“Financial Viability Analysis of the Road Sector Projects in India.


SUBMITTED TO:

UNDER THE GUIDANC

PREPARED AND SUBMITTED BY

ABSTRACT:
As India continues to grow at more than 8%, a balanced increase in the gross capital formation (GCF) in infrastructure as a proportion of the GDP emerges as the most important key in sustaining high economic growth. Though recently there have been investments in the infrastructure sector, the GCF as a proportion of GDP continues to be lower at around 5%. As far as the physical infrastructure is concerned, there exists a huge deficiency, in our view. Inadequate infrastructure is identified as one of the biggest constraints of doing business in India. Therefore, to give proper direction to highway development The Planning Commission of India has estimated an investment of INR

3118 billion under the Eleventh Plan versus the INR 1448 billion spent under the Tenth Plan. Further Private participation is crucial to meet the investment goal in infrastructure because there are limitations to budgetary support from the Indian government. For this purpose a proper framework is being put in place to enhance participation of the private sector in various segments of infrastructure. So we can expect a strong private participation in roads through BOT projects. BOT stands for "Built, Operate and Transfer". BOT model uses private investment to undertake the infrastructure development that has historically been the preserve for the public sector. In a BOT project a private company is given a concession to built and operate a facility that would normally be built and operated by the government. The facility might be a power plant, airport, toll road, etc. But we are here concerned with the financial attractiveness of toll road projects to the Private Infrastructure developers. For this purpose I have provided an insight to the various opportunities available like the tax benefits and various aids and grants announced by the Government. I have also tried to bring to notice all the major risks involved and steps to mitigate such risks. Further I have done a comprehensive financial analysis in which I have made certain assumptions and calculated the BOT toll road project’s IRR and DSCR, which proves the fact that such projects are, indeed, not only financially lucrative but also has a dazzling future.

CERTIFICATE OF ORIGINALITY

The thesis “Financial Viability Analysis of the Road Sector Projects in India” submitted by for his MBA program has been pursued and completed under my guidance. The same has been upto my expectation and so I, hereby, approve the same.

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

Dear Vijay, This is to inform that the thesis topic “Financial Viability Analysis of the Road Sector Projects in India”, as proposed by you, has been approved .This email is an official confirmation that you would be doing your thesis work under the guidance of. Make it a comprehensive thesis; the objective of a thesis should be value addition to the existing knowledge base. Please ensure that the objectives as stated by you in your synopsis are met using the appropriate research design. You must always use the thesis title as approved and registered with us. You are required to correspond with us by sending atleast six response sheets to (format attached along with this mail) at regular intervals, before 31st May 2008 (the last date for thesis submission).

Regards,

ACKNOWLEDGEMENT
Guidance, assistance and cooperation of a lot of people is always involved in successfully completing a project, and so with great pleasure and privilege I wish to thank those people who have been actively supporting me in the project. First of all, I would like to thank, for providing me an opportunity to work on this project. He constantly encouraged and guided me to streamline this project from conceptualization to finish.

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I am especially thankful to for guiding me through the project with valuable inputs and suggestions. He has been a source of constant support and encouragement. The whole of has been immensely supportive and very helpful during course of the thesis. Last but not the least, I would also like to thank from National Highways Authority of India for providing me documents pertaining to the subject under study.

Table of Contents
Chapter I: Introduction.
1.1 1.2 Study Background. Scope. 1 1 2

Chapter II: An Overview of Indian Road Sector.
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9

3 Classification of Roads. 3 National Highway Network. 5 Trend in Road Traffic. 5 Deficiencies in the Road Sector - mismatch between demand for road 7 transport and road space. Revenue from road transport and expenditure on roads. 7 Economic losses due to poor conditions of roads. 8 The dwindling Public Sector Outlay on Transport. 8 Agencies involved in Road Sector Development in India. 10 Road Development Plans. 13 v

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Current status.

Research Methodology Chapter III: Trends in Road Sector Financing.

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16 3.1 Traditional Financing Mechanism. 16 3.1.1 Budgetary Allocations. 16 3.1.2 Central Road Fund. 16 3.1.3 Octroi. 16 3.1.4 Foreign Aid to Road Sector. 17 3.1.4.1 Historical Background. 17 3.1.4.2 World Bank Aided Projects. 17 3.1.4.3 Asian Development Bank Aided Projects. 20 3.1.4.4 OECF/JBIC Aided Projects 23 3.2 Alternative Financing Mechanism. 24 3.2.1 Market Borrowings. 24 3.2.2 Private Sector Participation. 26 3.2.2.1 Government of India initiatives. 26 3.2.2.2 Implementation Models. 27  BOT (Toll Based). 27  BOT (Annuity). 31  Govt. owned SPV. 32  MOU (Negotiated Deal). 33  Govt. to Govt. Cooperation. 34 3.2.2.3 The Route Map already followed – A Data Base on 35 India’s Road Sector Privatization Efforts. 37 37 39 39 40 43 44 44 45 45 46 47 48 51

Chapter IV: Critical Issues – Private Sector Road Financing.
4.1 Stages in development of Road Sector Projects. 4.2 Financial Structuring of BOT Road Projects. 4.2.1 Project Financing. 4.2.2 Means of Financing. 4.2.3 Components of Project Costs. 4.3 Procurement Issues and Selection of Concessionaire. 4.3.1 Bidding Criteria. 4.4 Governments Role in facilitating BOT Projects. 4.4.1 Supportive Legal Framework. 4.4.2 Administrative Framework. 4.4.3 Govt. incentives and other form of support. 4.5 Contract Package and Project Agreements. 4.6 Identification of Risks Matrices and Instruments for Mitigation.

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4.6.1 Risks involved in Road Sector Projects. 4.6.2 Instruments for mitigating risks.

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Chapter V: Lessons from International Experience.

5.1 International Practices. 65 5.2 Advantages & Disadvantages of common Govt. support measures for 66 Toll Road development. 5.3 Examples of Toll Adjustment Procedures. 70 73 73 73 74 74 76 76 77 78 79 80 84 94

Chapter VI: The Way Forward – Opportunities for PSP in Road Sector Development & Conclusion.
6.1 Opportunities. 6.2 Findings. 6.3 Recommendations/Suggestions. 6.4 Conclusion – The Middle Path.

Chapter VII: Model: Financial Viability Analysis.
7.1 Description. 7.2 Sensitivity Analysis. 7.3 IRR & DSCR

Bibliography. Appendix A: Model Excel Sheets. Appendix B: Model of Concession Agreements Response Sheets

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1. Introduction
1.1 Study Background
The road sector has been, and will be for a long time, the dominant form of transport for freight and passenger movement throughout the world. In India the decade of 90s witnessed a series of economic reforms. The government since then is committed to second generation reforms aimed at achieving an annual growth rate of 7 to 8 percent. Such acceleration in growth is bound to create a massive demand for infrastructure services such as power, telecom, roads, ports, railways and civil aviation. Over the last few years, the road development scenario has changed rapidly. Until 1991, government was exclusively responsible for the development and maintenance of the road sector. In the absence of user charges, the road sector in India has relied entirely on the budgetary allocation and funding by multilateral agencies, which stagnated at about 3 percent of the total plan expenditure during the seventh and eighth five-year plans. The major initiative taken in the road sector was the constitution of the “Central Road Fund” with the introduction of a cess on fuel. Over the years this has become the major source of financing highways development programme. The revenue from the cess has increased from Rs. 2000 crores at time of its inception to Rs. 5000-6000 crores per annum. The era of 90s also witnessed major changes in the policies. To facilitate & induct the capital from private sector into road development, policies were amended and several incentives were introduced. Further to give proper direction to highway development, the National Highways Authority of India was made operational. A clear mandate was set for NHAI. A concrete plan of development was announced for National Highways and Rural Roads in the form of NHDP and “Pradhan Mantri Gramin Sadak Yojana”. It has thrown excellent Business opportunities for contractors, equipment manufacturers and suppliers, consultants, road developers, investors and managers. It is also expected to give a boost to the economy through increased demands for raw materials and job opportunities. However, it has also thrown challenges. Challenges, not to garner resources, but to ensure

2 optimum utilization of available resources, challenges to domestic contracting industry to modernize and upgrade to meet international competition, challenges to domestic equipment manufacturers to compete with multinational companies in the liberal import regime and finally challenges for the government to keep the momentum high as also to mobilize private sector participation.

Scope
Study of the past trends in financing of the road sector projects in India with a special emphasis on terms of financing, institutions involved in financing of the road sector projects, role of World Bank, ADB, etc. o Risks perceived by lenders in financing of the road sector projects and ways to mitigate these risks. o Public Private Partnership: Role of the private sector in the development of the road projects in India. o Also prepare a Model to show the Financial Viability of the Road Sector Project.

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2. An Overview of Indian Road Sector
2.1 Classification of Roads
India has the second largest road networks in the world totaling more than 3.3 million km at present. For the purpose of management and administration, roads in India are divided into the following five categories: 1. National Highways (NH). 2. State Highways (SH). 3. Major District Roads (MDR). 4. Other District Roads (ODR). 5. Village Roads (VR). The National Highways are intended to facilitate medium and long distance inter-city passenger and freight traffic across the country. The State Highways are supposed to carry the traffic along major centers within the State. Other District Roads and Village Roads provide villagers accessibility to meet their social needs as also the means to transport agriculture produce from village to nearby markets. Major District Roads provide the secondary function of linkage between main roads and rural roads.

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Indian Road Network
CATEGORIES
National Highways State Highways Major District Roads Village & Other Roads Total Length

LENGTH (KMS)
58,112* 1,37,119 4,70,000 26,50,000 33,15,231

(As we can see from the above bar chart that NHs are less than 2% but carry more than 40% of traffic)

2.2 National Highway Network
The National Highways are the primary arteries of the country’s traffic, connecting to nation’s capital to the various State capitals, major ports and centres of industries. The

5 national Highway system is owned by Central Government. The legal status is given by National Highways Act, 1956. When the era of planning started in India (in 1956), the length of National Highway system was 19,811 kms. This has now increased to 58,112 kms. The additions to National Highway System have been made after careful evaluation of various demands or needs arising from time to time. National Highways constitute less than 2% of the total road network, but carry nearly 40% of the total road traffic.

2.3 Trend in Road Traffic
The roads and highways in India account for about 87 per cent of the total passenger traffic and about 65 per cent of the total freight traffic in the country.

Traffic Movement (%)
Freight Year 1951 1961 1971 1991 2000 2015 (estimated) Road 11 28 35 53 65 80 Rail 89 72 65 47 35 20 Passengers Road 28 42 59 79 87 92 Rail 72 58 41 21 13 8

Traffic Movement in Bar Chart

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

It’s evident from above that the Freight transport by road has risen from 6 billion tonne km (BTK) in 1951 to 400 BTK in 1995 and 800 BTK in 2001. Passenger traffic has risen from 23 billion-passenger km (BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The annual growth of road traffic is expected to be 9% to 10%. Current boom in the automobile sector may even increase the future growth rate of road traffic. While the traffic has been growing at a fast pace, it has not been possible to provide matching investment in the road sector, due to the competing demands from other sectors, especially the social sectors, and this has led to a large number of deficiencies in the network. Many sections of the highways are in need of capacity augmentation, pavement strengthening, rehabilitation of bridges, improvement of riding quality, provision of traffic safety measures, etc. There are congested road sections passing through towns where bypasses are required. Many old bridges are in need of rehabilitation/replacement along with capacity augmentation.

2.4 Deficiencies in Road Sector

7 Road development has been ignored in most of the development plans of India. There has been no matching growth of the main road network comprising of National and State Highways as seen from the table given below: Category National Highways State Highways Major District Roads & Other Roads Total 1951 22,255 60,000 3,18,000 4,00,255 2007 58,112 1,37,119 31,20,000 33,15,231 % Change 161% 128% 881% 728%

The main roads have not kept pace with traffic in terms of quality also. Out of the total 1,95,231 km. Length of National and State Highways only 2% of their length is fourlane, 34% two-lane, and 64% single lane. As far as NHs are concerned, only 5% of their length is four-lane, 80% two-lane and the balance 15% continues to be single lane. Thus the road sector, in spite of its high priority is adversely affected by the poor quality and service levels. The poor quality of Indian roads is highlighted by congestion, old fatigued bridges and culverts, railway crossings, low safety, no bypasses and slow traffic movement.

2.5 Revenue from road transport and expenditure on roads
The entire revenue received by the Government by road transport taxation is not ploughed back on the roads. Presently the total allocations, central and state, available for road development are to the tune of Rs.11,000 crore, which is just 42% of total transportation revenues received by the government. This implies the inefficiency of our system, which consumes 58% of the total revenues received by the transportation sector.

2.6 Economic losses due to poor conditions of roads
The poor condition of roads has a telling effect on the economy. Movement of traffic on poor and congested roads increases the cost of operation of vehicles as well as loss of

8 valuable time and also contributing to high rate of road accidents. Our commercial vehicles are able to make only 250-300 kms in single day against 500-600 kms in developed countries. It has been roughly estimated that a saving of Rs. 25,000 crores per year could be brought about by road improvements. These savings would be in the form of reduced fuel consumption, lower wear and tear of vehicles and less damage to tyres. These can be avoided by modernizing the roads.

2.7 The dwindling Public Sector Outlay on Transport
In the successive Five Year Plans, the public sector outlay on transport has been declining. Plan (Year) Total Outlay or Expenditure Expenditure 1st Plan (1951-56) 2nd Plan (1956-61) 3rd Plan (1961-66) 4th Plan (1966-69) 5th Plan (1969-74) 6th Plan (1974-79) 7th Plan (1980-85) 8th Plan (1985-90) Annual Plan (1990-92) 9th Plan (1992-97) 1968 4672 8577 6625 15778 39426 109292 179277 137034 341000 Road Sector 135 224 440 309 862 1701 3807 6335 3779 13210 on % age of Total Plan Expenditure 6.7% 4.8% 5.1% 4.6% 5.5% 4.1% 3.5% 3.5% 2.8% 3.0%

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Ninth & Tenth Five Year Plan:
The following goals and objectives are defined for the Road Sector in the 9th & 10th Plan. 1. Phased removal of deficiencies in the existing NH network in the tune with traffic needs for 10-15 years with emphasis on high-density corridors for four laning. 2. Bring in highway-user oriented project planning in identifying package of projects section wise rather than isolated stretches. 3. Greater attention to rehabilitation and reconstruction of weak/dilapidated bridges for the safety of the traffic. 4. Modernization of road construction technology for speedy execution and quality assurance. 5. Engineering measures to improve road safety and conservation of energy. 6. Continued emphasis on Research f& development. 7. Integrating the development plans with Railways and other modes of transport. 8. Integrating the development plans with Railways and other modes of transport. 9. Providing employment opportunities to the labour force in rural areas. 10. Special attention for development of roads in the North-Eastern Region. 11. Encouraging private sector participation in development of roads.

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2.8 Agencies involved in Road Sector Development in India
Ministry of Road Transport & Highways (MORT&H)
Ministry of Road Transport & Highways is responsible for the formulation and implementation of policies and programmes for the development and maintenance of Roads & Highways. All roads other than National Highways in the various states fall within the jurisdiction of respective State Governments. Ministry being an Apex Organization in the Highway Sector makes specifications placed down on codes of practice for all items and activities related to construction of roads and bridges. The Ministry has basically been divided in two wings i.e. Roads & Highways and Transport. The various associated agencies under the ministry are: o NHAI o CRRI o IRCC o NITHE o IRC o IABSE

NHAI (National Highways Authority of India)
The execution of National Highway projects were either handled by State or Central Governments so there was a problem in fixing the responsibility between the between the two. Moreover, dual control of the Central and State Government often led to delays in decision-making. The Central Government realized a need of central agency that could directly facilitate the matter so, The National Highways Authority of India that was constituted under National Highways Authority of India Act, 1998 and made operational in February 1995. The Authority is an Autonomous Body with executive responsibility for the development, maintenance and operation of those National Highways and associated facilities vested in it by the Ministry of Surface Transport. The Authority has been entrusted with the projects under National Highways Projects (ADB loan, OECF, World Bank). In addition, NHAI is also responsible for the maintenance and development of Golden Quadrilateral, North South & East West corridors, providing port connectivity and some selected

11 projects like Naini Bridge, Hapur Bypass, Durg Bypass etc. NHAI is also responsible for implementation of the policy of privatization in highway sector.

CRRI (Central Road Research Institute)
Road research has played an important role in India’s road development. The problems of planning, design construction and maintenance of roads in India is unique and challenging and the ready made solutions from other countries are not found feasible and economical. Indigenous solutions have to be devised to suit the country’s local needs and resources. This task has been carried out by Central Road Research Institute (CRRI), Delhi, established in 1950, as one of the chain of the major laboratories under the council of Scientific and Industrial Research. The CRRI has many divisions, dealing with the diverse areas such as flexible pavements, rigid pavements, geotechnical engineering, roads, bridges, pavements performance, traffic and transportation, environment and road safety.

IRCC (Indian Road Construction Corporation Limited)
IRCC is a public sector enterprise under the Ministry of Road Transport and Highways. It was incorporated during 1976 as a specialized commercial enterprise in the field of construction of roads, bridges, airfield pavement and allied civil works both in Indian and abroad.

NITHE (National Institute of Training For Highways Engineers)
NITHE was established in 1983 for training of Highway engineers in Central & State Government Departments as well as private sector. It is a society under the administrative control of the Ministry of Road Transport & Highways. NITHE organizes foundational training programmes refresher courses and specialized courses for the in service Highway Engineers of Central & State Governments.

IRC (Indian Roads Congress)
The Indian Roads Congress (IRC) was set up by the Government of India in consultation with the State Governments in December, 1934. It is the premier body of Highways Engineers in India. The Principal objectives of the India Roads Congress are to provide a

12 national forum for regular pooling of experience and ideas on all matters concerned with the construction and maintenance of highways, to recommend standard specifications and to provide a platform for the expression of professional opinion on matters relating to roads and road transport including those of organizations and administration. It is also publishing Journals, monthly magazines and research bulletins. IRC is a registered society under the Registration of Society Act and is financed by contribution from Central Government, various State Governments and also contributions from its Members and sale of Publication.

IABSE (Indian National Group of the International Association for Bridge and Structural Engineering)
The International Association for Bridge and Structural Engineering (IABSE) was founded in 1929 in Zurich by Engineers from 14 countries, who recognized both the necessity for a closer human collaboration and exchange of information, knowledge and discoveries across all national borders. The Government of India, Ministry of Road Transport and Highways in consultation with various State Governments set up the Indian National Group (ING) of IABSE in May 1957. The goals of the Association are, promotion of international collaboration between engineering and researchers and particularly representatives of science, industry and public authorities. It also encourages the members for promotion and exchange of technical and scientific knowledge. The Indian National Group deals with all aspects of planning, design, analysis, detailing, construction, management, operation, maintenance, repair and rehabilitation of structures of all kind including Bridges.

Public Works Department (PWD):
In India PWD was first established in the Punjab Presidency in mid of the 19th Century out of Military Board. It is an institution now 150 years old and is firmly in saddle in all the States of the country. This institute i.e. State Public Works Department is the premier body responsible for delivery of developmental works, be it building, roads or bridges. In the Road Sector the road connectivity of villages, construction and maintenance of State Highways, Major District Roads, Other District Roads along with maintenance and

13 construction of National Highways as an agent of Government of India is the responsibility of the State PWD’s.

2.9 Road Development Plans
The country prepares a long term Road Development Plan once in every 20 years. The first was the Nagpur Plan (1943), which set the blue print for the period upto 1961. The second was the Bombay Plan, which was for the period 1961-1981. Next plan was the Lucknow Plan covering the period 1981-2001. The recent plans that are going on is the National Highway Development Plan & Pradhan Mantri Gramin Sadak Yojana.

National Highway Development Plan: For augmenting the capacity of National
Highways, sequel to Prime Ministers announcement, Central Government with National Highway Authority of India (NHAI) as its nodal agency is undertaking National Highway Development Project (NHDP). The plan envisages four and six laning of the following roads: o Golden Quadrilateral: Delhi-Mumbai-Chennai-Kolkata-Delhi. o North-South Corridor: Srinagar to Kanyakumari with spur from Salem to Cochin. o East-West Corridor: Silchar to Porbunder. o Port Connectivity to Major Ports.

Pradhan Mantri Gramin Sadak Yojana: Under the Pradhan Mantri Gramin
Sadak Yojana, two lakh villages with over 1,000 population will be connected to the nearest highway by 2008. All villages with a population above 500 will be connected by 2009. The cost is estimated at Rs. 60,000 crores. Indian villages need roads which serve for decades without maintenance, are hard enough to withstand iron-tyred bullock carts and can be used even monsoons.

National Highways Development Project (NHDP)
In order to improve the road network on a country wide level, the National Highway Development Project was set up by the PMO. The project aims to develop the Golden Quadrilateral, the North-South and East-West Corridor and other work including Port

14 Connectivity, as these are the high volume sectors carrying the substantial portion of the road traffic in India. The total length of Golden Quadrilateral is 5952 kms, North-South-East-West Corridor is 7300 kms and that of Port Connectivity 400 kms. The project envisages a total investment of Rs 58,000 crores spread over a nine-year period. Golden Quadrilateral is scheduled for completion by the end of 2003 and North-South-East-West Corridor by the year 2009.

2.10 Current Status
1. Of the 58,112 kms of National Highways in India about 33 per cent are single lane and only about 2 per cent of the total road network is four lane. The poor quality of Indian roads is highlighted by congestion, old fatigued bridges and culverts, railway crossings, low safety, no bypasses and slow traffic movement. 2. Considering the importance of the road sector in the country, the government has embarked on the ambitious National Highway Development Project covering 14,000 km with a cost of Rs. 58,000 crore and the projects have already started rolling. 3. The Indian construction industry that had been experiencing a slowdown witnessed a growth of 9 per cent and 8.5 per cent for the periods Financial Year 2000 and Financial Year 2001 (1st half) respectively. This was possible due to the increased spending in infrastructure and the actual taking off of some of the Road Sector projects.

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Research Methodology:

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

Research Data Source Research approach Research instrument Type of questionnaire Type of questions

: Analytical & Exploratory. : Secondary data. : Survey method. : Personal interviews & Financial Model. : Structured non-disguised. : Open ended.

I would be working on secondary data because of the fact that the various financial aspects of the projects like the Projects Initial Investment, the Payment Pattern, duration of the project, Project IRR, etc. have to be analysed to show the viability of such projects. For this purpose I will have to indepth and exhaustive study of all the available secondary data like journals, websites and other related documents.

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3. Trends in Road Sector Financing
3.1 Traditional Financing Mechanism
3.1.1 Budgetary Allocations: Roads are primarily funded through budgetary
allocations. Central government provides funds for National Highways and State Government for other roads. Further to give proper direction to highway development The Planning Commission of India has estimated an investment of INR3,118 billion under the Eleventh Plan versus the INR1,448 billion spent under the Tenth Plan.

3.1.2 Central Road Fund: The Central Road Fund derives its revenues out of the
duty on customs and excise levied on petrol and diesel. It is expected to provide Rs. 6,000 crore annually for National Highway Development Program. The states are also getting Rs. 1962 crore for development of state roads. A dedicated road fund has been created by the central government. It is expected that the total collections in the fund will be to the tune of around Rs. 10,000 crore. The allocations from the fund would be as shown: o 50% of the proceeds from additional excise duty on diesel would be allocated for development of rural roads. o Of the remaining balance, 57.5% would be provided for national highways, 27% for state roads, 3% for development of roads of interstate and economic importance and 12.5% for railway safety works such as rail roads over bridges, manning of level crossings etc.

3.1.3 Octroi: Octroi is the fees collected by the local authorities of towns and cities
from the trucks, which carry goods. It is one of the major avenues of resource generation of municipalities. The fund collected by octroi is generally used to develop the other district roads and village roads. Since the collection of octroi results in long detention of trucks on the roadside and entails waste of time and fuel, so central Government is pressurizing to abolish this mode of taxation.

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3.1.4 Foreign Aid to Road Sectors:
3.1.4.1 Historical Background: The first major external aid for roads was for the development of certain National Highway Section in Maharashtra, Bihar, Bengal started in 1960’s. This was funded by International Development Association (IDA), an affiliate of World Bank. Though efforts were made in the seventies to continue external aid for the roads by the World Bank, but were unsuccessful because of the differences on two issues: a. b. Inviting Global tenders The engagement of consultants.

Negotiations were again revived in the mid-eighties, when the Government of India agreed to the World Bank’s condition that tenders should be called on the basis of International Competitive bidding. Since then there have been a number of externally aided highway projects, both in Central Sector for National Highways and in the State Sector for State Highways and Rural Roads. 3.1.4.2 World Bank Aided Projects: Various projects that have been funded by world bank are: 1. India: State Highways Project Date: June 20, 1997 LOAN AMOUNT: IBRD-US $ 70 million PROJECT DESCRIPTION: The project will help relieve traffic congestion and reduce travel times by widening and upgrading priority roads, enhancing road maintenance, and strengthening the state road agency's ability to manage its road programs and assets. The main components of the project are: (i) civil works for widening and strengthening of about 1,400 kms of high-traffic volume State Highways and Major District Roads; (ii) reduction in the backlog of periodic maintenance work on 2,000 kms of state highways and major district roads and twenty kilometers of national highway damaged by a recent cyclone will receive emergency maintenance; and (iii) the Institutional Development Plan of the Roads and Buildings Department (RBD) will be supported through corporate strategy development, studies and/or pilot projects, training and staff development.

18 India: Third National Highways Project Date: June 6, 2000 LOAN AMOUNT: IBRD-US $ 516 million TERMS: Grace period=5 years, maturity=20 years PROJECT DESCRIPTION: This project will help bring down transport costs by increasing highway capacity, reducing traffic jams and road accidents, separating local and through traffic in towns, and improving pavements. The project will support the National Highway Authority of India (NHAI) in the development and maintenance of the 6,000 km "golden quadrilateral" between Delhi, Calcutta, Chennai, and Mumbai, and the development of the strategically important NorthSouth and East-West corridors and access to key ports. Specifically, the project will finance civil works for widening and strengthening about 475 kms of national highway from two lanes to four, six lane divided carriageways. It will also cover environmental management, including tree plantation, and a program of road work to introduce alternative maintenance contracting methods and improve traffic management and safety. 2. India: Gujarat State Highway Project

Date: September 6, 2000 LOAN AMOUNT: IBRD-US $ 381 million TERMS: Grace period=5 years; maturity=20 years PROJECT DESCRIPTION: The project will strengthen and widen about 800-900 kms of state highways while implementing periodic maintenance of an additional 1,000 kms of state highways. It will also finance technical assistance, training, and equipment needed to meet increasing demands on road services and infrastructure. The resulting reduction in transport bottlenecks is expected to help support the longterm economic growth needed to reduce poverty. 3. Date: May 24, 2001 LOANS AMOUNT: IBRD-US $ 360 million equivalent Terms: Grace period=5 years; maturity=20 years India: Karnataka State Highways Improvement Project

19 PROJECT DESCRIPTION: This project will finance road widening and strengthening, and technical assistance for improved management of road resources and road safety. The project will enhance and expand the core road network through institutional strengthening of Karnataka's main road agency and support for a pilot road safety program. Specifically, the project will upgrade and widen about 1,000 kms and repair an additional 1,300 kms of state roads. The project will also invest in Karnataka's road agency -- the Public Works Department -- to provide training for staff and modernize equipment and systems of strategic importance in improving state roads. 4. Date: June 22, 2001 CREDIT AMOUNT: IDA—US $ 589 million equivalent TERMS: Grace period = 5 years; Maturity = 14 years PROJECT DESCRIPTION: The project will fund the upgrading of this New DelhiCalcutta highway, a 1,300 kms stretch which suffers from major traffic congestion. The project will cut travel time and boost safety on. It will also help highway agencies improve management and delivery of highway services, including the management of a growing number of private sector contracts for road maintenance. The project will specifically upgrade 420 kms of national highway sections through Bihar, Jharkhand and Uttar Pradesh; implement road safety works; and pilot initiatives to foster private sector involvement in road financing. India: Kerala State Transport Project Loan Date: March 14, 2002 AMOUNT: IBRD – US $ 255 million TERMS: Grace period = 5 years; Maturity = 20 years PROJECT DESCRIPTION: Kerala State, on India’s southwest coast, has the highest rate of road accidents of any state in India. The Kerala State Transport Project will address the rapid increase in demand for road services that has contributed to this low level of road safety. The project will enhance road capacity and provide targeted safety programs designed to boost both safety and efficiency of Kerala’s roads. India: Grand Trunk Road Improvement Project

20 India: Mizoram State Roads Project Date: March 14,2002 CREDIT AMOUNT: IDA- US $ 60 million TERMS: Grace period = 10 years; Maturity = 35 years PROJECT DESCRIPTION: The credit will improve road capacity, quality, and safety through rehabilitation and maintenance. Specifically, the Mizoram project will expand or rehabilitate over 700 kms of the state’s core road network - nearly threefourths of the state’s total network over the next five years. These physical improvements will benefit an estimated 70 percent of the State’s largely poor population that relies on the road network on a daily basis. 3.1.4.3 Asian Development Bank Aided Projects: The Bank's policy focuses on alleviating constraints to economic development and attracting private sector participation to develop and maintain an efficient and dynamic multimodal transport system. Assistance is given to develop roads, railways, and ports. Bank support for roads is focused on policy reforms, and attracting private sector participation for the development of national highways and expressways, as well as state highways. Having helped support the establishment of the National Highway Authority, the Bank has strengthened its efforts in promoting reforms of the institutional and regulatory framework. It encourages improved efficiency in public sector operations and removal of bottlenecks in highdensity corridors. The promotion of environmental and safety standards are carefully examined during project preparation. There have been three loans from the Asian Development Bank to the Highway Sector and four other State Level loans. 1. Loan No. 918-IND: Road Improvement Project This project consists of improvement of Roads Equipment: Procurement of quality control, pavement evaluation and maintenance equipment for the PWD’s of the five states concerned. o Consulting Services: Provision of consulting services to (a) assist the Executing agencies in construction supervision of the Project; (b) undertake a

21 study for the development of a long-term plan for expressways; and (c) carry out a study for the updating of road user cost data. o Incremental Operation and Administration: Incremental operation and administration costs for the implementation of the Project. 2. Loan No. 1041-IND: Second Road Improvement This project comprises: o o Improvement of Roads: Procurement of equipment for traffic counting, Consulting Services: Provision of consulting services to assist the weighing and pavement evaluation. Executing Agencies in the implementation of the Project. 3. Loan No. 1274-IND: National Highways Project The Project comprises: o Highway Improvement: This component of the Project will cover improvement of the five national highway sections, totaling about 330 km in the five states. The improvements will include widening to four lanes (234 km) and strengthening of the existing pavements with asphaltic concrete surfacing. The five sections of the Project are: o Consulting Services: Consulting services for construction supervision of civil works under the Project are envisaged to be carried out by an appropriate combination of international and domestic consultants. 4. Loan No. 1279-IND: Bombay-Vadodara Expressway Technical Assistance Project The Project was formulated to assist the Government, through the provision of consulting services, with the preparation of detailed designs and contract documentation required for the implementation of the construction projects to develop an expressway between Bombay and Vadodara.

22 5. Loan No. 1747-IND: Surat-Manor Tollway Project The Project will improve the 180 km stretch between Surat and Manor of National Highway 8 linking the states of Gujarat and Maharashtra, including strengthening of the highway's pavements. Thus ease congestion in freight and passenger traffic between the industrial and agricultural areas of Gujarat and the west coast ports, including Mumbai. The objectives of the project are to remove capacity constraints and improve road safety on critical sections of the western transport corridor from Delhi to Mumbai. The completed project highway will be operated and maintained by the private sector through a toll concession. The commercialization of the operation and maintenance of the project represents a significant step in increasing private participation in national highway development in India and is expected to have a demonstration effect on the management of other national highway sections. 6. Loan No. 1839-IND: Western Transport Corridor Project The project will upgrade the 259-km Tumkur-Haveri section of the Western Transport Corridor (WTC) from a two-lane, single-carriage highway to a four-lane, divided highway. The safety features will include a dual carriageway to prevent headon collisions and service roads to separate slow-moving and fast-moving traffic. They will also include overbridges for pedestrians, bypasses to separate through traffic from local traffic, and fences to prevent unlawful crossing and reduce noise pollution in populated areas. 7. Loan no. 1870-IND: West Bengal Corridor Development Project The project will upgrade India's national and state highways that link West Bengal's southern ports of Kolkata and Haldia with eastern India, Bangladesh, Bhutan and Nepal. Specifically, the project will improve: o 370 km of National Highway 34, which was identified for priority assistance because of its strategic importance and its impact on poverty reduction. o 150 km of connecting state highways that link the corridor to Bangladesh. o 100 km of rural roads, giving poor communities easier access to markets, schools, and hospitals and thus improving their job and income opportunities.

23 3.1.4.4 OECF/JIBC Aided Projects: Five National Highway Projects have been so far funded by Overseas Economic Cooperation Fund of Japan/Japan Bank for Inrenational Cooperation so far. The total loan is of the order 37.557 billion Japanese Yen. Four of these projects are for four-laning and one is for major bridge across River Yamuna at Allahabad.

Project Name National Highway-2 Improvement Project National Highway-5 Improvement Project

Date of Approval 9 Jan, 1992

Amount of approval 4855 million Yen 11,360 million Yen 4,827 million Yen 5,836 million Yen 10,679 million Yen

Interest Rate 2.6%

Repayment Period 30 years

Grace Period 10 years

24 Jan, 1994

2.6%

30 years

10 years

National Highway-24 28 Feb 1995 Improvement Project National Highway-5 28 Feb 1995 Improvement Project Calcutta Transport 25 Feb 1997

2.6%

30 years

10 years

2.6%

30 years

10 years

2.3%

30 years

10 years

Infrastructure Development Project

24

3.2 Alternative Financing Mechanism
3.2.1 Market Borrowing:
1. Issuing of Infrastructure Bonds by NHAI guaranteed by Government: In financial year 2006, the authority issue raised Rs.7,500 crore and in financial year 2007, Rs.8,100 crore from the issue of Infrastructure Bonds. The authority is going to raise Rs.10,200 crore in the financial year 2008-2009. Specifications:

The Authority / Issuer / National Highways Authority of India, Authority NHAI incorporated under the National Highways Authority of India Act, 1988.

Issue

/

Offer

/

Private Private Placement of Non-Convertible Redeemable Taxable Bonds (with benefits under section 54EC of Income Tax Act 1961for Long Term Capital Gains).

Placement

Bond(s)

Non-convertible redeemable taxable bond(s) in the nature of debentures with benefits under section 54EC of Income Tax Act 1961for Long Term Capital Gains, also referred to as NHAI Bonds(s).

Category Amount Offered Put/Call Option Credit Rating Rating Agency

Non-Financial Public sector unit. On tap 3 Years AAA Crisil

25 2. Issuing of Infrastructure Bonds by Maharashtra State Road Development Corporation (MSRDC): Specifications Nature Secured, Non-Convertible, Redeemable, Taxable Bonds Guaranteed by State Government of Maharashtra for Rating Rating Agency Tenor Amount Offered Put/Call option Coupon Rate Category timely payment of interest and repayment of principle. CARE “(A+SO)” CARE 7/10/12/15 years 250 crores. 5/7/10/none respectively. 11/11.25/11.50/11.72% respectively. Non-Financial SLU

3. Issuing of Infrastructure Bonds by Roads and Bridges Development Corporation of Kerala Ltd. (RBDCK): Specifications Nature Secured, Non-Convertible, Redeemable, Taxable Bonds Guaranteed by State Government of Kerala for timely Tenor Amount Offered Put/Call option Coupon Rate Category payment of interest and repayment of principle. 7 years. 25 crores. 5 years. 12.25% annually. Non-Financial SLU

3.2.2 Private Sector Participation:
Public Private Partnerships (PPPs) are characterized by the sharing of investment, risk, responsibility and reward between the partners. The reasons for establishing such partnerships vary but generally involve the financing, design, construction, operation and maintenance of public infrastructure and services. The underlying logic for establishing

26 partnerships is that both the public and the private sector have unique characteristics that provide them with advantages in specific aspects of service or project delivery. The most successful partnership arrangements draw on the strengths of both the public and private sector to establish complementary relationships. The roles and responsibilities of the partners may vary from project to project. As the roles and responsibilities of the private and public sector partners differs on individual servicing initiatives, but the overall role and responsibilities of government do not change. Public private partnership is one of a number of ways of delivering public infrastructure and related services. It is not a substitute for strong and effective governance and decision making by government. In all cases, government remains responsible and accountable for delivering services and projects in a manner that protects and furthers the public interest. Public private partnerships can vary in: o o o The degree of risk allocated between the partners. The amount of expertise required on the part of each partner to The potential implications for user fee payers.

negotiate contracts.

3.2.2.1 Government of India Initiatives: The following measures have been implemented by the Government. o o o o o o NHAI”. Road sector has been declared as an industry. This facilitates Provisions of Monopolies and Restrictive Trade Practices Act National Highways Act has been amended to enable levy of fee The Road Sector has been declared as an infrastructure to The establishment of the “Infrastructure Development Finance The establishment of “National Highway Authority of India – borrowing on easy terms. have been relaxed to enable firms to enter the highway sector. on National Highways, Bridges and Tunnels. permit floating bonds. Company (IDFC)”.

27 o o Permitting upto 100% foreign equity participation for the Significant import duty concessions available on equipment

projects set up by foreign private entrepreneurs. and raw material being imported by projects in various Infrastructure Sectors.

3.2.2.2 Implementation Models
o o o o o BOT (Toll Based) BOT (Annuity) Govt. owned SPV MOU (negotiated deal) Govt. to Govt. Cooperation

Built, Operate and Transfer (BOT-Toll Based) BOT stands for "Built, Operate and Transfer". BOT model uses private investment to undertake the infrastructure development that has historically been the preserve for the public sector. In a BOT project a private company is given a concession to built and operate a facility that would normally be built and operated by the government. The facility might be a power plant, airport, tollroad, tunnel or water treatment plant. The private company is also responsible for financing and designing the project. At the end of the concession period the private company returns ownership of the project to the government. The concession period is determined primarily by the length of the time needed for the facility revenue stream to pay off the company's debt and provide a reasonable rate of return. The various variants of BOT scheme are: o Build, Own and Operate (BOO): The Government either transfer ownership and responsibility for an existing facility or contracts with a private partner to build, own and operate a new facility in perpetuity. The private partner generally provides the financing. o Build, Own, Operate and Transfer (BOOT): The private developer obtains exclusive franchise to finance-build, operate, maintain, manage and collect user

28 fees for a fixed period to amortize investment. At the end of the franchise, title reverts to a public authority or Government. o Build, Lease/Rent and Transfer BLT/BRT): The Government contracts with the private partner to build a facility to provide a public service. The private partner then leases the facility to the Government for a specified period after which ownership vests with the Government. This approach can be taken where Government requires a new facility or service but may not be in a position to provide financing. o Build, Transfer and Operate (BTO): The Government contracts with a private partner to finance and build a facility. Once completed, the private partner transfers ownership of the facility to the Government. The Government then leases the facility back to the private partner under a long term lease during which the private partner has an opportunity to recover its investment and a reasonable rate of return. o Modernize, Own/Operate and Transfer (MOT): The private partner takes a facility from the Government, expands or modernizes it, then operates the facility under a contract with the Government. The private partner is expected to invest in facility expansion or improvement and is given a specified period of time in which to recover the investment and realize a return. o BOR: Build, Operate and Renewal of the concession. o DBFO: o DCMF: Design, Build, Finance and Operate. Design, Construct, Manage and Finance.

o ROO: Rehabilitate, Own and Operate. o ROT: Rehabilitate, Own and Transfer. In a BOT project, the Government decides the need of the project and its scope. The design, performance and maintenance of the project is tailored to the objectives of the country and the private sponsors are selected by appropriate bidding or evaluation process in order to arrive at the price that is fair to both the Government and the sponsors. A properly drafted agreement limits the private sponsors to a reasonable rate of return and ensures that the project serves the country's national interest and economy. Advantages of BOT Scheme:

29 o Cost savings: With BOT Scheme, Government is able to realize cost savings for both the construction of capital projects as well as the operation and maintenance of services. For example, construction cost savings can often be realized by combining design and construction in the same contract. The close interaction of designers and constructors in a team can result in more innovative and less costly designs. The design and construction activity can be carried out more efficiently, thereby decreasing the construction time and allowing the facility to be put to use more quickly. Private partners may be able to reduce the cost of operating or maintaining facilities by applying economies of scale, innovative technologies, more flexible procurement and compensation arrangements, or by reducing overhead. o Risk sharing: With public private partnership, Government can share the risks with a private partner. Risks could include cost overruns, inability to meet schedules for service delivery, difficulty in complying with environmental and other regulations, or the risk that revenues may not be sufficient to pay operating and capital costs. o Improved levels of service or maintaining existing levels of service: Public private partnerships can introduce innovation in how service delivery is organized and carried out. It can also introduce new technologies and economies of scale that often reduce the cost or improve the quality and level of services. o Enhancement of revenues: BOT scheme may set user fees that reflect the true cost of delivering a particular service. BOT scheme also offer the opportunity to introduce more innovative revenue sources that would not be possible under conventional methods of service delivery. o More efficient implementation: Efficiencies may be realized through combining various activities such as design and construction, and through more flexible contracting and procurement, quicker approvals for capital financing and a more efficient decision-making process. More efficient service delivery not only allows quicker provision of services, but also reduces costs. o Economic benefits: Increased involvement of Government in BOTs can help to stimulate the private sector and contribute to increased employment and economic

30 growth. Local private firms that become proficient in working in BOTs can “export” their expertise and earn income outside of the region. Project Structure

G ov ernm ental A gency
Su bscrip tion A greem ent I nsu rance

I nsu rers

P olicies

C on cessionaire

L oan A greem ent

L en d ers

E ngineeri ng P rocu rem ,ent C onstru ction C ontract

I nd ep enden t D esign C onsu ltant
Disadvantages of BOT Scheme:

EPC C ontractors

In the absence of historical traffic data, there is uncertainty involved in achieving the estimated traffic on the new road facility based on a diversion analysis. The up-front capital grant, which may be upto 25% of the project cost and will have to be matched by at least an equal amount of equity contribution by the PD will provide enough confidence to the private developers to bid for the project. The private participant will bid for the grant amount on the basis of his perception of the various project risks viz. construction, operations & maintenance, financing and revenue (traffic volume and toll collection).

31

BOT (Annuity Scheme)
In this option, a private developer is responsible for design, development, construction, operation, maintenance and financing of the project. It is a kind of a BOT scheme in which the prospective bidder for the road project submit their estimates of the annual payment they expect from the Sponsors for taking up the project. The sponsors would award the project to the bidders asking the lowest annuity payments. Revenue to the concessionaire accrues from annuity payments to be made by the governmental agency, which reduces the revenue risk for the concessionaire. In this type the governmental agency may or may not retain the right for collecting the tolls from the users of the facility. Project Structure

Insurers
Insurance Policies

Private Developers
Subscription Agreement

Equity Investors

Governmental Agency

Concession Agreement Land, Annuity Feasibility Studies

Promoters/ Sponsor

Loan Agreement

Lenders

Independent Consultant Contract

Tolling Contract

Engineering Procurement , Construction Contract

Operation & Maintenance Contracts

Independent Consultant

EPC Contractors

O&M

Contracts

Advantages o Selection of the private developer is through an international competitive bidding process wherein the bidders asking for the lowest annuity amount is awarded the BOT contract. This leads to induction of private party on the most competitive terms.

32 o As the revenue (traffic volume and toll collection) risk is substantially mitigated, financing for the project can be arranged on the most competitive commercial terms. Disadvantages o The entire revenue risk will be fully borne by the Government. o Impose a high financial burden on the Government is for a long period.

Govt. Owned Special Purpose Vehicle (SPV)
In this case the Promoter shall be responsible for the development and implementation of the Project and form a Special Purpose Vehicle (SPV) as the implementing agency. In this approach, a Private Developer (PD) shall be selected through an International Competitive Bidding process. The Project shall be awarded to the PD on BOT basis for a fixed concession period. The PD shall be responsible for design, development, construction, operation, maintenance and financing of the Project. Promoter has to provide a one-time capital grant to cover a part of the revenue shortfall risk. The PD shall domicile the Project and all the activities related thereto in a Special Purpose Vehicle (SPV). The investments made in the Project by the SPV and returns thereon shall be recovered by way of revenues generated from the operation of the project. The SPV shall be entitled to collect tolls from the users of the Project road at rates to be specified in the Concession Agreement. The toll rates shall be indexed to inflation (WPI, CPI, etc.) and may undergo annual revision. Advantages The advantages in this model are: o As the SPV would be promoted by a Sovereign body, this will be looked upon favourably by lenders / investors thereby facilitating financing on commercial terms.

33 Project Structure

Governmental Agency
Subscription A greement Insurance

Insurers

Policies

SPV/ Corporation

Loan A greement

Lenders

Engineering Procurement , Construction Contract

Independent Design Consultant

EPC Contractors

O&M Contractor

Disadvantages The disadvantages in such a strategy could be: o It would be detrimental to the achievement of overall policy of public-private partnership for infrastructure development. o It would create a significant burden on the budget of Government/Promoter for a long period.

Memorandum of Understanding (MoU negotiated deal)
As per this structure, the Project shall be awarded to a private Project Developer (PD) on a Build-Operate-Transfer (BOT) basis based on negotiated terms for a pre-determined (fixed/variable) concession period. The PD and Government shall enter into a Memorandum of Understanding (MoU) for this purpose. The PD shall be responsible for design, development, construction, operation, maintenance and financing of the Project.

34 Advantages o This structure allows for harnessing the efficiencies (operational and financing) of private sector o Reduces financial burden on Government as only a one-time capital grant will be required to be given to the project. Disadvantages o Selection of the private developer is not through a public/open process. Hence issues of transparency may arise. o As this would be a negotiated deal, this transaction may lead to price distortions in the absence of a competitive mechanism for selection of the private participant.

Government to Government Cooperation
In this case a Memorandum of Understanding may be signed between Government of India and Government of interested countries (e.g. Malaysia, Korea, Japan, Canada etc.) or their nominated company/companies. The SPV will be formed by companies from the country with whom the MoU is signed. The Project implementation shall be on BOT basis, which will encompass design, engineering, financing, procurement, construction, operating, maintenance and tolling of the Project highway. Example NHAI has signed an agreement with Government of Malaysia promoted ‘Swarna Tollway Limited’ in order to implement certain sections of two National Highways in the State of Andhra Pradesh. Advantages

The SPV implementing the project will have the backing of both the Government of India and its own Government. The structure allows for introduction of international experience in similar projects.

Disadvantages

35

The satisfactory conclusion of Government-to-Government negotiations may take excessively long time. As this would be a negotiated deal, this transaction may lead to price distortions in the absence of a competitive mechanism for selection of the concessionaire.

Project Structure
Foreign G ovt Com pany 1 Foreign G ovt Com pany 2 Foreign Govt Com pany 3

Subscription Agreement Assignment Concession Agreement of Loan Agreements

Governm ent of India
Independent Consultant Contract

SPV
Insurance Policies

Lenders

Independent Consultant

O&M Contract

Tolling Contract
EPC Contracts

Insurers

EPC Contract Section

1

EPC Contract Section

2

Contractor 1

Contractor 2

3.2.2.3 The Route Map already followed – A Data Base on India’s Road Sector Privatization Efforts For realizing India’s ambitious growth plans, it is critical that this invaluable asset of road network must be substantially upgraded to maximize the effectiveness. Towards this capacity enhancement of the road network, both in qualitative and quantitative terms, the NHDP and Pradhan Mantri Gramin Sadak Yojana are the major initiatives. These projects have the vast potential in creating the employment. The Government in collaboration with Private Sector has already awarded and completed various projects by

36 using different implementing models like BOT (Toll Based / Annuity), SPV, MOU and Govt. to Govt. cooperation to ensure unobstructed mobility and accessibility and serving the need of a modern India. Private Sector participation through BOT (Toll Based / Annuity) and SPV Projects NH No. Length (km) BOT (Toll Based) Projects Satara – Kagal 4 133 Tumkur – Neelmangla 4 32 Nellore – Tada 5 111 ROB at Kishangarh 8 1 Jaipur – Kishangarh 8 90.38 Delhi – Gurgaon 8 27.7 BOT (Annuity) Projects Palsit – Dankuni 2 65 Panagarh – Palsit 2 65 Maharashtra – Belgaum 4 77 Ankapalli – Tuni 5 59 Nellore Bypass 5 17.2 SPV Projects Jaipur Bypass 8 34.7 Ahmedabad Vadodara 8 50 Expressway Moradabad Bypass 24 18 Stretch Status Completed Completed Under Implementation 4 Laned Awarded Completed Under Implementation Under Implementation Under Implementation Under Implementation Approved for Award Completed Completed Completed

(The project details are given in the annexure)

37

4. Critical Issues – Private Sector Road Financing
4.1 Stages in development of Road Sector Projects
1. Identification: o Identify Project. o Define Form of Financing. o Preliminary Feasibility Study. o Assign Project Manager and Team. o Government. 2. Government Preparation for Tendering: o Procurement Procedure. o Prequalification. o Project Agreement. o Tender Documents o Bid Evaluation Criteria. 3. Sponsor's Preparation to Bid: o Form Consortium / Possibly Project Company. o Feasibility Study o Identification of Project Potential. o Submit Bid Package. 4. Selection: o Evaluate Bids. o Clarifications / Adjustments. o Project Award. 5. Development: o Form Project Company. o Equity Contributions.

38 o Loan Agreement. o Financial Closing. o Construction Contract. o Supply Contract. o Off-take Contract. o Insurance Contract. o Operation & Maintenance Agreement. 6. Implementation: o Construct facility and Install Equipment. o Testing. o Acceptance. o Technology Transfer and Capability Building. o Evaluation. 7. Operation: o O&M during the Concession Period. o Inspection. o Training. o Technology Transfer and Capability Building. 8. Transfer: o Transfer Procedures.

39

4.2 Financial Structuring of BOT Road Projects
The various types and sources of capital are available for financing the BOT Road Projects. As each type of capital bears different level of risks so by means of various financing techniques and legal instruments different types of capital are matched to different project risks. Financial Structuring is done to establish the appropriate mix of debt, equity and mezzanine capital and also to ensure that funds are arranged from appropriate sources. This process is also referred as assembling the financial package. 4.2.1 Project Financing: In BOT projects financing is done through "Project Finance" technique. Lender seeks finance either through limited recourse basis or a non-recourse basis. The lender in a non-recourse financing arrangement will look only to the project's asset and revenue stream for repayment, not to the additional sources of security, such as the total assets or balance sheet of the project sponsors. But most of BOT projects are financed on a limited recourse basis rather than Non-recourse basis because in this recourse is available against the project company and its assets, including real estate, plant and equipment, contractual rights, performance bonds, insurance, government guarantees and other commitments the project company has obtained. The rate of return of a BOT project must be sufficient not only to repay the lenders but also to reward the sponsors for committing their equity and know-how and for assuming the risks involved in such projects. In such financing, a separate project company is established by the project sponsors to implement the project. This type has several advantages for sponsors: o It allows the sponsors to borrow funds to finance a project without increasing their liabilities beyond their investment in the project. On the sponsor’s balance sheet, therefore, their exposure to the project is the amount of their equity contribution to the project and nothing more. o Lenders to the project assume a part of project risks, since they are lending without full recourse and primarily on the basis of the project assts.

40 BOT financing is a specialized form of project financing. Some of the common features of BOT financing are as follows: o It involves the financing of a discrete venture that is more often defined by its revenue stream than by its products or markets. o It involves several interrelated contracts with third parties, such as suppliers, purchasers and Government agencies, which are crucial to the credit support for the project. o Project loan repayments are secured by project cash flows, as specified in contractual agreements or as indicated by demand forecasts, rather than project assets. o Project sponsors will rely primarily on guarantees to minimize their exposure to project risks and uncertainty. 4.2.2 Means of Financing Financing or capital is required for the implementation of all the projects. The types of funds available for the projects are: o Equity Capital. o Debt Capital. o Mezzanine Capital. o Institutional Investors. o Capital Market Funding. o International Financial Institutions. o Support by Export Credit Agencies. o Combined Public and Private Finance. Each type of capital plays a specific role in the project financing and has its own risk characteristics so the return on each type of capital depends on the risk characteristics of each type. 1. Equity Capital: Equity is the lowest-ranking capital of all in terms of its claims on the assets of a project. It represents the funds injected by the owners of the project. In this all the

41 project obligations are to be met before any distributions made to the equity investors. If a project fails, all other claims must be met before any claims made by equity investors. Equity investors therefore bear a higher risk than any other provider of the capital so, equity capital is also referred as risk capital. However, if a project is successful, then the surplus after all obligations are met will entirely accrue to the shareholders and results in the capital gains. In BOT project, the fixed assets are transferred to the Government at no cost, so the equity investors return on investment will come only from the revenues generated during that period so these investors must be fairly compensated for being the highest risk takers. 2. Debt Capital: Project's senior debt has the highest ranking of all the capital. Senior debt has first claim over all the assets of a project and must be repaid first. Only after the claims of senior debt are satisfied, the claims of other capitals are considered. As the senior debt bears the limited risk so the returns are limited just to the payment on the loans, irrespective of the profitability of the projects. Equity investors prefer a high debtequity ratio, while creditors prefer a low debt-equity ratio because a higher debtequity ratio leads to lower cost of capital and vice-a-versa. Generally the BOT projects financed in India are at debt-equity ratio of 70:30. 3. Mezzanine Capital: It is a more flexible instrument than either pure equity or debt, as it has characteristics of both the debt and equity capital. So the risk involved is between debt and equity capital. Examples of mezzanine financing are subordinated loans and preference shares. The subordinated loans and preference shares both have the characteristics of the debt as the regular payment of interest and capital is to be made, but the payments are subordinated to senior debt and to be made only when the project funds are available. For project sponsors, the advantage of mezzanine financing is that it enables projects to be financed with more debt and less equity. 4. Institutional Investors:

42 In addition to subordinated loans provided by the project sponsors or by Governmental financial institutions, subordinated debt can be obtained from financing companies, investment funds, insurance companies, collective investment schemes and other institutional investors. The institutions normally have large sums available for long-term investment and may represent an important source of additional capital for infrastructure projects. The main reasons for accepting the risk of providing capital to infrastructure projects are the prospects of remuneration and interest in diversifying investment. 5. Capital Market Funding: Funds may be raised by the placement of preferred shares, bonds and other negotiable instruments on a recognized stock exchange. The public offer of negotiable instruments requires regulatory approval and compliance with requirements of the relevant jurisdiction. 6. International Financial Institutions: International financial institutions also play a significant role as the provider of loans, guarantees or equity to privately financed infrastructure projects. A number of projects have been financed by World Bank, Asian Development Bank, International Finance Corporation or by other development banks. 7. Support by Export Credit Agencies (ECA's): Export credit agencies provide support to the projects in form of loans, guarantees or a combination of both. The participation of export credit agencies may provide a number of advantages, such as lower rate of interest than commercial banks and longer-term loans. 8. Combined Public & Private Finance: The public funds originate from Government Income and sovereign borrowing. They are combined with private funds as initial investment or as long-term payments, or may take governmental grants or guarantees. Infrastructure projects are sponsored by

43 the Government through equity participation in the concessionaire, thus reducing the amount of equity and debt needed from private sources.

4.2.3 Components of Project Costs While deciding the type of capital and sources of finance to be used, it is important to first identify the main components of project costs, so that the needs and risk characteristics of each can be matched by the appropriate funding. The main components of project costs are as follows: o Pre-investment Costs. o Bidding & Procurement Costs. o Project Development Costs. o Construction Costs. o Operating Costs. o Termination Costs. 1. Pre-investment Costs: These are the costs incurred by the project sponsors in developing the project concept and preliminary project design. 2. Bidding & Procurement Costs: A project concession can be awarded through either competitive bidding or direct negotiation with sponsors. In both the cases, the government agency responsible for awarding the concession has to carry out an outline study of the project to collect information needed for the bidding documents and prepare themselves for negotiations with sponsors. The bidders and sponsors also have to undertake extensive design and analysis work to prepare their bids and to have meaningful negotiations with the government. 3. Operating Costs: These are the costs involved while operating the facility upon completion of construction.

44 4. Project Development Costs: On the basis of the preliminary project design, the project sponsors have to further develop and refine the BOT scheme during the bidding and the post-concession award period. 5. Construction Costs: This is the main expenditure in any project. It includes the construction of the entire facility, including the purchase and installation of equipment. 6. Termination Costs: At termination the costs may or may not be involved. If the project agreement requires the facility to be transferred it may involve a cash payment by the government agency taking-over that facility.

4.3 Procurement Issues and Selection of Concessionaire
An adequate procurement strategy or procedure must be in place before a BOT policy can be carried out. The success of a BOT project will depend to a large extent on what has occurred before the sponsor group was selected. Procurement procedures are influenced by various factors like the business environment, the infrastructure policy and the nature of the particular BOT project. There are two approaches for procurement are: o Competitive Tendering o Negotiated System Following objectives should be satisfied before choosing a particular procurement procedure: 1. 2. 3. 4. 5. 6. 7. 8. Satisfy the needs of the particular BOT project. Ensure procedural clarity, fairness and transparency. Promote competition. Encourage private sector innovation and alternative solutions. Assure investors, lenders and other parties that government has Strengthen public confidence in the BOT approach to Promote an early award of an project. Minimize the cost of developing BOT projects.

selected the right BOT proposal. infrastructure development.

45 4.3.1 Bidding Criteria The selection process of the Project Developer shall be based on technical competence of the bidder and a financial bid. While the parameters of technical competence are only qualifying in nature, the financial bids shall form the criteria of selecting the Project Developer. In the financial bid, the criteria for selection may be one of the following: o Bidding on the basis of least grant sought from the Government with pre-specified toll rates and concession period. o Bidding on the basis of length of the concession period with pre-specified grant element and toll rates. However NHAI had finally adopted the bidding criteria on the basis of grant. o Bidding on the basis of least toll rates with pre-specified concession period and grant. o Returns (IRR / NPV basis) expected by the bidder as calculated on the basis of a pre-specified formula. In this case, the concession period shall be flexible and shall expire once the pre-specified returns are achieved. The toll rates shall be prespecified.

4.4 Governments Role in facilitating BOT Projects
One of the advantage of the BOT concept for the Government is that a considerable workload, including responsibility for financing, designing, construction and operation of the projects, is transferred from the Government agencies and ministries traditionally responsible for infrastructure projects to the private sector. However, this does not imply that Government’s role is limited to supervision and monitoring of BOT projects. BOT infrastructure projects require that the Government play an active role, in preconstruction and pre-investment phases of a project. It is the Government that initially approves the use of the BOT concept in connection with the infrastructure projects. It decides the procurement process, manages the procurement proceedings and defines the criteria for the selection of BOT sponsors. The various facilities that the Government should provide to BOT projects are: 4.4.1 Supportive Legal Framework for a BOT projects: The attractiveness of a BOT project to the private sector depends to the large extent on the way the

46 Government address the fundamental legal issues, such as enforcement of contracts, private ownerships, security arrangements, taxes, remittance of foreign exchange and profits. Inadequate legal framework can undermine the strength and effectiveness of contracts for BOT projects. The elements of a legal and regulatory framework for implementing a successful BOT projects are: o The basic legislative authority for awarding BOT projects: It includes designating the individual ministries, government agencies authorized to procure and implement BOT project. It also includes passing regulations that define the responsibilities of the government agencies and ministries for the development and implementation of the projects, issuance of licenses and permits and central Government approvals. o Enabling public legislation: The Government may have to enact legislation authorizing the acquisition of land for the project, the transfer of public assets to the project and provision of work permits or other necessary government input. o Adequate security legislation: The creation and protection of security interests, mortgages and liens in respect to project assets in favour of the lenders and enforcement of remedies under the security package should be assured by country’s legal system. o Legislation to promote foreign investment: Various incentives should be given to the sponsors like the right to exchange local currency into foreign currency, simplified import licensing and custom procedures, right of foreign investors to establish companies in the country, tax regime for foreign investment etc. o Protection of contract rights under the governing law and by adequate legal institutions. 4.4.2 Administrative Framework for BOT projects:

The Government must establish a credible and efficient administrative framework to successfully implement the BOT projects. The potential sponsors and lenders will evaluate the organization, experience and procedures of the procuring administrative entity, an efficient administrative framework will accelerate private sectors investment in BOT projects.

47 o Planning and coordinating: The governmental agency helps the private sector in doing the proper economic and financial analysis of BOT projects. It also helps by drafting the model or standardized project agreements and provides consultancy services for examining the implementation of BOT projects. o Administration for BOT projects: As a BOT project requires approvals, permits and licenses from several ministries, agencies and local authorities the Government helps the private sector in getting clearances to avoid costly and unnecessary delays. o BOT training programmes for administrative personnel: The Government should train its administrative staff personnel to understand and appraise BOT projects thus, helping in meeting the Government’s objective. 4.4.3 Government incentives and other forms of support The Government recognizes the need to provide incentives and some direct or indirect support to BOT projects. The extent and type of support varies considerably, depending on other things like force majeure risks, the feasibility of the project, the country’s need for the project etc. o Tax incentive and concessions: Private sector investors in BOT projects enjoys tax concessions, like exemption from corporate tax, exemption from income tax for foreign project staff, reduction from real estate tax, reduction of import duties on equipment, raw materials etc. o Land and other Logistical facilities: Government provide the land on which the project is to be built, constructs the associated infrastructure facilities, including access roads, transmission lines and communications. o Contribution of existing assets by the Government: In this the Government gives the right to the sponsor to operate and earn revenues from existing assets like toll roads etc. o Government guarantees and stand-by financing: The Government provides various guarantees like protection against the loss of expected revenues due to competing projects, provides with the subsidy support to cover the difference between the full commercial price and the actual user charges. It also provides the protection against currency exchange risk and uninsurable force majeure events.

48 o Loans and Equity contributions: Government provides direct loans and direct equity investment from Government assures the private sector the Government’s involvement in the project and thus helping in bringing down the cost of the project. o Attractive risk-reward provisions: The Government allows the project company to earn a certain return on their equity investment and after that to distribute the excess revenue between the company and the Government entity according to the pre-arranged formula.

4.5 Contract Package and Project Agreements
A BOT project involves a number of important contractual arrangements among the participants. In a BOT project, the agreements are used to define the respective rights, obligations and risks of each party. The various contracts or agreements involved in Contract Package and Project Agreements are: o Consultant Agreement. o Preliminary Consortium Agreement. o Project Company Agreement. o Concession Agreement. o Construction Agreement. o Equipment Supply Contracts. o Operation and Maintenance Contracts. o Insurance Contracts. o Financing Contracts. o Security Package. 1. Consultant Agreement: As the Government lack expertise in the field of BOT agreements and related matters so it needs to recruit outside consultants to help in identifying and defining the project and putting together its request for the proposal. This includes three types of expertise: o Technical expertise in Road Sector.

49 o Financial Consultancy, for knowledge about potential sources of funding, financing structures and instruments, foreign exchange, capital markets, feasibility studies etc. o International Business legal counsel to help the Government draft or review necessary documentation, and help establish the contractual documents with project sponsors. 2. Preliminary Consortium Agreement: It is the first contract between the initial sponsors referred to as preliminary consortium agreement or joint venture agreement. The initial sponsors enter into this agreement in order to respond to a government request for proposals. The agreement among sponsors provide terms for initial sharing of the substantial costs required to do the feasibility studies, to hire outside advisers, to prepare tenders and to do other preliminary development work. 3. Project Company Agreements: In a BOT scheme, the project company includes a number of active and passive sponsors, such as contractors, equipment and material suppliers, government agency, operators and investors so, the contractual agreements among the final consortium members will expand and will establish long term binding commitments among the parties. 4. Concession Agreement: The project agreement is central to the BOT projects. The project agreement sets forth the rights and obligations of the Governmental agency and the project company. The obligations of the Government are as follows: o Authorize the project company to be engaged in the project for the period of concession. o Provide the land, rights etc. required for the project. o Provide access roads and utilities for the project. o Agree not to authorize competing projects. o Provide for inflation adjustment, foreign exchange convertibility and exchange rate protection to the degree necessary. The obligations of the Concessionaire are: o Design, develop, finance, construct, complete, test, commission, operate and maintain the project according to specific design and performance criteria.

50 o Protect the environment through appropriate use of pollution control equipment and environmentally sound construction and operation techniques. o Provide periodic reports to the supervising government agency and give it access to the project for inspection purposes. o Provide insurance coverage for the project, pay liquidated damages to the government for delay or failure to complete the project or to meet the expected performance. o Transfer the project in a good working condition to the Government at the transfer date. 5. Construction Agreement: It is the agreement that is signed between the project company and the contractor for the construction of the facility, it puts the project company, the equity investors and lenders and the Government at risk. This agreement ensures that the project construction is completed timely and within the budget and it meets the standards of performance. 6. Equipment Supply Contracts: If the project requires substantial heavy equipment in addition to the construction itself, the project company will sign a contract with equipment supplier for the supply of such equipments. 7. Operation and Maintenance Contracts: In many BOT projects, the project is not operated and maintained by the project company itself but is contracted out to a firm experienced in the operation and maintenance of the facility. The O&M contract will define parameters for operating efficiency, it includes penalties for failure to meet the efficiency level. 8. Insurance Contracts: A BOT project requires extensive insurance coverage, including casualty, third-party liability and business interruption insurance. 9. Financing Contracts: These are the contracts between the project company and the lenders for the commitments of the loans or principle debt amount or the standby loans or bank guarantees to cover cost overruns or delays during construction or revenue shortfall during operations. 10. Security Package: The lenders to the BOT project requires fairly elaborate security arrangements. Like the project revenues are usually paid not to the project company but in the escrow accounts maintained by an escrow agent. The escrow agent is one of the banks hat are acting as lenders to the project. Payments are made

51 from the escrow account according to the stipulated priorities. The lenders insist that escrow accounts are to be maintained in order to pay debt service for a minimum period before any distributions are made to the equity investors. The benefits of the various contracts entered into by the project company as well as the other assets of the company are assigned to a trustee for the benefit of the lenders. Numerous policies insuring against a variety of risks are secured. Lenders requests the Government support to protect lenders against the risks which are out of control and causes the project to fail.

4.6 Identification of Risk Matrices and Instruments for Mitigation
4.6.1 Risks involved in Road Sector Projects
Choosing among the options for private participation depends on the particular needs of the country and the nature of risk sharing between the public and private sectors. The risk to which each party is committed through the contract is to be clearly defined as well as understood so that disputes may not occur and the responsibilities will be based on the assignment spelled out in the contract. The rule of thumb is that private road infrastructure projects work best when project risks and responsibilities are assigned to the party that can best bear them. The private sector is generally better managing commercial risks and responsibilities, such as those associated with construction, operation and financing. In contrast, toll roads may also depend on public participation in areas such as acquisition of right-of-way, political risk and in some cases, traffic and revenue risk. The government considers giving financial support or guarantees if traffic levels in the early years are insufficient. The main risks involved in road sector projects are: o Political Risks o Construction Risks o Market and Revenue Risks

52 o Finance Risks o Legal Risks o Operating Risks In addition, contracts commonly address Force Majeure and legal liability because they have proven to be the serious sources of cost overruns in the sector.

1. Political Risks:
Political risk concerns government actions that affect the ability to generate earnings. These could include actions that terminate the concession, the imposition of taxes or regulations that severely reduce the value to the investors, restrictions on the ability to collect or raise tolls as specified in the concession agreement etc. Many projects are delayed because of the difficulties of acquiring right-of-way or environmental clearances that both the governments and the operators underestimate. Government generally agrees to compensate investors for political risks, although in practice, governments may cite justifications for their action to delay or prevent such payments. Thus, private investors generally assume the risks that are associated with the dispute resolution and the ability to obtain compensation if the government violates the concession agreement.

2. Construction Risks:
A common cause of cost overrun stems from design changes and unforeseen weather conditions during the construction phase. The private sector typically bears primary responsibility for the construction uncertainties and attempts to cover it through insurance. The public sector may assume responsibility for risks under its control such as competing complementary facilities or allowing cost increases associated with major design changes.

3. Market and Revenue Risks:
Demand uncertainty continues to be a major factor in most of the projects. Traffic and toll levels may not be sufficient to cover all costs, including construction, operation and maintenance. The private sector fully depends upon the government for the handling of the traffic and revenue risks.

4. Financial Risks:

53 Financial risk is the risk that project cash flows might be insufficient to cover debt service and then pay an adequate return on sponsor equity. Financial constraints like lack of long-term debt capital hinder the road development projects. Non-availability of local or domestic finance markets may lead to the higher risks for road sector projects which need long-term financing. Currency risks involve the impact of exchange rate fluctuations on the value of domestic currency. It can subject to the convertibility as the operator may not be allowed to convert the local currency into the foreign currency. Financial risks are best borne by the private sector but a substantial government risk sharing is required either through revenue or debt guarantees or through participation by state or multilateral development institutions.

5. Legal Risks:
Regulatory risk stems from the weak implementation of regulatory commitments built into the contracts and the laws or other legal instruments that are relevant to the value of the transactions as it was originally assessed. The major risk lies on the part of the concessionaire like lack of power and capacity.

6. Operating Risks:
Operating risks are the risks that emerge at the time of the operations of the project on the part of operator’s default. It can also involve the risks like force majeure risks that are beyond the control of both the public and private partners, such as floods or earthquakes, or other non-political factors such as strikes and industrial disturbances that impair the project’s ability to earn revenues. Sometimes private insurance is becoming available for catastrophic risks but generally public sector faced with the need to restructure the project if such disaster or problem occurs.

4.6.2 Instruments for Mitigating Risks:

54 1. Equity Guarantees: These provide a concessionaire with the option to be bought out by the government at a price that guarantees a minimum return on equity. Although the liability is contingent, the government effectively assumes project risk and reduces the corresponding private sector incentives. 2. Debt Guarantees: These guarantee that the government will pay any shortfall related to principal and interest payments. Sometimes, the government also guarantees the scheduled refinancing. This creates significant government exposure and reduces private sector incentives, although it may decrease the cost or increase the amount of debt available to the project. 3. Exchange Rate Guarantees: These are the guarantees where the government agrees to compensate the concessionaire for increases in financing costs due to exchange rate effects on foreign financing. Exchange rate guarantee helps in increasing the incentive to use foreign capital. 4. Grants/Subsidies: Government can furnish grants or subordinate loans at project inception, which helps in buying down the size of the project that needs private finance. Generally these grants or subsidies have no provision for repayment. 5. Subordinated Loans: These can fill up a gap in the financing structure between senior debt and equity. These types of loans have attractive features that they can be repaid with a return if the project is successful. Subordinated loans improve feasibility by increasing the debt service coverage ratio on senior debt and by reducing the need for private equity that needs higher return. 6. Minimum Traffic and Revenue Guarantees: In these types of loans government compensates the concessionaire if traffic or revenue falls below a minimum threshold, which is generally set 10 to 30 percent below the expected volume. Traffic and revenue guarantees help in retaining the financial incentives in the project. 7. Shadow Tolls: In this the government contributes a specific payment per vehicle to the concessionaire as toll, rather than the user. These are the ongoing revenue stream

55 from the government in lieu of an up-front grant or loan and as these are paid over time, these leads to a less burden on the public on the public budget. 8. Concession Extensions and Revenue Enhancements: These provide financial support that involves limited public sector risk, but they do little to support or enhance private financing. A government can firstly extend the concession term if revenue fall below a certain amount and can restrict the competition from the ancillary services.

1.
Potential Risk

Political Risks.
Exposure Concession Company Project Lender & of Risk Mitigation Measures.

Lack of power and capacity Obligations of Grantor

of

Grantor to bind the State, and to pay compensation (and/or are void pay operating charges),

Legal due diligence

Nationalization; discriminatory changes in law; political force majeure event; abandonment of Project by Grantor; default by Grantor

Project is lost or is not viable

Obtain right for Company

to

compensation from Grantor for project loans, equity and lost profits; exclude right of Grantor to terminate in these circumstances; obtain political risk insurance

56

Change in law not specific Returns to Sponsors Obtain right for Company to to the Project; increase in are taxes service less; may debt increase tariff; require Sponsors to be put in new money; otherwise a project risk

jeopardized

Breach by the Grantor of Users exclusivity

may

use If serious enough and not cured obtain right for Company to terminate; otherwise obtain right

obligation; competing facilities; threatened

failure by the Grantor to concession meet undertakings to assist

viability for Company to claim damages

of the Project is from the Grantor

Approval of tariff increases Project is not viable is not given

Obtain decision;

right

to

appeal right

tariff to

obtain

compensation of the Company by the Grantor for cash deficiency; require Sponsors to put in new money; otherwise a project risk

2.
Potential Risk

Construction Risks.
Exposure Concession Company Project Lender & of Risk Mitigation Measures.

Cost overruns; unanticipated Delays, variations, time extensions

increased Require a lump sum, fixed time construction contract with little scope for variations; claim damages; call performance bonds;

project debt

57 draw on standby loans; require Sponsors to put in new money; otherwise a project risk

Contractor is an investor in Contractor the Company and

has

a Ensure independent Sponsors and of Construction

conflict of interest Project Lenders are involved in the construction negotiation contract may be too Contract; easy on Contractor

Contractor/Supplier defaults Delays or goes bankrupt

Due diligence on Contractor/ Supplier; claim damages call performance bonds

Site acquisition problems; Delays problems squatters Access problems to adjacent Delays areas with removing

Ensure

there

is

expropriation

legislation

Ensure that Grantor obtains access rights for Company

Adverse site conditions

Delays, costs

increased Obtain

a

comprehensive require

site

survey; pass this risk on to the Contractor; insurance adequate

Existing damage/

environmental Delays

Obtain agreement by the Grantor for compensation payments to the Company, and right to extend the

Archeological remains

58 concession period

Change in law or Grantor Project unilaterally requires design increased; changes

cost

is Obtain agreement of Grantor to

Project accept responsibility for payment

may not be viable; of design changes or to authorize new loans may not tariff to be increased to pay be able to be raised; additional finance costs Delays

Variations and changes in Increased design Company, third party requested Contractor or

finance Ensure that the Company, the Grantor and the Contractor agree to “back to back claims” principle; require Sponsors to put in new money in the required amount

by costs and delays

Environmental damage and Delays, force majeure events costs

increased Require adequate insurance; claim on insurance; obtain right for the Company to terminate the concession or to be granted an extension to concession period

3.
Potential Risk

Market and Revenue Risks.
Exposure Concession Company Project Lender & of Risk Mitigation Measures.

Inadequate

traffic

or Deficiency in debt Due diligence - require sound service inadequate and traffic studies; try to have right to returns increase tariff; try to have

tolls/fares are inadequate

59 to Sponsors deficiency guarantee or subsidy from Government; increase concession period and refinance loan facilities; Sponsors required to put in subordinated loans; otherwise project risk.

Consumers do not accept Deficiency in debt tariff levels and traffic drops service off inadequate to Sponsors and returns

Require Grantor to compensate Company for cash deficiency where due to breach by Grantor of its obligations; otherwise a project risks.

Concession too high

fees

and Deficiency in debt Ensure fees and subordinated inadequate to Sponsors

and profits are to debt service

Grantor’s profit shares, are service

returns payable to Project Lenders

Authorization the Grantor

for

tariff Deficiency in debt Require Grantor to compensate and Company returns reference for to shortfall debt (by inadequate to Sponsors service

increases is not granted by service

coverage); require Sponsors to put in new money; otherwise a project risk.

60

4.
Potential Risk

Finance Risks.
Exposure Concession Company Project Lender & of Risk Mitigation Measures.

Borrowings

in

local Increase

in

debt Raise loans in foreign currency; structure with balloon payment at end of loan term repayment of which loan term is guaranteed by multilateral; refinance at end of

currency carry high interest service rates and/or loans with long tenors and/or are there unavailable is limited

ability to enter into swaps

Loans are raised in foreign If foreign currency Require that Company hedges its currency and there is a is borrowed, when forex exposure; devaluation currency of obtain right for local converted, there is Company to increase tariff by a insufficient money, percentage related to the rate of to pay debt service devaluation

Increase in interest rates

Increase service

in

debt Fix interest rates; enter into swaps; obtain right to increase tariff by a percentage related to interest rate increase; drawdown of standby loans; require Sponsors to make subordinated loans

Increases in operating costs Decrease in funds Obtain right to increase tariff due to inflation available for debt based on CPI basis or based on

61 service rate of increase in prices of component costs

Foreign currency is not available

Foreign

currency Obtain agreement from Central

debt is not able to Bank to procure foreign currency; be repaid in foreign obtain agreement from Project currency Lenders to accept equivalent value in local currency

5.
Potential Risk

Legal Risks.
Exposure Concession Company Project Lender & of Risk Mitigation Measures.

Concession Company does Security of use of key assets

is Site inspections and legal due

not have ownership or rights worthless; viability diligence; make this an event of of Project may be default under Loan Agreement in doubt Concession Company not Concession able to satisfy conditions Contract may precedent Agreement in Grantor; and Project Concession terminated by the Sponsors possibly Lenders Ensure that conditions precedent be are within Company’s control

lose their upfront costs and expenses Concession breaches Contract Company Concession Concession Contract may Obtain grace periods and step-in be rights for the Project Lenders in

terminated by the Concession Contract; obtain debt

62 Grantor; principal interest Concession bankrupt, occurs Agreement Company insolvent under is Concession or Contract may to Loan terminated Grantor; principal interest Security is not enforceable Project Lenders risk Legal or is deficient loss of and interest due diligence; obtain Project assumption agreement or

Lenders risk loss of obligation to repay the project and loans from the Grantor; Sponsors lose their equity Obtain grace periods under

be Concession Contract; Ensure that be Project Lenders have right to by enforce security; obtain right for a

another event of default able

Project Substituted Entity to take over the and

Lenders risk loss of Concession

principal guarantees from Sponsors

6.
Potential Risk

Operating Risks.
Exposure Concession Company Project Lender & of Risk Mitigation Measures.

Lack

of

exclusivity

to Inadequate a debt

traffic Obtain traffic studies and get an service Grantor/other Agencies Governmental

prohibit concessions

competing which may lead to exclusivity agreement from the deficiency

Lack of interconnection and Inadequate contribution infrastructure of a debt

traffic Analyze

interconnection

existing which may lead to requirements and get Grantor / service Transport Authority to implement

63 deficiency them

Force majeure events

Interruption operations Grantor entitled terminate debt deficiency

in Ensure

there

is

adequate

which insurance; require the Company to being standby loans to pay for the to damage repairs; obtain grace the periods and right for extension to service Concession Contract

may lead to the claim on insurance and/or draw on

concession and to a the concession period in the

Operator

default,

or Interruption operations; Concession terminated

in Claim on performance bonds; claim damages from Operator; ensure there are grace periods in O&M Contract; appoint new

becomes bankrupt

Contract may be Concession Contract; terminate Operator

Default Company Contract

by

Concession Operator may claim Ensure there are grace periods in under O&M damages; Concession Contract may be terminated O&M Contract; obtain step-in rights for the Project Lenders

64

Strikes

and

industrial Interruption operations; Concession terminated

to Ensure that Company obtains the agreement for the Operator to be responsible for this and ensure obtain grace periods in Concession Contract; obtain step-in rights for the Project Lenders

disturbances

Contract may be there is a right to claim damages;

Operating costs are too high

Reduction in cash Ensure that there are controls in available for debt the O&M Contract; ensure there service are termination rights for the Company in the O&M Contract if costs remain high

Failure of “technology”

Interruption operations; Concession terminated

to Due diligence; obtain technology feasibility reports; ensure there is a right for the Company to claim from technology providers

Contract may be damages

5. Lessons from International Experience

65

5.1 International Practices
The principle countries pursue four different approaches or forms of entities for construction and operation of Road Sector Projects. The four approaches are as follows: o Government Agency o Public Corporation o Private Concessions o Public-Private Partnerships All of these approaches have their on advantages and disadvantages. 1. Government Agency: In case of a government agency as entity, which is a case in Indonesia, Malaysia, the Philippines, Thailand and United States, the advantage is the potential for comprehensive, systematic and uncontradictory network planning and extension. The disadvantages are the need for prioritization of competing fund usage because public funds are often not enough to meet network development needs timely and the difficulties often faced to improve cost effectiveness and operational efficiency. 2. Public Corporations: The Public Corporations as entities are employed

in countries like Japan, Indonesia, Thailand, France and the Philippines. The advantages in this case are their stronger impact in pursuing in a coherent manner government road and expressway network development goals, but the potential for cross subsidizing among routes in a network. Disadvantages of Public Corporations are normally that they lack incentives to respond timely and efficiently to changing market conditions and they lack incentive for cost reductions and they are generally less efficient than private entities. 3. Private Concession: Private Concession entities are widely pursed now in Argentina, Brazil, Chile, Colombia, France, Hungary, Mexico, Spain, Hong Kong, SAR(China) and the United States. The advantage in this type is that they are more efficient and they show a stronger tendency to respond quickly to changing market conditions. The main disadvantage of this type is that they can lead to difficulties in overall network planning and extension realization.

66 4. Public-Private Partnerships: Public-Private Partnerships as entities are

employed in countries like Hungary, Columbia, SAR(China), Indonesia, and Philippines. The advantages of this type are that they bring additional resources to the project and complete in a shorter time, leads to increase in efficiency in construction and project operation, through market discipline, assuring the project is completed on schedule and within the budget.

5.2 Advantages and Disadvantages of Common Government Support Measures for Toll Road Development
Support Measures Comfort Letter China Contents Advantages Disadvantages A legally non-binding Can provide Not legally letter support actions stated in agreement performance issued to to not by financiers give sponsors clearly assurance such of as government a support is and binding a when implicit government

certain minimum level of

contractual no

public corporation as a attainable. Land Acquisition China, United States grantor of concession Expropriation of right Helpful for the Delays construction. Cost of because the right land acquired maybe of government concessionaire. or the with support expropriation resides the usually borne either by the usually

Thailand, of way for toll road concessionaire

government. This improves "project economics" to a great extent when implemented at

67 no cost to the Extension Concession Period Indonesia and others of Measure to sponsors. provide Improves project Effect on current cash small. flow is

compensation for the economics. loss of profit due to circumstances caused of Contributes by the government of Construction connecting

Construction Related Facilities United Thailand and others

Construction to delays may impair

roads, significantly

Kingdom, access ramp, etc.

the project since critically connecting roads the and facilities critical for commencement of operation. is Facilitation of the Weak closing may

other commencement are of operation. elements

Revenue Support Malaysia, (SAR)

Revenue

support

design impose a

China usually done with a finance compensation paid by

minimum threshold for and the project. the government. Sharing Deriving revenue from Possible Existing an existing toll road mitigation

large contingent liability on the government. Revenue sharing of formula requires design. burden and

Revenue with Facilities Malaysia, others

facility; can take the revenue shortfall careful Thailand, form of taking over the risk in the startup Possible facility years. employees including debts. Toll is debts,

United Kingdom and complete

when all assets, employees are to be transferred. of Possible financial inflexibility in

and assets as well as Shadow Toll Argentina paid by Facilitation

United Kingdom and government according private financing burden/fiscal to the vehicle-km of the without traffic counted stimulating the later years;

68 automatically. resistance tolling. Provisions Development of Right of commercial Enhancement and development along the project toll road to supplement economics. to may tolling. of Excessive dependence impair on this measure may project economics. of Arrangement may be time and consuming hinder

transition to real

Third-Party Revenue (SAR) Subsidies/Grants Spain

Malaysia and China project economics. Government support Enhancement

Chile, Colombia and both in cash and in project kind such as land and economics. facility.

implementation may be delayed; possible risk of undue governmental intervention, "moral hazard," etc. of Possible of it is project interest

Subordinated Loans Malaysia and others

A type of loan for Facilitation which repayment to is finance the because subordinated loan). some institutional

closing deterioration

senior loan (ordinary treated as equity; economics due to Government, could be used as higher facility cost. cost and cases, to mitigate risks investors such as parent company and, in stand-by

are providers of the overrun is higher than for a Foreign Guarantees senior debt. Exchange Compensation impact caused for Facilitation

loan. The intersect rate revenue shortfall.

of Possible

large

by finance closing in contingent

69 Indonesia, Philippines devaluation and Spain of local foreign currency liability for the in

currency. It could be when country risk government formula. high. on Facilitation currency

built into the tariff in this respect is the event of large devaluation. of Possible large contingent liability for the government; moral hazard for concessionaire Equity Guarantees Guarantee investment. of equity Facilitation and implementation. and lenders. of Possible large liability for the government; moral hazard for concessionaire and investors. other

Loan Guarantees

(Bond) Guarantee

repayment of loan and finance closing. on redemption of bond

China and others

project proposals contingent

70

5.3 Examples of Toll Adjustment Procedures
Country France Example Government discretion. Description of Approach Toll rate adjustments are at the discretion of the Ministry of Finance, which tends to approve larger increases for less profitable companies. The French approach avoids unnecessarily high returns to investors, but at the risk of sacrificing efficiency by undermining incentives to make exceptional efforts Japan to control costs or improve productivity. Use of an advisory The Japanese toll revenue pooling system requires a committee to the reexamination of total cost redemption every time Prime Minister. there is an expansion of the expressway network (i.e. when the Minister of Construction issues a construction order for a network addition). When the cost of constructing a network expansion or other significant period, the improvement proposal requires goes a toll rate adjustment and/or an extension of the toll collecting through official government procedures involving a review and examination by a “Toll Committee” and approval by Spain Use of MOC and MOTC reflecting public hearings. formula Spain’s approach to regulating the toll rates of concessionaires is based on a formula linked to price inflation. The Spanish approach has the merit of promoting new investment and efficiency, and it has only limited risks of unnecessarily high returns to investors, since “excess” profits are moved to a Special Reserve. Hong Kong A sophisticated yet If traffic and therefore revenue falls below a forecast SAR straightforward toll volume, the TAM will allow the operator to advance adjustment formula(TAM)-“be st Practice”. the prespecified date of a toll increase. Conversely, if the amount of revenue received by the operator is above the forecast, resulting in a rate of return that

linked to inflation.

71 exceeds a specified range, a toll increase will be Philippines deferred. An advanced toll Mandated by Presidential Decree No. 1894, it is adjustment procedures. based upon a parametric formula that takes into account prevailing local and foreign interest rates, the consumer price index, currency values, and a construction materials price index. However, if toll road investors happen to receive a windfall, there is no profit-sharing clause—the investors keep all of Indonesia Uncertainty adjustment procedures. the reward. in Under Law No. 13/1980, the designation of a road section as a toll road and the determination of initial toll tariffs require Presidential approval of proposals made by Minister of Public Works. The concession company proposes tariff adjustments every two or three years based on a formula incorporating the consumer price index, but approval cannot be guaranteed by the government. Uncertainty over the toll adjustment procedure may discourage private Mexico Uncertainty adjustment procedures. investors. in Both toll increases and decreases typically require approval of the Secretariat of Communications and Transport, which restricts most concessionaires’ abilities to responsively adjust pricing to optimize Malaysia An approach revenues once the roads were open to traffic. for The proposed new method is to annex the forecast traffic volume to the concession agreement. If the

addressing

uncertainty- similar actual traffic level is more than the forecast level at a to that of Hong specified time, the Government could request either Kong SAR. the deferral of a toll rate increase or lowering of the level of toll rate increase; but if the actual traffic is less than forecast, the concessionaire could request to bring forward the timing of toll rate increases.

72

73

6. The Way Forward – Opportunities for PSP in Road Sector Development
6.1 Opportunities exist in
o Highway construction. o Widening of about 38 percent of National highway from single to double lanes. o Strengthening of about 60 percent of the two lane roads. o Highway related on route activities like restaurants, motels and rest/parking areas as may be decided by the Implementing Agency.

6.2 Findings
o Private sector is still reluctant to invest in the infrastructure projects because of the high risk of traffic volume and long gestation period. o In the annuity projects the entire revenue risk is fully borne by the government and it imposes a high financial burden on the government for a long period. o Government departments have abundant technical expertise but there is a lack in financial management. o Infrastructure financing is in its recent stage, only few projects have been completed under these implementing models, the agreements or documents related to these have not been scrutinized in the court of law or no judgements have been passed yet. o Undeveloped Domestic Capital Markets, lack of proper instruments to meet the requirements for the infrastructure projects. o No foreign funding in infrastructure projects. o No single window clearances: Lengthy procedures for getting clearances.

74

6.3 Recommendations / Suggestions
o Government should try to remove the bottlenecks in the financing of infrastructure projects and ease the legal procedures and formalities. o Single window clearances for the projects, like environmental clearances, land acquisition problems etc. o Government should try to provide as many incentives as it can like tax incentives and concessions, loans and equity contributions, land and other logistical facilities, risk rewards etc. o Need to develop innovative mechanisms / products for private sector participation like securitization, annuity model, assured returns etc.

6.4 Conclusion – The Middle Path
The country is poised to take up infrastructure projects comprising huge road network of expressway standard and other similar roads. Adoption of private financing for such projects is an almost inevitable course of action. However, it appears that the private sector is not yet ready to handle all these projects, particularly the mega projects costing a few hundred crores for various reasons. Conscious efforts must be made by the Government to nurture the private sector to acquire the competence to handle this mammoth job. Building up of conducive environment for private participation should also be task on hand. However in the intervening period, the execution of such projects through the medium of Government corporations acting as BOT entrepreneurs seems to be the most appropriate option, this can be termed as the contemporary middle path. The maturing of the investing community in course of time will result in the emergence of lenders and investors with different risk profiles and the capacity to assess and assume risks of varying types and degrees. As most infrastructure projects have long gestation periods, entirely different set of investors may be associated with the project during their development, construction and operation phases depending on their risk appetite.

75 Mobilization of resources on the scale required for appropriate road infrastructure development would be possible only in the environment which protect the interests of the road users and also assures a reasonable rate of return to the investors. In this context, the need for strengthening the institutional setup as well as adopting new financial instruments is self-evident and needs no reiteration. Innovative application of new financing modalities would, perhaps, provide the required impetus for attracting large private investment flows in road infrastructure projects.

76

Model
7.1 Description
This is a BOT (Toll Based) model of a four lane, 53 km long road project. A BOT (Toll Based) project involves private party bidders who invest in the project and get returns from the tolls collected during the operations. The total project cost is Rs. 322.60 crores and the construction period is 30 months beginning from 1st April 2008. In the model, the expenditure phasing has been done for a typical road project. The impact of financing pattern on expenditure phasing and thus on the overall cost of the project can be easily analyzed in this exercise. Also taken into account is the tax holiday afforded to the infrastructure projects in the Union Government Budget to compute the tax provisioning requirements. In this project EPC cost, traffic volume and phasing of the cost is provided by the Governmental agency and is given to make the project financial feasible by using the various mix of the finance options available for the project in order that the project can attract the private investors with a good rate of return. In the end the sensitivity analysis has been done to study the impact of changes in the interest rate and financing pattern on the Project IRR and the total Project Cost. The model is prepared in Excel Sheet and involves the calculation of Toll Revenues expected, DSCR i.e. Debt Service Coverage Ratio. (see appendix B)

77

7.2 Sensitivity Analysis
BOT (Toll Based) Model CASE - I CASE - II
No Grant DEBT EQUITY GRANT GEARING Equity Amount Debt Amount Grant Amount Project IRR Cost of Capital Avg. DSCR (Amounts in crores) (see appendix B) 70% 30% 0% 2.33 99.75 232.76 0 11.39% 13.40% 1.17 10% Grant 60% 30% 10% 2 98.25 196.51 32.75 11.42% 12.00% 1.19

Case III
20% Grant 50% 30% 20% 1.67 96.78 161.3 64.52 11.25% 10.60% 1.37

7.2 Internal Rate of Return & Debt Service Coverage Ratio
The IRR is that discount rate that makes the net present value of the expected returns of a project zero. The advantage of IRR is that it can be used even when the discount rate is unknown. Here we have calculated IRR based on the cash flows generated from the toll

78 collected and then its compared with the total investment of the project. Further the IRR is compared with the cost of capital to get a clearer picture w.r.t. the financial attractiveness of the project. As we know that if the IRR > cost of capital then accept that project and if IRR < cost of capital then reject the project. Here we can see that the IRR of the project is 11.25% which is greater than the cost of capital of the project which stands at 10.60%.Hence, we can clearly judge that the project is an attractive project. Further to measure the monthly debt payment ability of the project we have calculated the DSCR i.e. Debt Service Coverage Ratio because it refers to the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations and the higher this ratio is, the easier it is to borrow money for the enterprises’ property. If DSCR is less than 1 then it would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments In general, DSCR = Net Operating Income / Total Debt service. As we can see that after making necessary calculations the DSCR comes to 1.37, which is greater than 1, so, we can comfortably conclude that the project is a lucrative one and the interested entrepreneurs should not hesitate to bid for such toll based BOT projects, but only after one follows the method prescribed here in this research. (see appendix B)

Bibliography
Reports & Other Publications
1. Seminar on Financing, Implementation and Operation of Highways in 21st Century (New Delhi, 24 – 25 March, 2008.)

79 2. A Report on Road Sector in India, IIM Ahmedabad. 3. The Feasibility Study on the construction of Expressways in the NCR in India: Final Report, IL&FS. 4. Guidelines for Infrastructure Development through BOT Projects, NHAI. 5. Privatization and Regulation of Transport Infrastructure, World Bank Institute. 6. National seminar on Road Development, “The Emerging scenario”, 14 March 2008, New Delhi held by Confederation of Indian Industry. 7. Brochure of NHAI. 8. India Today July 24 2007 edition.

Concession Agreements:
I. II. Moradabad Bypass Project. Delhi – Noida Project.

Websites / Weblinks
I. II. III. V. www.nhai.org www.nic.in www.worldbank.org www.ciionline.org

IV. www.indiainfoline.com VI. www.ficci.org VII. www.jkr.gov.my

80

APPENDIX: A

81

Model of Concession Agreements under BOT scheme Moradabad Bypass Project:

Details Promoter Method Financing Concessionaire

Construction of 4-Lane Expressway along an 18.22 km stretch from 148.43 to166.65 on NH-24 in Uttar Pradesh NHAI of Special Purpose Vehicle (SPV) on BOT basis. Moradabad Toll Road Company, incorporated underthe provisions of the Companies Act 1956 30 years 22 Feb 1999. Project Cost 103.5 crores. Debt-Equity Ratio 70:30. Debt 72.45 crores: 40 crores from IDFC @ 13.25% : 32.45 crores from SBI Equity 31.05 crores : 26.55 crores by NHAI : 4.5 crores by EPC Contractor UP State Bridge Corporation Borrower has to repay the principal amount of loan in 36 quarterly installments commencing from September 15, 2004. Backended.

Concession Period Agreement Date Financial Package

EPC Contractor Repayment Schedule

Repayment Pattern Financial Risk & • The project has been funded through non-recourse Mitigation project financing, thus no claims on NHAI’s balance Framework sheet. • NHAI has provided a debt service coverage of Rs 5 crores, until the debt service revenue is build up. Demand / Market • The need to the project is well established by the Risk & Mitigation congestion levels in the city thus alleviating the non Framework usage risk by the users. • NHAI levies uniform toll rates thus alleviating the non usage risk by the users. Legal / Regulatory • NHs Act has been amended thus enabling the Risk & Mitigating Government to offer concession to the private party Framework to finance, design, construction, operate, maintain the facility and collect toll from the users. Construction Risk • The EPC contractor owns the design risk by & Mitigating constructing the project as per his own design. Framework • Contractor’s equity has been adjusted against payments due to them for construction work

82 completed. Operating Risks & • Incase cost overruns in maintenance, it would be Mitigating directly funded byNHAI. Framework • Incase, minimum revenue is not achieved NHAI has agreed to take the residual risk by providing revenue shortfall loan to the project company.

Delhi Noida Project:

Details

Promoter Sponsor Method Financing Concession Agreement Concessionaire

Project involves construction of 552.5 m long 8-lane bridge across river Yamuna in Delhi with about 5 km long approach roads, grade seperated interchanges to ease the traffic movement and semi-automatic toll plaza. / Sponsored by: Government of Uttar Pradesh, NOIDA Promoted by: IL&FS of Special Purpose Company (SPC / SPV) NOIDA & NTCBL.

Noida Toll Bridge Company Limited (NTBCL) incorporated under the provisions of the Companies Act 1956. Concession Model Fixed Return and Variable Period. Return on 20% p.a. Investment Concession Period 30 years and extendable till assured returns achieved. Financial Package Project Cost 408 crores. Debt-Equity Ratio 70:30. Debt 288 crores: Raised from IL&FS, World Bank Equity 120 crores: Participants NOIDA, IL&FS, IFCI, AIG Sectoral fund, Prudential fund. EPC Contractor NTBCL and EPC Contractor (Marubeni and Mitsui, JAPAN). Contract based on item rate contract and least project cost. O & M Agreement NTCBL & Inter-toll. Delivery of Project • sites • Unencumbered and vacant possession of the project sites to be delivered by the respective state governments to NTBCL as a condition precedent. The cost of land to be borne by Government and cost of rehabilitation and relocation of displaced people to be borne by NTBCL.

83 Transfer On conclusion of the Concession Period, the bridge hal be transferred to NOIDA and ashram Chowk Flyover, part of the project, to be handed over to Delhi Government. Other than the security of the assets of the project, additional rights as follows granted: • Right to cure a Concessionaire event of default if the Concessionaire is unable to resolve the problem within the cure period provided. • If NOIDA moves to terminate the agreement after the Concessionaire and lender’s inability to cure the event of default, Lender has the right to a substitute Entity to replace the Concessionaire. • Performance Bond from the EPC Contractor – post construction 18 months • Strict construction monitoring by the Project engineer • Provision to extend Concession agreement incase of non-achievement of 20% return over the 30 year period. • A debt service reserve to be maintained to ensure that servicing does not get adversly affected in the short run. • Concession Agreement provides for the land development rights upon the certification by independent auditor, incase of inadequacy of Project revenues from tolls Concessionaire assured of exclusivity till the bridge achieves rated capacity.

Lender’s Rights

Technology Risk Mitigation plan Risk of shortfall in traffic Mitigating Plan

Risk of competing traffic routes mitigating plan Poor Maintenance O&M contract has strict maintenance standards with of the facility performance based compensation package to the Contractor and penalties for non-compliance. Risk of O&M Costs O&M Contract is a fixed price contract with the risk of being higher than cost overruns being borne by the O&M contractor anticipated Force Majeure Comprehensive Insurance Coverage. Risk Mitigating Plan Political and Social NOIDA to atleast pay a compensation to meet the Risk mitigating outstanding liabilities of NTCBL towards lenders, incase plan of termination.

84

APPENDIX: B

85

Financing Parameters Length of Highway Total Project Cost (incl. development, financing costs etc.) Equity Brought upfront Debt as % of Project Cost Equity as % of Project Cost Debt /Equity Ratio Gearing Grant as % of Project Cost

53 Kms 322.60 0.50 50% 30% 50 : 30 1.67 20% % of total Equity 100% 0% 100%

Equity Rupee Equity Forex Equity Total Equity

96.78 0 96.78

Cost 12%

Economic Assumptions Date of Base EPC Cost WPI Toll Escalation Rate Date of Base Toll Rates Expenditure Parameters Annual O&M Expenses - for Original Capex - for Insurance Resurfacing after every 5 years Escalation Rate for O&M Book Depreciation Rate (SLM Basis) Tax Depreciation Rate (WDV Basis) Lenders Upfront Fee Corporate Tax Rate 01-Sep-07 6.25% 6.25% 01-Apr-08

0.50% 0.50% 18.20 6.00% 5.59% 10% 1.05% 35.70%

of Original Project Cost of Original Project Cost crores (as on COD) p.a. (95% of COD)

86

Traffic Assumptions Vehicle Type As on Toll Plaza 1

1 Traffic Volume COD 1114 482 129 772 2573 12451 1992-99 7.00% 6.50% 6.50% 6.50% 6.50% 5.97% 2000-05 7.50% 7.50% 7.50% 7.50% 7.50% Growth Rate 2006-2010 7.50% 7.00% 7.00% 7.00% 7.00% 20112015 7.20% 6.80% 6.80% 6.80% 6.80% After 2015 6.80% 6.30% 6.30% 6.30% 6.30%

1-Apr-01 Cars 850 LCV 375 MAV 100 Bus 600 HCV 2000 Total PCUs 9663 *Leakage may occur because of incomplete journeys/purely local traffic. Leakage may have to be provided for based on traffic study/survey. Traffic Assumptions Vehicle Type As on Toll Plaza 2 Cars LCV MAV Bus HCV Total PCUs Toll Rate Assumptions Vehicle Type As on Cars LCV Multi Axle Vehicles Bus HCV Traffic Volume 1-Apr-01 700 200 150 400 1500 7375

2.68

17.00

5.97%

Growth Rate COD 918 257 193 515 1930 9505 19962000 7.00% 6.50% 6.50% 6.50% 6.50% 20002005 7.50% 7.50% 7.50% 7.50% 7.50% 2005-2010 7.50% 7.00% 7.00% 7.00% 7.00% 2010 2015 7.20% 6.80% 6.80% 6.80% 6.80% After 2015 6.80% 6.30% 6.30% 6.30% 6.30%

Unit Rate (Rs./km) 1-Apr-97 1-Apr-05 0.40 0.65 0.70 1.14 1.40 2.27 1.40 2.27 1.40 2.27

87

EPC COST

247.00 1-Oct08 0.53% 1.30 1-Jan09 5.03% 12.43 0.11 0.25 0.39 0.44 0.05 0.00 0.00 1-Apr09 11.83% 29.23 1.25 0.58 0.18 0.05 0.06 0.00 1-Jul09 16.65% 41.11 3.44 0.82 0.18 0.00 0.05 0.48 1-Oct09 9.91% 24.47 5.53 0.49 0.18 0.00 0.05 1.28 1-Jan10 11.50% 28.40 3.72 0.57 0.18 0.00 0.05 1.98 1-Apr10 20.23% 49.96 4.82 1.00 0.18 0.00 0.05 2.95 1-Jul10 19.49% 48.15 9.36 0.96 0.18 0.00 0.06 4.22 1-Oct10 4.63% 11.44 9.90 0.23 0.18 0.00 0.06 5.15 1-Jan11 0.21% 0.51 0.00 2.56 0.01 0.2 0.14 0.00 0.02 5.54 1.00 0.37 1-Apr11 100.00% 247.00 0.00 40.69 4.94 0.20 1.79 1.35 0.49 0.00 21.60 1.00 1.69 1.86

Quarter Beginning

Total Cost Retention Money Repayment Escalation Contingency Vehicles(Ambulance, crane, jeeps etc) Supervision Charges Preliminary Expenses Preoperative Expenses Mobilisation Advance Interest During Construction System for Toll Plaza Lenders Fee Insurance Charges Total Project Cost Retention Money 0.00% Adjustment of Mobilisation Advance Balance Mobilisation Advance Net Project Cost Funds Drawdown Schedule Total Equity Loan Drawdown Equity Initial Upto 50% Equity Final Grant Drawdown Total Funds Drawdown

0.03 0.00 0.86 0.04 0.00 1.69 0.00

0.02

0.06

0.11

0.15

0.19

0.26

0.33

0.36

3.92 0.00 0.00 0.00 3.92

13.68 0.00 0.00 0.00 13.68

31.40 0.00 0.00 0.00 31.40

46.19 0.00 0.00 0.00 46.19

32.16 0.00 0.00 0.00 32.16

35.09 0.00 0.00 0.00 35.09

59.22 0.00 0.00 0.00 59.22

63.27 0.00 0.00 0.00 63.27

27.32 0.00 0.00 0.00 27.32

10.35 0.00 0.00 0.00 10.35

322.60 0.00 0.00 322.60

3.92 3.92

13.68 13.68

30.79 30.79 0.61 31.40

3.92

13.68

8.17 27.23 0.00 8.17 10.79 46.19

5.69 18.96 0.00 5.69 7.51 32.16

6.21 20.69 0.00 6.21 8.20 35.09

10.47 34.91 0.00 10.47 13.83 59.22

11.19 37.30 0.00 11.19 14.78 63.27

4.83 16.11 0.00 4.83 6.38 27.32

1.83 6.10 0.00 1.83 2.42 10.35

161.30 48.39 48.39 64.52 322.60

88

Projection of Average Daily Traffic Volume Year Beginning 1-Apr-11 Cars 947 LCV 410 MultiAxle Vehicles 109 Bus 656 HCV 2187 Total PCU's 10583 Year Beginning Cars LCV MultiAxle Vehicles Bus HCV Total PCU's Total Traffic 1-Apr-19 1689 718 191 1149 3828 18558 1-Apr-19 1391 383 287 766 2871 14168 32726 1-Apr-20 1816 768 205 1229 4096 19865 1-Apr-20 1495 410 307 819 3072 15167 35032 1-Apr-21 1946 820 219 1312 4375 21223 1-Apr-21 1603 437 328 875 3281 16204 37428 1-Apr-11 780 219 164 437 1640 8079 18662

1-Apr-12 1018 441 118 705 2351 11377 1-Apr-12 838 235 176 470 1763 8685 20062 1-Apr-23 2237 936 250 1497 4990 24225 1-Apr-23 1842 499 374 998 3743 18497 42721

1-Apr-13 1094 474 126 758 2527 12231 1-Apr-13 901 253 190 505 1896 9336 21567 1-Apr-24 2398 999 266 1599 5329 25881 1-Apr-24 1975 533 400 1066 3997 19762 45643

1-Apr-14 1177 509 136 815 2717 13148 1-Apr-14 969 272 204 543 2038 10037 23184 1-Apr-25 2571 1067 285 1708 5692 27650 1-Apr-25 2117 569 427 1138 4269 21114 48764

1-Apr-15 1265 548 146 876 2921 14134 1-Apr-15 1042 292 219 584 2190 10789 24923 1-Apr-26 2745 1134 303 1815 6050 29405 1-Apr-26 2261 605 454 1210 4538 22454 51860

1-Apr-16 1360 586 156 938 3125 15130 1-Apr-16 1120 313 234 625 2344 11550 26679

1-Apr-17 1462 627 167 1003 3344 16195 1-Apr-17 1204 334 251 669 2508 12364 28559

1-Apr-18 1571 671 179 1073 3578 17336 1-Apr-18 1294 358 268 716 2683 13235 30572

1-Apr-22 2087 876 234 1402 4672 22674 1-Apr-22 1718 467 350 934 3504 17313 39987

1-Apr-27 2932 1206 322 1929 6432 31272 1-Apr-27 2415 643 482 1286 4824 23880 55152

Projection of Toll Rates (in Rs.)

89

Year Beginning Cars ( 1 PCU) LCV MultiAxle Vehicles Bus HCV Actual Toll Rates (in Rs.) Year Beginning Cars ( 1 PCU) LCV MultiAxle Vehicles Bus HCV

1-Apr-07 34.43 60.26 120.51 120.51 120.51

1-Apr-08 36.58 64.02 128.05 128.05 128.05

1-Apr-09 38.87 68.02 136.05 136.05 136.05

1-Apr-10 41.30 72.28 144.55 144.55 144.55

1-Apr-11 43.88 76.79 153.59 153.59 153.59

1-Apr-12 46.62 81.59 163.18 163.18 163.18

1-Apr-13 49.54 86.69 173.38 173.38 173.38

1-Apr-14 52.63 92.11 184.22 184.22 184.22

1-Apr-15 55.92 97.87 195.73 195.73 195.73

1-Apr-07 35.00 60.00 120.00 120.00 120.00

1-Apr-08 35.00 65.00 130.00 130.00 130.00

1-Apr-09 40.00 70.00 135.00 135.00 135.00

1-Apr-10 40.00 70.00 145.00 145.00 145.00

1-Apr-11 45.00 75.00 155.00 155.00 155.00

1-Apr-12 45.00 80.00 165.00 165.00 165.00

1-Apr-13 50.00 85.00 175.00 175.00 175.00

1-Apr-14 55.00 90.00 185.00 185.00 185.00

1-Apr-15 55.00 100.00 195.00 195.00 195.00

1-Apr-16 59.42 103.98 207.97 207.97 207.97

1-Apr-17 63.13 110.48 220.97 220.97 220.97

1-Apr-18 67.08 117.39 234.78 234.78 234.78

1-Apr-19 71.27 124.72 249.45 249.45 249.45

1-Apr-20 75.73 132.52 265.04 265.04 265.04

1-Apr-21 80.46 140.80 281.61 281.61 281.61

1-Apr-22 85.49 149.60 299.21 299.21 299.21

1-Apr-23 90.83 158.95 317.91 317.91 317.91

1-Apr-24 96.51 168.89 337.77 337.77 337.77

1-Apr-25 102.54 179.44 358.89 358.89 358.89

1-Apr-26 108.95 190.66 381.32 381.32 381.32

1-Apr-27 115.76 202.57 405.15 405.15 405.15

1-Apr-16 60.00 105.00 210.00 210.00 210.00

1-Apr-17 65.00 110.00 220.00 220.00 220.00

1-Apr-18 65.00 115.00 235.00 235.00 235.00

1-Apr-19 70.00 125.00 250.00 250.00 250.00

1-Apr-20 75.00 135.00 265.00 265.00 265.00

1-Apr-21 80.00 140.00 280.00 280.00 280.00

1-Apr-22 85.00 150.00 300.00 300.00 300.00

1-Apr-23 90.00 160.00 320.00 320.00 320.00

1-Apr-24 95.00 170.00 340.00 340.00 340.00

1-Apr-25 105.00 180.00 360.00 360.00 360.00

1-Apr-26 110.00 190.00 380.00 380.00 380.00

1-Apr-27 115.00 205.00 405.00 405.00 405.00

90

Projection of Annual Toll Revenues (In Rs. cr.) Year Beginning Cars LCV MultiAxle Vehicles Bus HCV Total Toll Revenue 1-Apr-11 1.71 1.14 0.84 3.83 13.17 20.69 1-Apr-12 1.84 1.32 0.98 4.46 15.34 23.94 1-Apr-13 2.26 1.53 1.09 4.98 17.12 26.98 1-Apr-14 2.43 1.65 1.26 5.75 19.77 30.85 1-Apr-15 2.93 1.90 1.45 6.61 22.72 35.61 1-Apr-16 3.15 2.17 1.65 7.53 25.88 40.37 1-Apr-17 3.77 2.46 1.87 8.54 29.37 46.01 1-Apr-18 4.45 2.79 2.11 9.66 33.22 52.24

1-Apr-19 4.79 3.32 2.38 10.90 37.47 58.86

1-Apr-20 5.61 3.73 2.75 12.56 43.17 67.82

1-Apr-21 6.52 4.17 3.07 14.05 48.30 76.12

1-Apr-22 6.99 4.66 3.51 16.03 55.11 86.29

1-Apr-23 8.07 5.41 3.98 18.21 62.61 98.28

1-Apr-24 9.27 6.24 4.51 20.62 70.88 111.51

1-Apr-25 10.60 6.91 5.09 23.27 79.99 125.85

1-Apr-26 12.02 7.87 5.80 26.50 91.10 143.29

1-Apr-27 13.60 8.92 6.57 30.05 103.29 162.43

Year Beginning

1-Apr-11

1-Apr-12

1-Apr-13

1-Apr-14

1-Apr-15

1-Apr-16

1-Apr-17

1-Apr-18

91

Net Toll Revenue Less : O & M Expenses for initial 2 lane Profit before Depn., Interest and Tax Less : Book Depreciation @ 5.59% : Interest on Rupee Debt Profit before Tax Less : Tax Profit after Tax Cumulative Profit After tax Dividend Dividend Tax Retained Earnings Cumulative Retained Earnings 1-Apr-19 58.86 5.24 53.62 18.03 14.30 21.29 0.00 21.29 -69.97 0.00 0.00 21.29 -69.97 1-Apr-20 67.82 5.57 62.26 18.03 11.19 33.04 0.00 33.04 -36.93 0.00 0.00 33.04 -36.93 1-Apr-21 76.12 38.60 37.52 18.03 7.40 12.09 0.00 12.09 -24.84 0.00 0.00 12.09 -24.84 1-Apr-22 86.29 6.28 80.01 18.03 2.96 59.02 0.00 59.02 34.18 0.00 0.00 59.02 34.18

20.69 3.23 17.46 18.03 22.58 -23.15 0.00 -23.15 -23.15 0.00 0.00 -23.15 -23.15 1-Apr-23 98.28 6.68 91.61 18.03 0.00 73.58 0.00 73.58 107.76 0.00 0.00 73.58 107.76

23.94 3.43 20.51 18.03 22.58 -20.10 0.00 -20.10 -43.25 0.00 0.00 -20.10 -43.25 1-Apr-24 111.51 7.09 104.42 18.03 0.00 86.39 0.00 86.39 194.15 0.00 0.00 86.39 194.15

26.98 3.64 23.34 18.03 22.58 -17.27 0.00 -17.27 -60.52 0.00 0.00 -17.27 -60.52 1-Apr-25 125.85 7.54 118.31 18.03 0.00 100.28 0.00 100.28 294.44 0.00 0.00 100.28 294.44

30.85 3.87 26.99 18.03 22.32 -13.36 0.00 -13.36 -73.88 0.00 0.00 -13.36 -73.88 1-Apr-26 143.29 8.01 135.28 18.03 0.00 117.25 0.00 117.25 411.69 0.00 0.00 117.25 411.69

35.61 4.11 31.50 18.03 21.49 -8.02 0.00 -8.02 -81.90 0.00 0.00 -8.02 -81.90 1-Apr-27 162.43 8.51 153.92 18.03 0.00 135.90 36.97 98.92 510.61 0.00 0.00 98.92 510.61

40.37 28.51 11.87 18.03 20.31 -26.47 0.00 -26.47 -108.37 0.00 0.00 -26.47 -108.37

46.01 4.64 41.37 18.03 18.75 4.59 0.00 4.59 -103.77 0.00 0.00 4.59 -103.77

52.24 4.93 47.31 18.03 16.77 12.51 0.00 12.51 -91.26 0.00 0.00 12.51 -91.26

92

Year Beginning Total outflow excl. IDC Inflows PBDIT Less Tax Net Inflow Project IRR Cost of Capital

1-Oct-08 17.60

1-Apr-09 141.11

1-Apr-10 142.29

1-Apr-11 0.00

1-Apr-12 0.00

1-Apr-13 0.00

1-Apr-14 0.00

1-Apr-15 0.00

1-Apr-16 0.00

17.46 0.00 -17.60 11.25% 10.60% -141.11 -142.29 17.46

20.51 0.00 20.51

23.34 0.00 23.34

26.99 0.00 26.99

31.50 0.00 31.50

11.87 0.00 11.87

1-Apr-17 0.00

1-Apr-18 0.00

1-Apr-19 0.00

1-Apr-20 0.00

1-Apr-21 0.00

1-Apr-22 0.00

1-Apr-23 0.00

1-Apr-24 0.00

1-Apr-25 0.00

1-Apr-26 0.00

1-Apr-27 0.00

41.37 0.00 41.37

47.31 0.00 47.31

53.62 0.00 53.62

62.26 0.00 62.26

37.52 0.00 37.52

80.01 0.00 80.01

91.61 0.00 91.61

104.42 0.00 104.42

118.31 0.00 118.31

135.28 0.00 135.28

153.92 36.97 116.95

93

Year Beginning Profit before Depn., Interest but after Tax Add fresh inflows through unsecured loans Sub-total Interest Payment on first loan Interest Payment on second loan Debt Repayment for first loan Debt Repayment for second loan Sub-total for first loan Sub-total for second loan Total Repayment DSCR for the loan

1-Apr-11 17.46 8.51 25.97 22.58 0.00 0.00 0.00 22.58 0.00 22.58 1.15 0.00 0.00

1-Apr-12 20.51 5.46 25.97 22.58 0.00 0.00 0.00 22.58 0.00 22.58 1.15 0.00 0.00

1-Apr-13 23.34 0.00 23.34 22.58 0.00 0.00 0.00 22.58 0.00 22.58 1.03 0.00 0.00

1-Apr-14 26.99 4.43 31.42 22.32 0.00 5.00 0.00 27.32 0.00 27.32 1.15 0.00 0.00

1-Apr-15 31.50 0.00 31.50 21.49 0.00 7.50 0.00 28.99 0.00 28.99 1.09 0.00 0.00

1-Apr-16 11.87 22.99 34.85 20.31 0.00 10.00 0.00 30.31 0.00 30.31 1.15 0.00 0.00

1-Apr-17 41.37 0.00 41.37 18.75 0.00 13.00 0.00 31.75 0.00 31.75 1.30 0.00 0.00

1-Apr-18 47.31 0.00 47.31 16.77 0.00 16.00 0.00 32.77 0.00 32.77 1.44 0.00 0.00

1-Apr-19 53.62 0.00 53.62 14.30 0.00 20.50 0.00 34.80 0.00 34.80 1.54 0.00 0.00

1-Apr-20 62.26 0.00 62.26 11.19 0.00 25.00 0.00 36.19 0.00 36.19 1.72 0.00 0.00

1-Apr-21 37.52 6.07 43.59 7.40 0.00 30.50 0.00 37.90 0.00 37.90 1.15 0.00 0.00

1-Apr-22 80.01 0.00 80.01 2.96 0.00 33.80 0.00 36.76 0.00 36.76 2.18 1.00 1.37

1-Apr-23 91.61 0.00 91.61 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a. 1.00 0.00

1-Apr-24 104.42 0.00 104.42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a. 1.00 0.00

1-Apr-25 118.31 0.00 118.31 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a. 1.00 0.00

1-Apr-26 135.28 0.00 135.28 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a. 1.00 0.00

1-Apr-27 116.95 0.00 116.95 0.00 0.00 0.00 0.00 0.00 0.00 0.00 n.a. 1.00 0.00

94

RESPONSE SHEETS

95 Thesis Response sheet Response sheet number: 1 (one) Thesis Topic: “Financial Viability Analysis of the Road Sector Projects in India.” Date: 22/05/08 Name: Vijay Garodia Batch: SS/ 06-08 Alumni Id: DS68-F181 Phone No: 9971619555 Email Id: vijaygarodia@gmail.com

Progress of the work : I have collected data that is required for my thesis but still preparing the questionnaire. I have also met my guide to help me out for the same, as of now I am sending the introduction of my thesis.

Introduction The road sector has been, and will be for a long time, the dominant form of transport for freight and passenger movement throughout the world. In India the decade of 90s witnessed a series of economic reforms. The government since then is committed to second generation reforms aimed at achieving an annual growth rate of 7 to 8 percent. Such acceleration in growth is bound to create a massive demand for infrastructure services such as power, telecom, roads, ports, railways and civil aviation. Over the last few years, the road development scenario has changed rapidly. Until 1991, government was exclusively responsible for the development and maintenance of the road sector. In the absence of user charges, the road sector in India has relied entirely on the budgetary allocation and funding by multilateral agencies, which stagnated at about 3 percent of the total plan expenditure during the seventh and eighth five-year plans. The major initiative taken in the road sector was the constitution of the “Central Road Fund” with the introduction of a cess on fuel. Over the years this has become the major source of financing highways development programme. The revenue from the cess has increased from Rs. 2000 crores at time of its inception to Rs. 5000-6000 crores per annum. The era of 90s also witnessed major changes in the policies. To facilitate & induct the capital from private sector into road development, policies were amended and several

96 incentives were introduced. Further to give proper direction to highway development, the National Highways Authority of India was made operational. A clear mandate was set for NHAI. A concrete plan of development was announced for National Highways and Rural Roads in the form of NHDP and “Pradhan Mantri Gramin Sadak Yojana”. It has thrown excellent Business opportunities for contractors, equipment manufacturers and suppliers, consultants, road developers, investors and managers. It is also expected to give a boost to the economy through increased demands for raw materials and job opportunities. However, it has also thrown challenges. Challenges, not to garner resources, but to ensure optimum utilization of available resources, challenges to domestic contracting industry to modernize and upgrade to meet international competition, challenges to domestic equipment manufacturers to compete with multinational companies in the liberal import regime and finally challenges for the government to keep the momentum high as also to mobilize private sector participation. Scope of thesis:Study of the past trends in financing of the road sector projects in India with a special emphasis on terms of financing, institutions involved in financing of the road sector projects, role of World Bank, ADB, etc. o Risks perceived by lenders in financing of the road sector projects and ways to mitigate these risks. o Public Private Partnership: Role of the private sector in the development of the road projects in India. o Also prepare a Model to show the Financial Viability of the Road Sector Project.

An Overview of Indian Road Sector Classification of Roads: India has the second largest road networks in the world totaling more than 3.3 million km at present. For the purpose of management and administration, roads in India are divided into the following five categories: 6. National Highways (NH). 7. State Highways (SH). 8. Major District Roads (MDR). 9. Other District Roads (ODR). 10. Village Roads (VR). The National Highways are intended to facilitate medium and long distance inter-city passenger and freight traffic across the country. The State Highways are supposed to carry the traffic along major centers within the State. Other District Roads and Village Roads provide villagers accessibility to meet their social needs as also the means to

97 transport agriculture produce from village to nearby markets. Major District Roads provide the secondary function of linkage between main roads and rural roads. Indian Road Network CATEGORIES National Highways State Highways Major District Roads Village & Other Roads LENGTH (KMS) 58,112* 1,37,119 4,70,000 26,50,000

Total Length 33,15,231 (*NHs are less than 2% but carry more than 40% of traffic) National Highway Network The National Highways are the primary arteries of the country’s traffic, connecting to nation’s capital to the various State capitals, major ports and centres of industries. The national Highway system is owned by Central Government. The legal status is given by National Highways Act, 1956. When the era of planning started in India (in 1956), the length of National Highway system was 19,811 kms. This has now increased to 58,112 kms. The additions to National Highway System have been made after careful evaluation of various demands or needs arising from time to time. National Highways constitute less than 2% of the total road network, but carry nearly 40% of the total road traffic. Trend in Road Traffic The roads and highways in India account for about 87 per cent of the total passenger traffic and about 65 per cent of the total freight traffic in the country. Traffic Movement (%) Freight Year 1951 1961 1971 1991 2000 2015 (estimated) Road 11 28 35 53 65 80 Rail 89 72 65 47 35 20 Passengers Road 28 42 59 79 87 92 Rail 72 58 41 21 13 8

98 Freight transport by road has risen from 6 billion tonne km (BTK) in 1951 to 400 BTK in 1995 and 800 BTK in 2001. Passenger traffic has risen from 23 billion-passenger km (BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The annual growth of road traffic is expected to be 9% to 10%. Current boom in the automobile sector may even increase the future growth rate of road traffic. While the traffic has been growing at a fast pace, it has not been possible to provide matching investment in the road sector, due to the competing demands from other sectors, especially the social sectors, and this has led to a large number of deficiencies in the network. Many sections of the highways are in need of capacity augmentation, pavement strengthening, rehabilitation of bridges, improvement of riding quality, provision of traffic safety measures, etc. There are congested road sections passing through towns where bypasses are required. Many old bridges are in need of rehabilitation/replacement along with capacity augmentation. Deficiencies in Road Sector Road development has been ignored in most of the development plans of India. There has been no matching growth of the main road network comprising of National and State Highways as seen from the table given below: Category National Highways State Highways Major District Roads & Other Roads Total 1951 22,255 60,000 3,18,000 4,00,255 2001 58,112 1,37,119 31,20,000 33,15,231 % Change 161% 128% 881% 728%

The main roads have not kept pace with traffic in terms of quality also. Out of the total 1,95,231 km. Length of National and State Highways only 2% of their length is fourlane, 34% two-lane, and 64% single lane. As far as NHs are concerned, only 5% of their length is four-lane, 80% two-lane and the balance 15% continues to be single lane. Thus the road sector, in spite of its high priority is adversely affected by the poor quality and service levels. The poor quality of Indian roads is highlighted by congestion, old fatigued bridges and culverts, railway crossings, low safety, no bypasses and slow traffic movement.

99 Revenue from road transport and expenditure on roads The entire revenue received by the Government by road transport taxation is not ploughed back on the roads. Presently the total allocations, central and state, available for road development are to the tune of Rs.11,000 crore, which is just 42% of total transportation revenues received by the government. This implies the inefficiency of our system, which consumes 58% of the total revenues received by the transportation sector. Economic losses due to poor conditions of roads The poor condition of roads has a telling effect on the economy. Movement of traffic on poor and congested roads increases the cost of operation of vehicles as well as loss of valuable time and also contributing to high rate of road accidents. Our commercial vehicles are able to make only 250-300 kms in single day against 500-600 kms in developed countries. It has been roughly estimated that a saving of Rs. 25,000 crores per year could be brought about by road improvements. These savings would be in the form of reduced fuel consumption, lower wear and tear of vehicles and less damage to tyres. These can be avoided by modernizing the roads.

Comments from internal/external guide: My thesis guide pointed out that some of the figures was not updated and were not the latest ones. Thus I tried my best to get those updated and some are left, for which I am still working and will be updated soon. Signature of the external guide: Signature of the Student: Signature of the internal guide:

Vijay Garodia
Thesis Response sheet Response sheet number: 1 (one) Thesis Topic: “Financial Viability Analysis of the Road Sector Projects in India.” Date: 22/05/08 Name: Vijay Garodia

100 Batch: SS/ 06-08 Alumni Id: DS68-F181 Phone No: 9971619555 Email Id: vijaygarodia@gmail.com

Progress of the work : I have collected data that is required for my thesis but still preparing the questionnaire. I have also met my guide to help me out for the same, as of now I am sending the introduction of my thesis.

Introduction The road sector has been, and will be for a long time, the dominant form of transport for freight and passenger movement throughout the world. In India the decade of 90s witnessed a series of economic reforms. The government since then is committed to second generation reforms aimed at achieving an annual growth rate of 7 to 8 percent. Such acceleration in growth is bound to create a massive demand for infrastructure services such as power, telecom, roads, ports, railways and civil aviation. Over the last few years, the road development scenario has changed rapidly. Until 1991, government was exclusively responsible for the development and maintenance of the road sector. In the absence of user charges, the road sector in India has relied entirely on the budgetary allocation and funding by multilateral agencies, which stagnated at about 3 percent of the total plan expenditure during the seventh and eighth five-year plans. The major initiative taken in the road sector was the constitution of the “Central Road Fund” with the introduction of a cess on fuel. Over the years this has become the major source of financing highways development programme. The revenue from the cess has increased from Rs. 2000 crores at time of its inception to Rs. 5000-6000 crores per annum. The era of 90s also witnessed major changes in the policies. To facilitate & induct the capital from private sector into road development, policies were amended and several incentives were introduced. Further to give proper direction to highway development, the National Highways Authority of India was made operational. A clear mandate was set for NHAI. A concrete plan of development was announced for National Highways and Rural Roads in the form of NHDP and “Pradhan Mantri Gramin Sadak Yojana”. It has thrown excellent Business opportunities for contractors, equipment manufacturers and suppliers, consultants, road developers, investors and managers. It is also expected to give a boost to the economy through increased demands for raw materials and job opportunities. However, it has also thrown challenges. Challenges, not to garner resources, but to ensure optimum utilization of available resources, challenges to domestic contracting industry to modernize and upgrade to meet international competition, challenges to domestic

101 equipment manufacturers to compete with multinational companies in the liberal import regime and finally challenges for the government to keep the momentum high as also to mobilize private sector participation. Scope of thesis:Study of the past trends in financing of the road sector projects in India with a special emphasis on terms of financing, institutions involved in financing of the road sector projects, role of World Bank, ADB, etc. o Risks perceived by lenders in financing of the road sector projects and ways to mitigate these risks. o Public Private Partnership: Role of the private sector in the development of the road projects in India. o Also prepare a Model to show the Financial Viability of the Road Sector Project.

An Overview of Indian Road Sector Classification of Roads: India has the second largest road networks in the world totaling more than 3.3 million km at present. For the purpose of management and administration, roads in India are divided into the following five categories: 11. National Highways (NH). 12. State Highways (SH). 13. Major District Roads (MDR). 14. Other District Roads (ODR). 15. Village Roads (VR). The National Highways are intended to facilitate medium and long distance inter-city passenger and freight traffic across the country. The State Highways are supposed to carry the traffic along major centers within the State. Other District Roads and Village Roads provide villagers accessibility to meet their social needs as also the means to transport agriculture produce from village to nearby markets. Major District Roads provide the secondary function of linkage between main roads and rural roads. Indian Road Network CATEGORIES National Highways State Highways Major District Roads Village & Other Roads LENGTH (KMS) 58,112* 1,37,119 4,70,000 26,50,000

102 Total Length 33,15,231 (*NHs are less than 2% but carry more than 40% of traffic) National Highway Network The National Highways are the primary arteries of the country’s traffic, connecting to nation’s capital to the various State capitals, major ports and centres of industries. The national Highway system is owned by Central Government. The legal status is given by National Highways Act, 1956. When the era of planning started in India (in 1956), the length of National Highway system was 19,811 kms. This has now increased to 58,112 kms. The additions to National Highway System have been made after careful evaluation of various demands or needs arising from time to time. National Highways constitute less than 2% of the total road network, but carry nearly 40% of the total road traffic. Trend in Road Traffic The roads and highways in India account for about 87 per cent of the total passenger traffic and about 65 per cent of the total freight traffic in the country. Traffic Movement (%) Freight Year 1951 1961 1971 1991 2000 2015 (estimated) Freight transport by road has risen from 6 billion tonne km (BTK) in 1951 to 400 BTK in 1995 and 800 BTK in 2001. Passenger traffic has risen from 23 billion-passenger km (BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The annual growth of road traffic is expected to be 9% to 10%. Current boom in the automobile sector may even increase the future growth rate of road traffic. While the traffic has been growing at a fast pace, it has not been possible to provide matching investment in the road sector, due to the competing demands from other sectors, especially the social sectors, and this has led to a large number of deficiencies in the network. Many sections of the highways are in need Road 11 28 35 53 65 80 Rail 89 72 65 47 35 20 Passengers Road 28 42 59 79 87 92 Rail 72 58 41 21 13 8

103 of capacity augmentation, pavement strengthening, rehabilitation of bridges,

improvement of riding quality, provision of traffic safety measures, etc. There are congested road sections passing through towns where bypasses are required. Many old bridges are in need of rehabilitation/replacement along with capacity augmentation. Deficiencies in Road Sector Road development has been ignored in most of the development plans of India. There has been no matching growth of the main road network comprising of National and State Highways as seen from the table given below: Category National Highways State Highways Major District Roads & Other Roads Total 1951 22,255 60,000 3,18,000 4,00,255 2001 58,112 1,37,119 31,20,000 33,15,231 % Change 161% 128% 881% 728%

The main roads have not kept pace with traffic in terms of quality also. Out of the total 1,95,231 km. Length of National and State Highways only 2% of their length is fourlane, 34% two-lane, and 64% single lane. As far as NHs are concerned, only 5% of their length is four-lane, 80% two-lane and the balance 15% continues to be single lane. Thus the road sector, in spite of its high priority is adversely affected by the poor quality and service levels. The poor quality of Indian roads is highlighted by congestion, old fatigued bridges and culverts, railway crossings, low safety, no bypasses and slow traffic movement. Revenue from road transport and expenditure on roads The entire revenue received by the Government by road transport taxation is not ploughed back on the roads. Presently the total allocations, central and state, available for road development are to the tune of Rs.11,000 crore, which is just 42% of total transportation revenues received by the government. This implies the inefficiency of our system, which consumes 58% of the total revenues received by the transportation sector. Economic losses due to poor conditions of roads

104 The poor condition of roads has a telling effect on the economy. Movement of traffic on poor and congested roads increases the cost of operation of vehicles as well as loss of valuable time and also contributing to high rate of road accidents. Our commercial vehicles are able to make only 250-300 kms in single day against 500-600 kms in developed countries. It has been roughly estimated that a saving of Rs. 25,000 crores per year could be brought about by road improvements. These savings would be in the form of reduced fuel consumption, lower wear and tear of vehicles and less damage to tyres. These can be avoided by modernizing the roads.

Comments from internal/external guide: My thesis guide pointed out that some of the figures was not updated and were not the latest ones. Thus I tried my best to get those updated and some are left, for which I am still working and will be updated soon. Signature of the external guide: Signature of the Student: Signature of the internal guide:

Vijay Garodia
Thesis Response sheet Response sheet number: 2 (Two) Thesis Topic: “Financial Viability Analysis of the Road Sector Projects in India.” Date: 1/06/08 Name: Vijay Garodia Batch: SS/ 06-08 Alumni Id: DS68-F181 Phone No: 9971619555 Email Id: vijaygarodia@gmail.com

Progress of the work : Research Methodology:
The research design which I have planned for my thesis will be of the following nature. Research Data Source : Analytical & Exploratory. : Secondary data.

105 Research approach Research instrument Type of questionnaire Type of questions : Survey method. : Personal interviews & Financial Model. : Structured non-disguised. : Open ended.

I would be working on secondary data because of the fact that the various financial aspects of the projects like the Projects Initial Investment, the Payment Pattern, duration of the project, Project IRR, etc. have to be analysed to show the viability of such projects. For this purpose I will have to indepth and exhaustive study of all the available secondary data like journals, websites and other related documents.  Comments from internal/external guide: The guide offered me a lot of support in the preparation of the above and showed me the right path to be taken in-order to carry out my analysis. Signature of the external guide: Signature of the Student: Signature of the internal guide:

Vijay Garodia
Thesis Response sheet Response sheet number: 3rd (Third) Thesis Topic: “Financial Viability Analysis of the Road Sector Projects in India.” Date: 05/06/08 Name: Vijay Garodia Batch: SS/ 06-08 Alumni Id: DS68-F181 Phone No: 9971619555 Email Id: vijaygarodia@gmail.com

Progress of the work : Opportunities exist in- Highway construction.
Widening of about 38 percent of National highway from single to double lanes. Strengthening of about 60 percent of the two lane roads. Highway related on route activities like restaurants, motels and rest/parking areas as may be decided by the Implementing Agency.

106

Findings- Private sector is still reluctant to invest in the infrastructure projects because
of the high risk of traffic volume and long gestation period. Government departments have abundant technical expertise but there is a lack in financial management. Infrastructure financing is in its recent stage, only few projects have been completed under these implementing models, the agreements or documents related to these have not been scrutinized in the court of law or no judgements have been passed yet. Limited foreign funding in infrastructure projects.  Comments from internal/external guide: I have shown the above work to my external guide and she has given her approval for the same. Signature of the external guide: Signature of the Student: Signature of the internal guide:

Vijay Garodia

Thesis Response sheet Response sheet number: 4th (Fourth) Thesis Topic: “Financial Viability Analysis of the Road Sector Projects in India.” Date: 6/06/08 Name: Vijay Garodia Batch: SS/ 06-08 Alumni Id: DS68-F181 Phone No: 9971619555 Email Id: vijaygarodia@gmail.com

Progress of the work : Structure of the thesis:
• • Introduction- Study Background, Scope, Limitations. An Overview of Indian Road Sector. Classification of Roads, National Highway Network, Trend in Road Traffic. • Deficiencies in the Road Sector

107 Economic losses due to poor conditions of roads, The dwindling Public Sector Outlay on Transport, Agencies involved in Road Sector Development in India, Road Development Plans, Current status. Trends in Road Sector Financing- Traditional Financing Mechanism, Budgetary Allocations, Central Road Fund, Foreign Aid to Road Sector, Private Sector Participation, Government of India initiatives, Implementation Models- BOT (Toll Based), BOT (Annuity), Govt. owned SPV, MOU (Negotiated Deal). Critical Issues – Private Sector Road Financing. Stages in development of Road Sector Projects, Financial Structuring of BOT Road Projects. Opportunities & Findings. Recommendations/Suggestions & Conclusion – The Middle Path. Financial Viability Analysis. Sensitivity Analysis, Details of some of the successfully undertaken projects. Bibliography.

• •

• • • •

 Comments from internal/external guide: Signature of the external guide: Signature of the Student: Signature of the internal guide:

Vijay Garodia

108 Thesis Response sheet Response sheet number: 5th (Fifth) Thesis Topic: “Financial Viability Analysis of the Road Sector Projects in India.” Date: 09/06/08 Name: Vijay Garodia Batch: SS/ 06-08 Alumni Id: DS68-F181 Phone No: 9971619555 Email Id: vijaygarodia@gmail.com

Progress of the work : Recommendations / Suggestions
Government should try to remove the bottlenecks in the financing of infrastructure projects and ease the legal procedures by single window clearances for the projects, like environmental clearances, land acquisition problems etc. Government should try to provide as many incentives as it can like tax incentives and concessions, etc. and also need to develop innovative mechanisms for private sector participation like securitization, annuity model, assured returns etc.

Conclusion – The Middle Path
The country is poised to take up infrastructure projects comprising huge road network of expressway standard and other similar roads. Adoption of private financing for such projects is an almost inevitable course of action. However, building up of conducive environment for private participation should also be task on hand. In the intervening period, the execution of such projects through the medium of Government corporations acting as BOT entrepreneurs seems to be the most appropriate option, this can be termed as the contemporary middle path. As most infrastructure projects have long gestation periods, entirely different set of investors may be associated with the project during their development, construction and operation phases depending on their risk appetite. Signature of the external guide: Signature of the Student: Signature of the internal guide:

Vijay Garodia

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