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Mr. Sarbesh Mishra, Assistant Professor, NICMAR (National Institute of Construction Management and Research) CISC, Hyderabad, prepared this case solely to provide material for classroom discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. NICMAR prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from any reproduction rights organization. To order copies or request permission to reproduce materials, contact The Editor, NICMAR Journal of Construction Research, National Institute of Construction Management and Research, 25/1, Balewadi, N.I.A. Post Office, Pune 411045. Phone (020)27292671, E-mail: The author can be reached at

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MAYTAS Infra Ltd: Risk Management in Assessing the Financial Feasibility of BOT Project

CASE: 11.70KM. ORR KOLLUR TO PATANCHERU SECTION, HYDERABAD Maytas Infra Limited is one of the leading Infrastructure Development, Construction and Project Management Companies in India with more than two decades of rich and varied experience in execution of landmark projects across the length and breadth of the Country. With established credentials in executing complex and challenging projects in all kinds of environment, Maytas Infra has repeatedly delivered projects on time and of the highest quality. An abundance of resources like People, Plant & Equipment, Finances etc, has enabled Maytas Infra establish an enviable record in the infrastructure sphere. Maytas Infra is an ISO 9001 - 2000 certified company, committed to the highest standards of quality. At Maytas Infra, every employee is dedicated to a continuous improvement of quality standards in every sphere of activity. The detailed Quality Policy is backed up by an independent quality control department manned by highly trained Quality professionals armed with the latest tools and systems for ensuring the highest quality standards throughout the company. Maytas Infra is committed to be the leader in Civil Engineering Construction with a Motto of 'Success through Quality'. Maytas Infra is in the forefront in executing the BOT projects (Refer to appendix – 1) and associated with several state governments and central government for the execution of different projects under Public Private Partnership model. This case pertains to the Outer Ring Road (ORR) KOLLUR to PATENCHERU Section, Hyderabad which is 11.7km. Appendix – 1 describes the scenario regarding public private partnership and financial appraisal methods while evaluating a project. Maytas Infra decided to take up the construction of Kollur to Patancheru section which was awarded on BOT basis in the annuity (Appendix – 1) based instead of popular Toll based or Shadow Toll based arrangements. The key difference between toll / shadow toll and annuity is bearing of traffic risk. Under shadow toll, traffic risk is borne by the BOT concessionaire while under annuity system; the concessionaire does not bear the traffic risk. The reason for annuity based payments in comparison to toll based may be attributed to financial appraisal parameter which was carried out as a part of financial appraisal. The appraisal of return include Estimate the costs and benefits of the project, i) Assess the riskiness of the project ii) Calculate the cost of capital iii) Compute the criterion of merit and judge whether the project is good or bad. The annuity payments were agreed to be paid on semi-annual basis to the contractor from the client for an agreed time period apart from the other concessions provided for the financial feasibility of the project as enumerated in the concession agreement to increase the return from this road project. The project details have been mentioned below:

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Project Details Out of the five road packages of Phase II A, the Concession for the 11.70 km Kollur to Patancheru section has been awarded for Annuity of Rs. 39.50 crores payable semiannually. The project aims at development of Eight-lane access controlled expressway. The Annuity Scheme of HUDA provides an incentive to private sector development and operations of select roads wherein the operator receives a fixed semi annual annuity payment towards operations cost and recovery of investment over the concession period. This scheme completely eliminates the traffic and revenue risk for the operator. HUDA has the right to toll the stretches at a later date. For the Kollur-Patancheru Project, HUDA would pay fixed annuity amounts of Rs 39.50 cr. semi-annually after project commissioning. The Outer Ring Road is a 158 km long road that connects PatancheruShamshabad- Hayathnagar- Medchal- Patancheru providing connectivity to various State Highways and National Highways. ORR is proposed to be developed in phases, wherein Phase I consists of 24.38 km of road, from Gachibowli in to Shamshabad NH 7, Phase II A consists of 62.30 km from Narsingi to Patanchru and from Shamshabad to Pedda Amberpet and the remaining part of the ORR of 75.32 km will be covered under Phase II B Work for Phase I has already commenced and is being executed on item rate contract basis. Development of Phase II A will comprise five road packages. All the stretches of Phase II A of the project have been awarded and are to be executed on a (BOT) Annuity basis.
The Project involves design, construction, development, finance, operation and maintenance of Eight-lane access controlled expressway under Phase II A program in the Hyderabad city for the section from Kollur to Patancheru from Km 12.00 to Km 23.70 and will include all works relating to or in respect of the Project Highway The project comprises construction of new road involving many new structures. The new structures required would include one interchange at Patancheru. The road will consist of 8 VUPs and 6 Passenger Under Passes (PUPs). There are 4 minor bridges of main carriage way and 4 minor bridges with service roads. There will be a total of 8 minor bridges. There will be 9 culverts on main carriageway and 4 culverts on the service roads. There will also be an administrative building with toll Plaza. In all a total of 65 new structures will be constructed.

Salient features of Concession Agreement: (a) The Concessionaire would be authorized to implement the Project and operate and maintain the Project facilities for a total period of 15 years inclusive of a 2½-year (30 months) implementation period. The construction commencement date would be 60 days from the date of execution of the CA The Concessionaire would be compensated for the capital costs and operating costs including returns on capital investment by way of a fixed semi-annual payment from HUDA during the operation period. HUDA will part finance project by way of Grant, which would be 20% of the bid project cost.


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Obligations of Concessionaire are as follows: (i) Develop, design, construct, engineer, finance, procure, operate & maintain the Project Highway during concession period Obtain, procure and maintain all applicable permits, rights, licenses, agreements and permissions Appoint, supervise, monitor and control the activities of contractors under their respective Project Agreements To obtain all necessary clearances/ permits from Railways in respect of construction of Railway Over Bridge (ROB)/Railway Under Bridge (RUB) To liaise with Government of Andhra Pradesh (GoAP) for implementation of the Rehabilitation and Resettlement plan.





HUDA’s obligations are as follows: i. Enable access to the site free from Encumbrances. ii. Permit peaceful use of the site by the Concessionaire as licensee. iii. Assist and provide all reasonable support to the Concessionaire in obtaining applicable permits. iv. Assist the Concessionaire in obtaining access to all necessary infrastructure facilities and utilities. v. Coordinate with GoAP authorities for completing the legal requirements and maintaining law and order during removal of encroachments by the Concessionaire vi. Provide necessary support to the Concessionaire in obtaining necessary environmental clearances in respect of tree cutting and necessary clearances /permissions / permits for shifting of all types of utilities services, construction of ROB/RUB on railway lines, resettlement & rehabilitation and bear the related expenses State Support HUDA will make the payment of Annuity Amount to the Concessionaire during the Concession Period with the support of Guarantee from Government of Andhra Pradesh extended to the Bankers of HUDA for providing Letter of Credit (LC) to service the payment of Annuity Amount. The BOT risk has been shown in the Exhibit B for the understanding of the reader.

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HUDA also has the support of Government of Andhra Pradesh for the following: (i) (ii) Termination Payments under the Concession Agreement as provided under the Concession Agreement Premature termination of the Concession during the Annuity Period or during the Construction Period at the instance of HUDA as provided under the Concession Agreement Provision of Right of Way (ROW) which is necessary for the Construction and Operation of the Project


Right of Way The following is the proposed schedule of handing over ROW: (i) (ii) (iii) At-least 50% of the ROW (other than junctions) shall be handed over to the Concessionaire on the Commencement Date. At least 80% of the ROW (other than junctions) shall be handed over to the Concessionaire within 90 days from the Commencement Date. At least 90% of the ROW and additional lands required for junctions shall be handed over to the Concessionaire within 180 days from the Commencement Date. Balance 10% of ROW shall be handed over to the Concessionaire within 365 days (1 year) from the Commencement date.


Existing Right of Way (ROW) shall be made available to the Concessionaire by HUDA free from all encumbrances and without any payment by Concessionaire. If HUDA does not enable access to any part or parts of the existing right of way for any reason other than a Force Majeure Event or breach of the Agreement by the Concessionaire, HUDA shall pay to the Concessionaire Damages at the rate of Rs. 1000 (Rupees one thousand) per month per 1000 (one thousand) sq. meters or part thereof if such area is required by the concessionaire for Construction Works . Project Cost and Means of Finance (a) Project Cost The cost of the project is estimated at Rs 501.75 cr. The summary break-up of project cost is given below: Particulars EPC and Directly related Costs Preliminary & Pre-operative Expenses Interest During Construction Interest upto first annuity payment date Total Project Cost (Rs Cr) 415.00 22.67 43.38 20.70 501.75

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As the first annuity payment would be made 6 months after the scheduled project completion date, a provision for funding the first six months of interest cost has been made as part of the Project Cost. (b) Means of Finance The project-funding requirement shall be met from a combination of promoters’ contribution, Government Grant and term loans. It is proposed to finance the project at a Debt Equity Ratio (DER) of 3:1. The means of finance for the project is as tabulated below: Means of Finance Government Grant Equity/ Quasi Equity Debt Total Grant HUDA will part finance the project by way of a Grant, which would be 20% of the bid project cost. To facilitate early commencement of work, first installment of 35% of the Grant shall be paid upfront on the Commencement Date against Bank Guarantee. HUDA shall pay the other installments of Grant to the Concessionaire linking up with the satisfactory achievement of project milestones. Counter-party risk mitigation (a) HUDA Rs cr 80.71 44.73 376.31 501.75

Fitch has assigned an issuer rating of ‘A (ind)’ to HUDA, based on the strong symbiotic relationship that it enjoys with the GoAP and support from GoAP Sale of parcels of land for residential and commercial developments –also called townships – will increase the revenues available to HUDA to take on other major projects and enable it to generate resources to service its ORR obligations. The project risk has been figured in the Exhibit – A of appendix. The strengths of HUDA are as follows: (i) (ii) (iii) (iv) HUDA is GoAP’s arm for directing and facilitating the economic development of HMA; HUDA has the implicit support of GoAP. Outer ring road (ORR) and other projects will boost strong infrastructure and economic development in the state. Strong revenues will emanate from sale of townships abutting the ORR. Improvements in infrastructure in HMA will help HUDA to fuel larger investments.

With respect to the proposed project HUDA has the support of GoAP for the following:

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(ii) (iii) (b)

HUDA will make the payment of Annuity amount to the Concessionaire during the Concession Period with support of Guarantee from GoAP to the Bankers of HUDA for providing Letter of Credit (LC) to service the payment of Annuity Amount Provision of Right of Way (ROW) which is necessary for the Construction and Operation of the Project Termination Payments under the Concession Agreement

Government of Andhra Pradesh The credit profile of the GoAP is based primarily on its growing GSDP, improving fiscal indicators and increasing own revenues. In FY06 (revised estimates, RE) its GSDP grew 8.9% yoy. The government has been relying on borrowings to manage its expenditure needs through open market loans, loans from central government, special securities and provident funds. The continued growth in the state’s GSDP will sustain buoyancy in revenue

Financing Arrangements: (a) Financial Closure: The Concessionaire shall achieve Financial Close within 90 days from the date of CA. Escrow Account: The CA provides for opening of an Escrow Account by the Concessionaire with a Bank within 60 days from the date of CA and all funds constituting the financing package be credited to the account (i) The Concessionaire shall deposit cash-flows from the Project into the account, the proceeds from which shall be appropriated in the following order: All taxes due and payable All expenses related to Project Construction O&M Expenses 1/12 (one twelfth) of the annual liability on this account The whole of the expense on completion of Punch List items incurred by HUDA The whole or part of the expense on repair work or O&M Expense incurred by HUDA All Concession Fees due to HUDA from the Concessionaire under the Agreement; Reimbursements of expenditure incurred by HUDA Debt service payments One-half of cost & expenses of IC Damages/ payments due to HUDA Balance as per Concessionaire’s discretion Insurance The Concessionaire shall maintain during and after the construction, insurances as required in accordance with the financing documents, applicable laws and desirable in accordance with good industry practice



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1. What are the advantages of Toll / Shadow toll? Why Maytas Infra decided not in favour of toll based arrangement in the concession agreement? What are the parameters that affect the modalities of payments in favour of a particular arrangement of payment?

2. What compensation or cost pass-through arrangements are there to safeguard the BOT concessionaire from shifts in regulatory ground rules? In this current case how Maytas Infra safeguarded its interest?

3. Will the government provide other revenue sources to secure debt besides tariffs? What reassurances will investors require in the BOT contract that the additional government revenues will be available for timely debt service payments by the BOT concessionaire?

4. How are penalties to be determined? What are the payment terms? Is there a grace period for payment? Are there interest penalties for payments more than 30 days late? Under what conditions may the regulator waive or allow a delay in payment? If paying a penalty meant that the BOT concessionaire would be unable to make a debt service payment, for example, would payment be waived or postponed?

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Appendix - 1 Public Private Partnerships (PPP) in India Infrastructure shortages are proving a key binding constraint in sustaining and expanding India’s economic growth. The government is actively promoting PPPs in the key infrastructure sectors of transport, power, urban infrastructure, and tourism, including railways. PPPs are seen as an important tool for producing an accelerated and larger pipeline of infrastructure investments, and catching up with the infrastructure deficit in the country. It has been estimated that during the Eleventh five year plan (2007 to 2012), India needs to invest over US$320 billion in infrastructure alone. The Committee on the Infrastructure Financing that submitted its report in May 2007 has already advised that the target for infrastructure investment should be revised from US$ 320 billion to US$ 384 billion at 200506 prices, which is equivalent to US$ 475 billion (priced currently). Achieving this investment will require major policy reforms. Looking ahead, private sector participation in infrastructure is an important focus of India’s Eleventh Five-Year Plan for 2007-2012. The government also has established a high-level task force to attract investment-including private funds-to projects of national and regional importance. The task force is concentrating on developing expressways, adding lanes to national highways, and build world-class international airports, mass rapid transport systems, ports and urban infrastructure. Availability of resources for the Eleventh Plan is still been firmed up. According to Eleventh plan tentative central plan outlay the total expected money needed is about Rs. 8, 12,000 crores of which about Rs. 2, 00,000 crore is to be provided as budgetary support while Rs. 6, 12,000 would need to be funded out of Internal and Extra Budgetary Resources (IEBR). Thus a PPP Cell has been established in the Department of Economics (DOE) to administer various proposals and coordinate activities to promote PPPs. Structuring PPP Projects The way PPP projects are structured and bid out holds the key to their outcome. Since PPPs in infrastructure are a recent phenomenon, the rules of the game are still evolving. In the transition, public and private stakeholders would pursue their individual objectives which may not necessarily optimize social welfare. But if PPPs are to be a significant source of infrastructure delivery, they must be structured so as to optimize on efficiency and user charges. The structure of PPP projects is largely determined by concession agreements and the bidding process. BUILD, OPERATE AND TRANSFER Build – A private company (or consortium) agrees with a government to invest in a public infrastructure project. The company then secures their own financing to construct the project. Operate – the private developer then owns, maintains, and manages the facility for an agreed concession period and recoups their investment through charges (Annuity) or tolls. Transfer – after the concessionary period the company transfers ownership and operation of the facility to the government or relevant state authority.

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The particular entity vested with the right to implement the project is commonly referred to as the Project Vehicle or Special Purpose Vehicle. Sponsors generally seek to implement a project through a special legal entity formed by them. The project company will usually be a company, partnership, a limited partnership, a joint venture or a combination of them. This will be influenced by the legal and regulatory framework of the host government. The tax regimes and foreign exchange rules may also affect the ownership structure. Many BOT projects are structured deliberately to insulate the project company from as many risks as possible. In these cases, the project company is intended to be a mere financing vehicle and risks will be passed through it. BOT Stages and Risks The word risk derives from the early Italian risicare which means “to dare. ‘Risks’ are nothing more than the variables or circumstances associated with the implementation of a specific project have the potential to adversely affect the development of a project or the interests of a participant, as the case may be. Risks include circumstances or situations, the existence or occurrence of which, will, in all reasonable foresight, result in an adverse impact on any aspect of the implementation of the project. Hazards and Uncertainties are considered to be the main sources of risk. ‘Risks’ can also be defined as i) Chance of loss ii) Uncertainty iii) Possibility of loss iv) Dispersion of actual from the expected results v) Probability of an outcome different from expected. It is also generally true of all infrastructure projects that the degree and nature of risks will alter with regard to the stages of the project The issues relating to the implementation of an infrastructure project differ with each stage of its implementation. It would, therefore, be relevant to obtain a bird’s eye view of the broad stages through which an infrastructure project is implemented. The stages of implementation for a project can be generally stated to be: (i) (ii) (iii) (iv) (v) The Gestation Stage, The Development Stage, The Construction and Start-up Stage, The Operational and Maintenance Stage, The Termination and Transfer Stage.

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Exhibit - A Risks & Its Perspective by Players

Legal and Regulatory Risks

Technology Risk

Delay in Project Development

Political and Social Risks

Operation and Maintenance Risks

Commercial Risks

Force Majeure Risk Market Risks

Environmental Risk

Cost Overrun Risk

Land Acquisition Risk

Financial Risks

(Classification of Risk)

Exhibit - B Sources of Risks
Market Demand


Risks in BOT




Legal and Regulatory Environment

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Options for Increasing Return on Road Projects The following options are identified for improving the viability of the project. • Shadow Toll. The direct toll mechanism is normally followed in most of the BOT projects under which the BOT concessionaire collects the toll charges directly from the user. An alternative to this is the shadow toll mechanism wherein the toll charges are paid directly by the government / project sponsor to the BOT concessionaire according to a predetermined toll structure. Shadow toll need not necessarily be the only form of remuneration to the concessionaire. The Shadow toll can be paid in addition to the toll being collected from road-users (for example the difference between the toll-charge that provides a normal rate of return and the toll-charge users are willing to pay could constitute the Shadow toll.) Annuity payment. Annuity payment is a variation of shadow toll wherein the payment to the BOT concessionaire is determined in absolute terms with no direct reference to the number of vehicles using the highway. Under annuity payment scheme the government retains the right to charge toll from users at any stage of the project. In most cases, it also retains all rights relating to property development, advertising along the project site, etc.

Financial incentives • • • Grants. According to NHAI guidelines, NHAI could provide cash support to the concessionaire. This amount should be utilized for meeting the total project cost and balance, if any, should be used for meeting the O&M cost Low interest rate loans. The government could provide the concessionaire access to low interest debt, either directly or facilitate the same through funding agencies. Revenue Shortfall Loan. According to NHAI guidelines, if the realizable revenue falls short of the subsistence income level during any accounting year, the concessionaire would be entitled to meet the shortfall (referred to as “Revenue Shortfall”) through a loan at an interest rate equal to SBI PLR. This debt is to be repaid from the net cash flows of the concessionaire and needs to be completely repaid within 2 years prior to completion of the concession period.

Guarantees and assurances • The government may guarantee the loans taken by the concessionaire, thereby improving the credit rating of the concessionaire. This would directly reduce the finance cost. The financial guarantee can be provided by a state/central agency that specifically provides credit enhancement services for development of state/national highways

The government could provide assurances for developing ancillary infrastructure in and around the project site thereby making the revenue. Ancillary revenues along project highway The concessionaire may be given permission for property development along the project highway. The various alternatives for ancillary revenues could be as follows:
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• • •

Transport terminals consisting of garages, service stations, warehouses, rest houses and other relevant infrastructure Restaurants, shops and motels Publicity and advertising space

Fiscal incentives Tax incentives are a very important component of any fiscal package. The various forms of tax incentives could be: • Tax holiday on Income Tax for the concessionaire company • Exemption/rebate on customs duty for imported equipment used in construction or operation of project highway • Exemption of stamp duty applicable to various contracts in the project • Exemption/rebate/deferment of other taxes such as service tax, works contract tax, etc. Appraisal of Return All the risk factors of a BOT highway project can be pulled together in the concept of cost of capital. This represents the required rate of return that all investors, blended together might expect on a project. Algebraically this can be expressed as: Cost of Capital = (Required ROR on debt x % of debt in the project) + (Required ROR on equity x % of equity in the project) Since interest expense is tax deductible, we can calculate the cost of capital either on a before tax or an after tax basis. It is important to understand that the tax rate that is relevant is the one that applies to project sponsors. The required ROR on debt i.e. the borrowing cost is having a number of risk factors, each of which commands a premium that must be paid to investors in order for them to bear that particular risk: Required ROR on debt = Risk free borrowing rate for specified time horizon + Premium for country risk + Premium for currency risk + Premium for project/sector risk + Premium for regulatory risk Similarly, we can think about the ROR on equity investment as being equal to a risk free rate plus a premium for higher risk faced by equity related to debt as well as all four risk factors above. The equity risk premium is a function of how risky a specific sectoral investment is relative to equity markets overall. This adjustment factor is known as beta. Thus, Required ROR on equity = Risk free borrowing rate for specified time horizon + Equity risk premium (adjusted by project beta) + Premium for country risk + Premium for currency risk + Premium for project/sector risk
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+ Premium for regulatory risk The next step is to consider the appropriate mix of debt and equity. This is known as capital structure or funding structure. It is essential to know the capacity of the debt and equity markets, their willingness to invest and the levels of return required. Debt Service Coverage Ratio (DSCR): In practice criteria like Debt Service Coverage Ratio (DSCR) is an important measure used to determine how easily a project could service its schedule repayments. The DSCR is typically is calculated on a rolling annual or semi-annual basis as: DSCR = Profit after tax – Depreciation + Interest Interest + Debt repayment for a particular period

It is used extensively by lenders to determine how much debt can be supported by project cash flows. The minimum DSCR required by lenders varies with each type of project. Usually DSCR should be more than 1.2 and average should vary between 1.35 and 1.4. A project having DSCR less than 1 is not accepted by lenders. Loan Life Coverage Ratio (LLCR): LLCR is used to determine the cash flow available over the term of the debt relative to the amount of the debt outstanding. LLCR = Present value of cash flow before debt service Present value of debt service cost

The goal is to have LLCR to be sufficiently greater than 1 under a full range of sensitivity analysis. A project with a low initial DSCR or LLCR may have its interest spread reduced as these ratios improve over the life of the project. There are several criteria that have been suggested by economists, accountants and others to judge the worthiness of capital projects. Some of the criteria are applicable to a wide range of investments; others are specialized and suitable for certain types of investments and industries. The important investment criteria are classified into two broad categories – discounting criteria and non-discounting criteria.

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