to accidents on the existing Mumbai-Pune National Highway each year.4

Feasibility study
In 1990, the Government of Maharashtra appointed RITES and Scott Wilson Kirkpatrick
of UK to carry out feasibility studies for the new Expressway to be operated on toll basis.
Important findings of the feasibility study are as given below
??RITES recommended the construction of a dual three-lane expressway taking of
from the NH4 at Kon near Panvel and ending at Dehu Road on the westerly
bypass outside Pune a total length of 84 km.
??Project cost, as estimated by RITES at 1994 prices, was Rs 11,464 million.
??RITES estimated that the diversion of traffic to the new expressway would be the
order of 40-45 percent of the total corridor traffic.
??The EIRR for the project was 17.81 percent, which is above the planning
commissions cut-off rate of 12 percent. Hence, the expressway project, as
envisaged by RITES, was economically viable.
??RITES recommended that subsidy might come from income through property
development on the land in the vicinity of the expressway.

MSRDC
After the recommendations were accepted; tender documents for the expressway were
prepared and bids invited by the Maharashtra public works department (PWD). Six
corporations purchased the tender documents but only one, the Reliance Corporation,

3The
4

Financial Express Official Website http://www.financialexpress.com/fe/daily/20000730/fec30031.html

The Financial Express official website http://www.financialexpress.com/fe/daily/20000730/fec30031.html

submitted a bid. The Reliance bid was for Rs 3,600 crore, a sum more than twice the
currently anticipated cost of the expressway and the government did not accept it. It is
difficult to pinpoint why the Reliance bid was so high. Factors that could have driven up
the bid price can be speculated. Potential costs for hold-ups to the project by the
environmental lobbies could be one. The unexpected decline in real estate demand
leading to reduction of real estate values throughout the Mumbai-Pune belt, the cost of
raising capital needed to acquire high end construction equipment, non-availability of
government subsidies, the overall size and cost of the project and uncertainty that tolls
would provide sufficient pay back in the stipulated time frame, could be other factors that
deterred private companies. Finally the government entrusted the work of constructing
the road to MSRDC. The MSRDC was set up in Maharashtra to expedite work related to
road sector development in the state on a BOT scheme. After that a committee was set up
to look into the geometric standards and technical provisions to de adopted for the
construction of the highway. The committee finally recommended the construction of a
rigid pavement, which would have an incremental sot of 6% over the flexible pavement
but was more economical. MSRDC started a series of meetings with the concerned
authorities and departments so that work could be completed expeditiously and in time.
Maharashtra State Electricity Board (MSEB) was persuaded to complete the shifting of
the electrical and transmission lines. The revenue department was requested to expedite
the work of land acquisition; forest and other departments were urged to expedite forest
and environment clearances. The project required 646 ha of land for right of way, 455 ha
of land for quarry and dumping area and 1338 ha for real estate development.
Appropriate reservations were also required for real estate land so that the land could
generate surplus revenue. Land acquisition and forest clearance was initiated and
accordingly forest and environment clearances were received in October 1997 and
November 1997, respectively. The choice of concrete technology and the large size of the
project as well as the relatively short time in which the work was to be completed
necessitated the use of highly automated, sophisticated equipment and high quality
construction materials. Modern machinery used in the project includes high capacity cone
crushers, sand-manufacturing machines, computer controlled automated batching plants
and laser guided slipform pavers. This level of quality and speed would be impossible

10

without automation. Equipment costing Rs 300 crore was purchased for achieving this
fast track construction.5

Project management consultants

It was decided to employ a panel of PMCs to carry out detailed engineering design and
estimate and supervise the construction work. The PMCs were selected on the basis of
marks allotted with weight age of 80 percent on the technical and 20 percent on the
financial offer. A condition was put that a PMC will not be allowed to undertake work of
more than one section. The minimum technical supervisory staff was also insisted upon.
Based on the detailed designs and estimates prepared by the PMCs, MSRDC invited bids
from contractors for the construction of the expressway.

Award of contract
The PMCs evaluated the bids from the contractors and an exhaustive technical evaluation
was carried out. Marks were distributed on various aspects like for example, experience
on similar works; record of early completions/delays; availability of machinery and
qualified personnel; quality of works executed; proposed work plan, etc. Bids were
ranked by assigning 25 percent weightage to technical scores and 75 percent weightage to
the financial bid. Work orders to the contractors were issued in January 1998. The work
of tunneling was awarded to Konkan Railway Corporation Ltd, on a turnkey and cost
plus basis.

Facilities to contractor
MSRDC provided a number of facilities to contractors such as providing land for labour
camps, quarries, electric supply for construction activities; locating petrol pumps adjacent
to the alignment; removal/diversion of utility services such as telephone/water/sewer
lines coming on the alignment; obtaining permission for tree cutting; ensuring availability
of survey/laboratory equipment at site; and ensuring requisite site communication
facilities. A number of facilities were also given to PMCs. The different sections of the
Mumbai pune express highway and their respective consultants and their contractors are
shown in Exhibit 2. The special features of construction are given in Exhibit 3 and the
special features of the contract are shown in Exhibit 4
5

Online Article http://www.epw.org.in/36-7/sa1a.htm

11

Financing of the project

In October 1997, preliminary estimate of the project was prepared. It was assessed that
the total cost of the expressway would be about Rs 1630 crore. Almost all tenders were
received within the estimated cost (Rs 1488 crores)6. As this is a BOT project, cost of
land acquisition and shifting of certain utilities was borne directly by the government.
In order to subsidize the project, the government has given 1,030 hectares of land, which
is to be used to generate surplus income and make the project financially viable. The cost
of the work is to be recovered from the toll being levied on vehicles using the road. A
request was made to the government to give guarantee for the finances to be obtained
from financial institutions. This was essential since MSRDC is a newly formed company
with an equity output of only Rs 5 crore. It was therefore thought that with government
guarantee and project strength, MSRDC would be in a position to get funds from
financial institutions through private placement financing. Through private placements,
Rs 2120.81 crores was obtained which was also meant for the flyover projects in
Mumbai.

Organizational structure and operational characteristics of MSRDC

The organisational structure and management strategy of MSRDC appears to be like
modern autonomous business corporations. There was a dynamic approach to collection,
transmission and free flow of information within the organization. Many activities of a
project were carried out simultaneously as for example the land survey was concurrently
taken up with the task of selecting PMCs so that as soon as the PMCs were selected the,
the survey data could be provided to them. Similarly, each PMC and contractor could
plan the construction of various sections of the expressway independently, in
coordination with other agencies, as well as keeping with the overall framework. There
was parallel information processing, networking and decentralized decision-making
strategies and transparency established. All units involved in the project such as the

Maharashtra state road development corporation

http://www.msrdc.org/projects/mumbai_pune.html

12

PMCs, contractors site and main offices and MSRDC offices were connected with a
networked computerized system so that problems could be tracked easily and decisions
could be taken immediately and that decision is reflected everywhere. Inter-related
processes such as material inventory, ordering, store control, manpower and machinery
requirements, measurement and certification of completed work, accounting, billing and
cash flow management are linked in this network. Any information regarding delays,
shortages of material, manpower or resources can be tracked continuously and corrective
measures can be taken immediately. There was a well-defined criterion for selecting
PMCs and contractors and it maintained a customer-service provide relationship with the
PMCS. While it had the right to choose the PMCs and contractors depending upon the
organisational structure, price and service provided it was also answerable to the public
for the efficient and early completion of the project, as it had raised money through
bonds. MSRDC is also looking at various other alternatives for financing the project.
Some of these are: (a) tapping the benefit from the real estate development along the
transport corridor (b) Imposing tax on petrol and diesel fuel to raise needed capital. (c)
Raising a cess on the wage bill of corporations in the beneficiary zone. MSRDC is also
looking at laying telecommunications ducts along various roads and bridges including the
expressway, which can be rented out to private telecommunications agency.

Critical review of Mumbai pune expressway:

The Mumbai pune express highway is considered to be a success story and hence other
state governments are closely watching the activities of MSRDC. It is considered to be
the finest example of public private partnership in road sector development. But the very
aim of attracting aim of involving a full private participant failed in these case as not even
a single international infrastructure company bid for the project and only one Indian
company, reliance, bid for the project inspite of many incentives provided by the
government like the guaranteed 20% return on investment, a promise of rapid and single
window approval, tax incentives and reduced duties on imported equipment for all
investments in industry, and, allowing up to 40 per cent government support to the
project, not a single international infrastructure company bid for the project. Private
sector entrepreneurs are allowed to recover their investments first, followed by the

13

government. The government finally did not accept any of the competitive bids and the
responsibility for constructing the road and its subsequent management was entrusted to
the MSRDC 1997. A number of reasons may be cited for the failure to attract private
participants. Foremost among them is the uncertainty related with toll-based system
where the developers are themselves responsible for recovering their investment. Private
participants are unsure as to if they would be able to recover their investment due to
uncertainty in traffic density and attendant risk. And also due to the fluctuations in real
estate cost the valuation of subsidy through free allotment of land by the government is
difficult. The later part of this paper would try to look at various alternatives to BOT
scheme, which may help in attracting more private participants to road sector
development.

Coimbatore bypass project

Introduction:
Coimbatore is a prosperous and industrial city of Tamil Nadu, is well connected by
National and State highways. The National Highway No.47 connecting Salem with
Kanyakumari via Trissur, Ernakulam, and Thiruvananthapuram in Kerala, passes through
the city. Congestion within the city was causing traffic delays and so there was a need for
a bypass. The alignment traversing a length of 27.67 kms was finalized and land for a
width of 40-45 m was acquired for this purpose in 1974. However construction was
delayed due to lack of funds.

Later in September 1995 the Ministry of Surface Transport in its initiative to foster
private participation in road infrastructure floated a global tender to select a private party
for development of this project on BOT basis. L&T Transport Infrastructure was the only
party, which responded to the tender and submitted a bid. But the L&T s bid was a
conditional one, which was based on the addition of a bridge over the Attupalam Bridge
on NH47 with in the City outskirts and a ROB on NH-209. These according to L&T were

14

included to improve the financial viability of the project. The bid was discussed in detail
with the State Government by the MoST and finally the bridge across Noyal River was
also included in the project. It is important to note here that the GoTN was involved only
in the finalization of bid.
The cost of the project including the bridge was estimated to be Rs.90 crores. L&T
Transportation Infrastructure Ltd was given a concession period of 21 years for the
bridge and 32 years in the case of the bypass to collect toll. The following Toll structure
was fixed initially in the concession agreement.

Category of

Toll on the bridge

Toll on bypass for

Toll on bypass for

Vehicle

for Old and New

part use Rs/trip

full use Rs/trip

5.00

7.00

19.00

15.00

10.00

28.00

15.00

20.00

56.00

23.00

30.00

84.00

Car/Van/Jeep

LCV

Bus/Truck

MAV/Heavy Trucks

Auto rickshaws. Two wheelers and slow moving vehicles were exempt from paying tolls.

The work on the project was commenced on December 1997 and Attupalam Bridge was
opened for transport in December 1998 and the bypass was opened to traffic on 2000.
L&T started collecting tolls from the day of commissioning (tolls were collected both on
the new as well as old bridge) but faced resistance to payment from public, mainly on the
bridge. The state transport corporations together with the local truck and taxi owners have
expressed their unwillingness to pay toll on the bridge. They were demanding concession
15

rates for frequent users and opposing the tolling of old bridge. However the compliance
on the bypass was better. L&T made several representations to the government regarding
their loss due to poor compliance. The state government in an attempt to resolve this
issue proposed introduction of concessional rates Rs.50 per day for government and
private buses and Rs.300 per month for all non-commercial vehicles in January 1999.
However, the suggestions were not accepted by L&T and it insisted on retaining the old
rates as agreed in the original agreement. But agreed to the subsidized toll rate of Rs 50
per day per bus of TN Transport Corporation irrespective of the number of trips the buses
will do provided the state government compensated the revenue losses sustained by the
company. The company is said to have made a loss of 20000 Rs per day on government
buses alone during 1999. Financial institutions which had lent 60 crore to L&T started
putting pressure on L&T and its financial losses turned out to be 9 crores per year
including interest charges7. L&T expressed its inability to enforce toll collection and on
request the State police was deployed. This didnt improve the toll collection in any
significant way and L&T reported a loss of Rs.7.4 crores in June 2000 and requested for
compensation. But GoTN was of the opinion that the loss could have been contained to
Rs.55 lakhs, if L&T had agreed to the concessional rates suggested by them.
L&T tried to enforce toll collection further with the help of police but this resulted in the
whole issue being politicized. Local political parties with vested interested organized a
city wide making the issue more complex.

Issues:
Public consultation:
No studies for demand or willingness to pay was carried out before deciding to include
the bridge also in the project. Nor were there any public consultation or discussion with
opinion makers were carried out.
Delays due to toll collection:

The Financial Express official website Online Article:

http://www.financialexpress.com/fe/daily/19991020/fco20046.html
7

16

The tolling has increased traffic delays and public look upon this as a hindrance rather
than any improvement of service.
Local Traffic:
Since the bridge is within the city limits there is huge local traffic and therefore repeat
trips are high. This has made the toll collection difficult because the agreement provides
for toll collection on every trip and the public is not willing to pay on each and every trip.
Toll on existing bridge:
The agreement provides for toll collection on the old two-lane bridge also. After the
completion of the new bridge, each bridge is now being used uni-directionally. This has
resulted in public objection for tolling the old bridge for which L&T has not made any
investment.

Learning from the above two cases

In both the above two cases we see that only one private party bid for the project inspite
of many incentives provided by the government. This problem mainly stems from
deficiency in project structuring. In the case of Mumbai pune expressway we see that
only Reliance bid for the project and that too they quoted an amount, which was
unacceptable to the government. In the case of Coimbatore bypass only L&T bid for the
project with the condition that the Attupalam Bridge should also be bundled with the
project though the bridge is geometrically not a part of the bypass to make it financially
feasible. A number of reasons may be cited for the failure to attract private participants.
Foremost among them is the uncertainty related with toll-based system where the
developers are themselves responsible for recovering their investment. Private
participants are unsure as to if they would be able to recover their investment due to
uncertainty in traffic density and attendant risk. And also due to the fluctuations in real
estate cost the valuation of subsidy through free allotment of land by the government is
difficult. This shows the need to change the project structuring and to look for
alternatives schemes to finance the project. We will be looking at various alternatives to
finance road sector development and involve private participants. But first of all lets look
at the objectives behind tolling of roads and the issues concerned with it

17

Simply put toll-pricing means asking the people for usage of the road. Toll pricing can
have many objectives
??If the road has been built by a private enterprise or is the result of a public private
joint venture then road tolls may be implemented to recover the capital invested
and for generation of additional profits.
??Road tolls may also be implemented for much needed investment capital for new
infrastructure development and hence bridge the gap between demand and supply.
??Road tolls may be implemented for optimal and proper usage of the road so that
the road does not attract excess users. When a commodity is too cheap it will be
over consumed and hence lead to supply side constraints.
??In may western countries road tolls have been introduced as a mechanism for
reducing auto dependence among the people. There are also other targeted pricing
mechanism like smog fees to reduce pollution, weight/distance charges to
promote lighter vehicles, congestion pricing, gas taxes and fines to meet a variety
of objectives.
??The efficiency of road tolls depends on its design and its implementation. Road
tolls if designed in the wrong way may hurt the poorer section of the society.
Moreover if implemented at the wrong place it may divert traffic away from the
toll road and cause congestion at some other road. Moreover it has been observed
in many western countries that there are huge congestion near tollbooths, which
drive up the stress level leading to accidents, road rage and wastage of gasoline.
??Therefore much thinking needs to be done while designing the road toll. These are
some of the important steps that are needed to be taken
??The tolls collected should be income and tax progressive so the poorer sections of
the society are not hurt.
??The toll should be done on a geographically widespread basis so that dislocation
of traffic does not take place. They should be part of an overall transportation plan
instead of being negotiated on a road-by-road basis. It should be publicly
controlled and mandated to direct revenues to alternative modes of transportation.

18

Issues concerned with toll roads:

Toll fixing and increments: As the future vehicular density and the willingness to
pay cannot be estimated accurately there is problem is fixing toll charge on roads. As in
the case of Coimbatore Bypass the no consideration was made for peoples willingness to
pay and demand for the bridge. This resulted in public opposition to toll collection.

Access control: Toll roads have to be access controlled. In India due to the prevalent
political and social systems access control will be very difficult to maintain. The chances
of people defaulting on their payment are high. This raises problems for the private
participant in toll collection and thus the project may ultimately turn out to be unviable
for the private player as seen in the case of L&T in the Coimbatore bypass case. There is
also the cost of monitoring toll plazas to prevent revenue leakage.

Flow of traffic: One of the prime objectives of toll roads is to reduce congestion. In
India toll charges, as an instrument to manage the flow of traffic is not viable as there are
hardly any other alternative route connecting two places. In such cases the toll charge
becomes a user charge for providing a service. Moreover even in case where alternatives
are available people unwilling to pay tolls may be unwilling to take the new road and this
will defeat the purpose of reducing congestion in the old road.

Social impacts: In a country like India where a large section of the population leaves
below the poverty line, implementing toll collection on roads effectively prevents them
from using that service. This necessitates the creation of alternative routes as for example
the creation of several underpasses in the case of Mumbai Pune Expressway. There is
cost to providing underpass for people not having access to motorized vehicular traffic.
Moreover the income and price elasticity for vehicular demand in India is still very high.
Hence there is no need to impose toll charges to reduce dependence on traveling by
personal vehicles.

Political opposition: Political opposition to tolling has been observed in many

countries. The opposition has meant that toll rates have not been increased as planned or
untolled facilities have been created to provide an alternative. Both this outcomes have
affect the financial viability of the project negatively thus driving private participants
away.

19

Alternatives to toll roads:

Criteria for selection:
Any financing plan for the road sector development should be long term, on a legal basis
and should fulfill the following criteria
??The financing scheme should take into account the demand potential
demand for road traffic and the peoples willingness to pay. In a country like
India people willingness to pay become all the more important since any clash
between the service provider and the customer might take a political turn as in the
case of Coimbattore bypass.
??Private participation in India cannot be totally ruled out as the road funds itself
may not be able to bridge the gap between the demand and supply for roads. But
the present system of involving private participants in road sector development
needs to be overhauled as there are many loopholes mainly related to the recovery
fund invested by the private participants and the sharing of risk which in itself is
related to the traffic density and peoples willingness to pay.
??The road sector development should also take into consideration the varied
political, social and economic atmosphere in different parts of the country. As for
example if we take the case of the north-eastern region it would be totally foolish
to leave the road sector development to the private sector as few would be willing
to invest there due to the political and economic atmosphere prevailing there.

The MSRDC and the Coimbatore bypass case show that there are lots of loopholes in
implementing toll roads. The uncertainty attached with revenue generation is keeping
private participants from investing in road sector development. The government does not
provide any traffic density and attendant risk and hence they shy away from such
projects. Moreover the present tolling scheme has got lot of problems attached with it as
20

mentioned above. So far of the 54000 NHDP projects only 1000 crore has materialized
through the BOT scheme. The next section of this paper tries to identify the various
alternatives available and their evaluation.

Shadow tolling:
Shadow tolling refers to the policy of paying the private investor a variable revenue
stream over time depending upon the usage of the road. The revenue stream depends
upon the types of vehicle plying on the road and the distance traveled. The type of
vehicles (heavy or light) may be detected through electronic sensors that are positioned at
predetermined places. Shadow tolling does not affect the behavior of the users because
they dont have to pay any tolls. Therefore it eliminates the problem of traffic diversion
due to tolling and thus in turn reducing congestion and environmental pollution. It also
eliminates the problem of discrimination against region or communities. Funds for
shadow tolls can come from diverse (and multiple) government and/or private sector
sources, including national and state Highway Funds, special assessments on nearby
properties and regional dedicated tax streams. The main objective of this purpose is to
transfer the responsibly and the associated risks of construction, operations, maintenance
and traffic density to the private participants. Thus the prime objectives of shadow tolling
may be summarized as
??Traffic risk can be transferred to the private participant
??Traffic levels are not impaired by real tolls or toll increases and hence the
problems of traffic diversion and road congestion are eliminated
??Multiple sources of revenues can be drawn upon to contribute to a shadow toll
fund
??Project cost obligations to the public sector sponsor (capital, maintenance and
operations) can be reasonably known in advance and guaranteed for a particular
traffic level.

21

Feasibility of shadow tolling in India:

Shadow based tolling is not feasible in India simply for the fact that private participants
are not ready to take up all the risks. These risks are mainly associated with the
uncertainty involved in traffic density, which cannot be explicitly projected. The constant
revenue stream, which has been promised to the private participant, has to come from
sources like road funds or special tax assessments on users. Hence shadow based tolling
is just another form of cross subsidization, which will be hard implementing unless the
problems associated with managing road funds are eliminated. These are problems
associated with the collection, administration and disbursements of funds from the
government to the private participant. It also involves setting up of expensive mechanical
vehicle estimation points which may lead to harassment of road users and corruption on
part of the regulating body. The unpredictable income stream may also be unpopular with
long-term financiers. There may also be manipulation of road traffic on higher side by the
promoter to maximize income.

Annuity based scheme

This at present is considered to be the most viable scheme for attracting private
participants. Due to the lukewarm response to its BOT scheme the National Highway
Authority of India is actively pursuing this alternative. Since most of the private
participants are risk averse the annuity scheme provides an attractive proposition to the
private participants to invest in the road sector. This scheme guarantees a fixed income to
the private participant every year during the concession period. This fixed revenue is
meant to cover the debt servicing cost borne by the private entity, operational and
maintenance cost and a reasonable return of equity to the private participant. The investor
also finds it easier to raise resources, as there is a guaranteed return on equity. Thus the
private participant is delinked from the risk associated with uncertainty in traffic density
and problems in collecting toll. There are two methods two finance this scheme so as to
provide a constant income to the private participant
??In the first method the government takes up the responsibility of collecting the
tolls and provides a constant income to the private participant from the revenue

22

generated through tolls. This scheme is not viable as these have the same
problems that are associated with direct tolling of the users by the private
participants and the uncertainty in predicting traffic density.
??A dedicated Central Road Fund is created and the private participant is paid
through revenues generated through this fund. A Central Road Fund also exists in
India, which has been created by levying 1 Rs. on petrol and High Speed Diesel
for the National Highway Development Project (NHDP). This is expected to
generate 60 billion Rs. per year. But there are lots of political bottlenecks in the
administration and management of this fund. There are also the usual problems
related with disbursement of funds. Even then these system of financing is very
effective because it attracts private partnerships through guaranteed financial
returns and the problems associated with tolling and shadow tolling is not
associated with this problem.
Annuity based tolling has its own sets of problems. The foremost question is if the
dedicated central road fund is enough to finance all the annuity-based projects. There is
also the problem of leakage of funds and the management and the distribution of funds.
There is also the problem if uniform development of roads throughout India can be
carried out totally through annuity-based scheme. As for example private participants
may not at all be willing to venture into the northeast regions even if they are sure of a
premium and secure return on investment due to the political climate prevailing out there.

Road Fund and BOT Scheme

Another alternative is to allow the private participant to invest in all those projects that
they feel are financially viable on a BOT basis. The private participant will recover his
investment by levying tolls. The cost of land acquisition, environmental clearance,
shifting of utilities and other legal issues will be borne by the government so as to make
the project more attractive to private participants. All other risks like the risks involved
with traffic density, toll collection, interest rate fluctuation, foreign exchange fluctuation
etc will be borne by the private participant. The government will delink itself from the

23

project after the initial work of structuring the bid and offering the project to a private
participant is over.
The central road fund will be used to develop all those areas where the private parties are
not willing to venture. An important step here will be to fence the road fund so that
money is not withdrawn from the funds for other purposes since in India there are many
competing investments. The prime issue here will be the management and disbursement
of funds.
This alternative has the advantage of the both the government and the private participant
actively participating in road sector development. With investment from the private
sector coming in areas, which they feel, are financially feasible, the government will have
more funds left for development of relatively backward and financially unviable region.
But even if the private sector invests, those roads will have the same problem of tolling.
The private participant will have to go for accurate demand estimation of traffic density
and willingness to pay.

Quasi public-private enterprise:

As seen in the case of Mumbai-pune expressway, the government can set up an
independent organization like the MSRDC to take up the financing and the construction
of the roads. Here again the government will lay down the initial seed capital and the
organization will have representatives from the government. The enterprise will have the
organizational and operational characteristics of a private firm so as to establish
efficiency, transparency and speed in project execution. The enterprise can raise money
through equity or through placements of bonds. It will recover its investments through
tolling. This alternative will have all the problems associated with tolling as mentioned
above and thus not fulfill the objective of attracting private investment.

RECOMMENDATIONS
After evaluating all the options we feel that the best alternative is the financing of road
sector is through a two-tier scheme combining both BOT contract with the private sector
and the use of the Central Road Fund.

24

CENTRAL ROAD FUNDS

The government in 1999-2000 imposed a Re 1 cess on petrol in 1998-99 and the same on
high-speed diesel. The collection out of this cess goes into a non-lapsable, nondiversionary Central Road Fund for the ambitious Rs 60,000-crore national highway
programme. The fund was formally created last year after Parliament cleared the Central
Road Fund Bill, 2000. The government later imposed an additional cess of RS.0.3 on
petrol and diesel to generate Rs 2,000 crore per annum which is proposed to be used for
the 7,300-km long north-south-east-west corridor project alone. 8However these alone
will not be sufficient to develop an effective road system in India as a large proportion of
villages are still without all-weather road connections. Most of the roads comprise of one
lane and in a number of urban areas, there is heavy congestion on roads and lack of
adequate mass transport system and the consequent explosion of the personalized modes
of transport (mainly two wheelers) has resulted in low speed, high energy consumption,
traffic jams as well as high levels of air and noise pollution and alarming rate of
accidents. Also it is very obvious that the provision of such a large network will not be
feasible with the road fund alone but also the participation of private sector (Ninth fiveyear plan report (97-02).9
The two-tier scheme will finance part of the road sector development through the central
road fund and the other through BOT contract with the private sector. The private sector
will recover their financing schemes by levying tolls on the roads they have built for the
concession period. The following guidelines should be followed in the two-tier scheme
??The private sector should be allowed to invest in all those projects only which
they feel are financially viable and will give them an adequate return on
investment. The risk of traffic density and willingness to pay should be
completely passed on to the private participant. This means it is the responsibility
of the private participant for estimating the demand for the toll by taking into
8

The Economic Times official Website. Official Website

http://www.economictimes.com/250601/bn03a.htm
99

National Informatics Center official website. Online Article: http://www.nic.in/ninthplan/vol1/v1c2-9.htm

25

consideration the political, social and economic climate of the region. The private
participant will have the full responsibility for selecting, designing and operating
the project. All the principal risk like demand side risk should be transferred to
the private participant.
??The government may here encourage private participation by bearing the cost of
acquisition of land, shifting of utilities and the cost of environmental and legal
clearance. The government and the private participant will have to mutually agree
upon the return on investment upon the return on investment which will determine
the period of concession. Hence the concession period and the technical
qualification of the private participants should be the sole criteria for evaluating
the bid process. The toll charge will be determined by the private participation
based on the demand for the road and the willingness to pay. Other incentives like
safeguard from foreign exchange fluctuations and reduction in custom duties on
imported equipments may be done on a project-to-project basis.
??The Central Road Fund should be used for all those projects where no private
players are willing to invest. Private sector investment in India is still at an
infancy state and hence the government still has an important role to play. Such
investment may be in projects, which the government feels are strategically
important, or projects pertaining to the universal dispersal of road sector
development. The investment in such projects may be carried out by the by setting
up an independent and commercial firm for managing the central road fund. The
key issue here will be the management of the Central Road Fund.

Managing road fund:

The road funds should not be simply a loosely managed off-budget accounts. They
should be based on a set of important design principles and should be fenced from all
other competing budgetary requirements. Decision should also be made as to for what
purpose the road funds will be used. The road funds may be used to finance only national
highways or it may also be used to finance state and rural roads.

26

If the road fund is only going to finance main roads, it could be managed through a
separate division in the NHAI (as in South Africa). On the other hand, if it is going to
finance a number of different roads, it should be managed through a separate road fund
administration (to avoid any conflict of interest). The road fund should be overseen by a
representative board, which could either be a separate board, or a sub-committee of the
board, which oversees management of the road network. Members should ideally be
nominated by the constituencies they represent like representatives of bus and lorry
owners association, regional representative (state wise) and there should be an
independent chairperson.
The road fund revenues should be collected using a simple two-part tariff consisting
primarily of an access fee (vehicle license fees and Road tax) and a user fee (like the
current system of levy on fuel and fines for overloading). The tariff should be designed to
ensure it does not abstract revenues away from other sectors. Road users should finance
extra spending on roads through extra payments, i.e., the extra revenues must be in
addition to all pre-existing taxes going into the consolidated fund. There should be a
consistent procedure for regularly raising and lowering the road tariff. Since there will
often be concerns that tariff increases - particularly increases in the fuel levy - may have
adverse repercussions on the consumer price index and hence on the economy. The board
may need to examine the impact of proposed increases in the fuel levy on the economy.
Problems may also arise due to the use of diesel by other sectors like manufacturing.

Conclusion:
We feel that for a resource scarce country like India government alone will not be able to support
the huge requirements of infrastructure projects. So government should actively pursue to attract
private sector investments to this sector by simplifying the projects with clarity in regulation and
clearances and by reducing externalities. We have attempted to come out with certain guidelines
based on the learnings from the cases and other sources, which could be used as pointers towards
future private-public partnership projects.

27

Bibliography
Government of India, Ministry of Finance, Economic division: Economic Survey 20002001
Hassan Abul, M. IAS. Coimbatore Bypass Experiences, Pointers to the Future Public
Private Partnership Projects.
Hassan Abul, M. IAS. A Note on Toll Collection in Coimbatore Attupalam Bridge.
Raghuram, G., et al., Infrastructure Development and Financing, Towards a PublicPrivate Partnership. Ahmedabad: Indian Institute of Management.
3iNetwork, India Infrastructure Report 2001, Issues In Regulation and Market Structure

28

Internet Documents
Annuity based returns for roads to lure private sector. Online: Article
http://www.economictimes.com/161100/16infr 02.htm
Bongirwar, P.L and Momain, S.S.Theme: the Mumbai pune expressway: From concept
to commissioning.
http://www.icjonline.com/june 2ka.htm
June 2000
Concession agreement. Online: National Highway Authority of India
http://www.nhai.org/concession-agreement.htm
Dandekar, C Hemlata and Mahajan, Sulakshana.MSRDC and Mumbai Pune
Expressway: A sustainable model for privatizing construction of physical infrastructure.
http://www.epw.org.in/36-7/content.htm
17 February 2001

Roads and highways: toll roads. Online: World Bank

http://www.worldbank.org/html/tpd/transport/roads/toll_rds.htm

Shift to annuity based tolling for roads. Online: Article

http://www.economictimes.com/290200/29econ22.htm
28 February 2000
TIDCO-Indian policies-Indian infrastructure-National Highways Policy. Online:
TIDCO
www.tidco.com/india-policies/india-infra/national_highways policy_asp
Government policy initiatives. Online: National Highway Authority of India
http://www.nhai.org/govt.policy.htm

Annuity based returns for roads to lure private sector. Online: Article
http://www.economictimes.com/161100/16infr 02.htm

29

MSRDC-Mumbai Pune Expressway Project. Online: MSRDC

http://www.msrdc.org/projects/mumbai-pune.html

History crosses Mumbai Pune Highway. Online: Article

http://www.expressindia.com/ie/daily/19990518/ile 18030.html
8 May ,1999

The Mumbai Pune expressway. Online: Article

http://www.financialexpress.com/te/daily/2000o730/fec
300031.html

Venkataraman, Kavita and Raman, TMA. L&T may pull out of Coimbatore bypass
project. Online Article:
http://www.financialexpress.com/fe/daily/19991020/fco20046.html
October 29, 1999

Raman, TMA.L&T looking for partner to divest equity in Coimbatore bypass. Online
Article:
http://www.expressindia.com/fe/daily/19981022/29555414.html
October 22, 1998

30

Exhibit 1: Government policy initiatives

Policy Initiatives for Attractive Foreign / Private Investment
1.

Government will carry out all preparatory work including land acquisition and
utility removal. Right of way (ROW) to be made available to concessionaires
free from all encumbrances.

2.

NHAI / GOI to provide capital grant up to 40% of project cost to enhance

viability on a case to case basis

3.

100% tax exemption for 5 years and 30% relief for next 5 years. May be
availed of in 20 years.

4.

Concession period allowed up to 30 years

5.

Foreign direct investment up to 100% equity partners for construction of

roads and bridges.

6.

Arbitration and Conciliation Act 1996 based on UNICTRAL provisions.

7.

The Housing and Real Estate development which is an integral part of the
Highway project will be treated as infrastructure and will be entitled for same
tax benefits

8.

NHAI permitted to participate in equity in BOT projects upto 30% of total

acre.

9.

Almost duty free import of modern high capacity equipment of highway

construction.

10.

Private sector allowed to retain toll money.

11.

Strengthening of Central Road Fund. Its final format should ensure that the
cesses and other charges like tolls are domiciled in a non-diversionary fund.
NHAI to look at highways as a service rather than only from the point of view
of construction. Safety, performance and operational indices to be
incorporated in tender documents.

12.

Exhibit II: Construction details of Mumbai pune

expressway
Section-wise details and names of PMCs and contractors involved in the project
Section

Length,
km

Estimated
cost
Rs crore

Tender
amount
Rs crore

Name of
PMC

Name of
contracto
r

31

Rs crore

Rs crore

Section A
(Kon to
Chowk)

13.232

127.33

136.82

Stup
Consultants
with Hyder

IJM/SCL
joint
venture

Section B
(Chowk to
Adoshi)

16.629

195.05

194.00

Inter
Continental
Consultant
&
Technocrat
s Pvt Ltd
(India)

Hindustan
Constructi
on
Co, Mumb
ai

Section C
(Kusgaon
to
Ozarde)

22.995

177.46

163.56

Frischmann
Prabhu
(India) Pvt
Ltd

Larsen &
Toubro
Ltd,
Chennai

Section D
(Ozarde to
Dehu
Road)

16.150

132.70

133.47

Sir Owen
Williams
Investment
Ltd

Jog
Engineerin
g Ltd,
Pune

Package I:
Adoshi to
long
tunnel

7.130

86.46

93.15

Consulting
Engineering
Services
(India) Ltd

Shapoorji
Pallonji &
Co, with
Lighten
Asai joint
venture

Package
II: Long
tunnel to
Lonavla
bypass

8.280

108.96

104.35

Consulting
Engineering
Services
(India) Ltd

Larsen &
Toubro
Ltd,
Chennai

Panvel
bypass
Package I:
0/0 to
8/200

8.200

108.00

88.89

Technogem
Consultants
, Thane

PBA-PCEC
(joint
venture),
Mumbai

Package
II: 8/200
to 9/750

1.550

64.50

49.99

Technogem
Consultants
, Thane

M Venkat
Rao,
Visakhapa
tnam

Tunnel
work 5
twin
tunnels

5.724

200.00

200.00

Ghat
Section

Other
expenses:
Toll plaza,
building,
fencing,
sign
boards,
technical
consultant

Konkan
Railway
Corporatio
n Ltd

324.00

32

s' fees, etc

Total

1488.0
0

Maharashtra State Road Development Corporation

http://www.msrdc.org/projects/mumbai_pune.html

Exhibit III: Special features of construction (Mumbai

Pune Expressway)
The Mumbai-Pune expressway has several special construction features,
which are briefly elaborated below.
Under each contract, the total length assigned to a contractor was
16 to 20 km, which can be conveniently managed by him.
Each section has got independent number of access and each side is
accessible by adjoining roads.

33

 Several quarries were available within the stretch and the average
lead works out to 3 to 4 km, which indirectly reduces the burden on
the contractor.
Useful materials available from cutting like stone, the contractor
without any extra charges/cost can use murum, etc.
All the structures on expressway are simple in nature, except
viaducts in Section B having height of 20 m and above.
Shortage of construction material including cement was not
anticipated.
The total formation width is about 45 m, and as such sufficient
workspace is available to the contractor for deploying large number of
construction equipment.
Most of the work to be done using heavy machinery considering
work volume and time limit.

Indian Concrete journal official website

http://www.icjonline.com/june2ka.htm

Exhibit IV: Special features of the contract (Mumbai

pune expressway)
The contract was based on the FIDIC format, which is generally adopted on
international contracts of World Bank-aided projects. The FIDIC format has
been modified to suit the special requirements of this project. Some of the
important provisions in the contract are highlighted below.
As a measure to cover financial risks of the contractors, the contract
provided for payment of price variation as per a pre-determined
formula linked to various price-related indices.
As a further measure of risk coverage, the contract provides for full
reimbursement of customs duty paid by the contractor for importing
construction machinery necessary for the work.
Foreign exchange fluctuations in respect of the exchange spent for
purchase of construction equipment would also be borne by MSRDC.
The contracts have a provision for payment of bonus to the
contractors for early completion at the rate of Rs 20 lakh per week of

34

early completion. It has also a provision for levy of penalty of Rs 30

lakh per week of delay in completion.
Early payment of the contractor
s bills has been guaranteed and
delay in payment of certified bills beyond 10 days would entitle the
contractor to an interest of 15 percent on undisbursed amount.
Mobilization advance of 10 percent and machinery advance of 5
percent is allowed to the contractor at 15 percent interest.
Contractors have been exempted from payment of royalties on
construction material used on this project.
Simple dispute redressal mechanism was evolved.
In case of abandonment of work or termination of contract, the
balance work need not be carried out at the risk and cost of the
contractor.

Indian Concrete journal official website

http://www.icjonline.com/june2ka.htm

35