PROJECT APPRAISAL

Group – 17

Re-evaluation of the NH-67

Coimbatore – Mettupalayam Bypass Project

Team Members
Dr.P.Anbalagan Dr.J.Ravishankar
Saurabh Rao Neeraj Semwal
Rajaram Mane Dr.P.Umanath
Project overview

The project appraised in this note prepared by group 17 is regarding the formation
of a new Four lane by pass road connecting the city of Coimbatore and
Mettupalayam. This project is being proposed by NHAI in the PPP mode to be
executed by a concessionaire selected through a competitive bidding process.

Coimbatore is an Urban agglomeration with the population of two million located

in the Western region of Tamil Nadu. It is the biggest Industrial and commercial
hub in the region. The city and the district are heavily industrialized, with the
presence of second largest cluster of MSMEs in India. The district is a leader in
textiles, machinery, casting, pumps and auto spare parts. This results in very high
heavy vehicle traffic in and around the city. Also, the district has the highest per
capita income and vehicle ownership in the State. In addition, the city’s proximity
to Tiruppur and the city being the gateway to Ooty and Cochin ensure sustained
traffic through out the year.

The city and district are very vibrant economically and thus have the environment
to make PPPs in infrastructure successful. In fact, the first PPP project for
formation of toll based highway through a private concessionaire was put up only
in this district, way back in 1998. So no major execution and sustainability issues
are expected.

Project Description

The district has three main national highways passing through it – NH-47, NH-
209 and NH-67. Among them, the NH-67 connects the city with the southern and
central parts of the State. The existing stretch is four laned already and it enters the
city from the east and goes north to Ooty. This is the second most congested
highway in the region and the congestion is particularly severe in the northern
arm. The average annual daily traffic is 25,000 PCUs in the north and 14,000 in
the east. The higher congestion in the north is mainly due to the local traffic.

The project is for the formation of a by pass road in a new alignment from Sulur in
the eastern arm to Mettupalayam in the northern arm. The total length of the road
would be 54 km out of which 48 km would be from new road formation and the
rest 6 km would be improvement of the existing road. The project includes 4
bypasses for the suburban areas, 3 ROBs, 9 underpasses and one grade separator.

The total land to be acquired is 776 acres and 371 structures in this acquired area
would be affected. The land acquisition cost is assumed to be around Rs.126
crores, based on 2006 guideline values. The work cost is projected to be Rs.547
crores. Thus, the total cost is Rs.773 crores, of which the work cost is being borne
by the concessionaire and the land cost is being borne by the NHAI.
Cost Estimates
The cost estimates have been prepared based on the standard schedule of rates and
they include the costs of all the sub-components also.

S.No. Description Amount (in Rs.)

1 Site Clearance and Dismantling 17129638
2 Earth Work 1133218162
3 Granular Base Course and Sub-Base 907540554
4 Bituminous Courses 1346116010
5 Culverts (Pipe, Slab & Box Culverts ) 292956976
6 Bridges ,ROB's , Grade separator & Underpasses 1308215492
7 Drainage and Protective Works 179352699
8 Junctions, Footpath & Kerbs 60641910
9 & Way side Amenities 45811721
10 Traffic Sign Markings and other Road Appurtenances 117046215
11 Miscellaneous 61820493
  Total Cost of Civil Work 5469849870

Assumptions and Parameters used in the analysis

The following are the assumptions used in appraising the project financially and
economically. They have been based on the broad parameters as per the latest
Highways Development Model prescribed – HDM-4.

 Debt – Equity ratio :- 70:30

  Subsidy – maximum 40%
 Concession period (Incl. 24 months construction period) – 25 years
 Escalation – 5%
 Interest on Debt – 11%
 Interest During Construction – 11%
 Project Phasing : First year – 40% , Second year – 60%
 Loan Repayment period – 10 years
 Tax rebate – 10 years (100% exemption for 10 years)
 Moratorium – 2 years
 Depreciation by Straight line method - 100% for 18 years
 Depreciation by Written down value method – 10%

Financial Analysis

The financial analysis is aimed at the question as to whether the project is viable
for the concessionaire without any subsidy from the concessioning authority and if
not so, arrives at the minimum quantum of subsidy (VGF) needed to make it
viable. Keeping in view the present market condition, the minimum return criteria
for the B.O.T project is considered as follows:-

 Project FIRR – Post Tax : Minimum of 14%

 Return on Equity (Equity IRR) : Minimum of 15%
 Debt Service Coverage Ratio (DSCR) : Minimum 1.33
 Net Present Value (NPV) @ 12% : Should be positive
 Payback Period : Should not be more than
10 Years for a Concession
Period of 15years
This analysis is being carried out for four laning of the project road for a length of
53.930 km with a civil construction cost of 546.985 cr. for 25 years concession
period. Analysis is carried out to find out both the return on equity for maximum
grant of 40% and also the minimum grant required for getting 15.00% equity IRR.
It is found that the Return on Equity for the maximum grant (40%) is (Equity IRR)
17% (20% as Equity support and 20% as O & M Grant), which is well above
norms. For the minimum norms, that is 15% equity IRR for 25 years concession
period, 30% grant required. The conclusions are:

Financial Parameters
Scenarios Post Tax Return on NPV @ 12% Concession
FIRR % Equity % (Rs. Crore) Period
30%
(15:15) 12.63% 15.04% 18.34 25 years
subsidy
40%
(20:20) 13.46% 17.00% 60.81 25 years
Subsidy

From the above it can be seen that project road is financially viable on BOT basis
for a concession period of 25 years but only with VGF of 30% of project cost.

Economic Analysis

The economic analysis is based on the standard methodology used to evaluate the
benefits of road transportation projects. The evaluation takes into consideration the
benefits to the society and economy in terms of reduced costs and time for travel
as well as the social costs. The analysis is aimed at arriving at monetary values –
EIRR and NPV, after incorporating all the economic and social factors. In this,
two scenarios are projected, the first taking into account the economic value of
lesser travel time and the second without it.

With Time savings Without Time savings

EIRR
NPV (Rs. in Cr) EIRR (%) NPV (Rs. In Cr)
(%)
32.39% 63.4 24.38% 40.9

It can be seen that the project has a substantially higher EIRR compared to FIRR
due to the fact that subsidies and taxes have been taken out, with the subsidies
being substantial and the taxes being waived in the first ten years. Also, time
savings results in a hike of 50% in both EIRR and NPV.

Sensitivity Analysis

The sensitivity analysis was carried out to study the impact of variations in the
project costs and benefits and to verify if the project becomes unviable in any
adverse scenarios. Apart from the assumed project scenario, three other scenarios
were projected assuming 15% variation in base costs as well as benefits. Since the
endeavour is to check the viability, the assumed scenarios are on the negative side
only. The conclusions are
 With Time savings Without Time savings
Scenario
EIRR NPV (Rs. in EIRR NPV (Rs. in
(%) million) (%) million)
Scenario 1: Base Costs 32.39% 6335.4 24.38% 40.9
and Base Benefits
Scenario 2: Base Costs
Plus 15% and Base 29.11% 6368.8 21.40% 41.1
Benefits
Scenario 3: Base Costs 28.30% 5286.7 21.40% 3598.26
and Benefits Minus 15%
Scenario 4: Base Costs
Plus 15% and Benefits 26.00% 5385.4 18.86% 1960.76
Minus 15%

From the above, it can be seen that the project is viable even in the worst case
scenario of the costs going up by 15% and the benefits dropping by 15%.
Re evaluation of factors

Although the project seems to be viable financially and

economically, a study of various factors shows some critical deficiencies . They
are as follows

a) The toll revenues projected are based on the assumption that 36 percentage
of the traffic at the ends is divertible. This is not based on correct origin
destination study and the field experience.
b) Toll free freeways (state highways) available on the same alignment have
not been given due weightage in terms of traffic diversion under the
assumption that the better quality of the by pass will induce the traffic to
flow this way. This may not be true since the freeways are good two lane
roads and the tolling is substantial.
 c) The toll plaza is being located at Narasimmanaickenpalayam in the
northern arm. This is aimed at tolling at the point of maximum traffic
density, which is predominantly local traffic. This would definitely raise a
public outcry since the toll load of a few long distance users is being loaded
on the local population.
d) The land acquisition cost has been undervalued grossly. This has large
hidden cost for NHAI in addition to vociferous opposition from the affected
people since the northern arm runs through predominantly costly and
developed areas.

After studying the project design, the tolling envisaged and the higher road length
and acquisition. Our group felt that
1) To make the project viable, the toll plaza has been located at the point of
maximum traffic density and alignment changed to suit this.
2) The work cost also inflated due to the incorrect alignment.
3) The additional cost to be loaded on daily users -are not on by passable
traffic.
4) The overall imperfect solution results in higher land area, acquisition cost ,
work cost and travelling time
Hence it is imperative to arrive at an alternative which would be a best possible
solution in terms of viability for the developer along with lower work cost,
acquisition and tolling. This would be possible if the alignment is of shorter length
and the toll plaza is relocated in such a way that the destination based traffic alone
is tolled. This trade off between lower base cost and lower future benefits would
result in a low cost and implementable solution.

Alternative suggestions
Based on the methodology suggested in the previous paragraph, the following
changes are being suggested to arrive at an alternative model.
 1) No change in the initial stretch(up to NH-209)
2) From that point go for the shortest possible alignment to reach
Mettupalayam.
3) Toll plazas at Sulur and Mettupalayam.

This model will have the following impact on various facets of project
implementation.
a) Reduces the road length by 13 km from 54 km to 41 km.
b) No need for 2 ROBs
c) Reduces land acquisition by 105 cares
d) Avoids acquisition in developed areas –costly and structures.
e) Toll revenue to fall by 40%
The above changes will have cost savings for both the concessionaire and
the concessioning authority. The implications are given below.

Impact on work cost: ( for the concessionaire)

i) Reduction in road length : 13 km

Per Km cost for road : Rs. 8 Cr.

Reduction in road cost : Rs. 104 Cr

ii) Reduction in cost of 2 ROBs : Rs. 30 Cr.

TOTAL : Rs. 134 Cr.

Impact on acquisition cost: ( for the concessioning authority )

i) Reduction in road length : 13 km

Usage of existing road : 6 km

Per km acquisition needed : 25 acres (6 Hectares)

Approximate cost per acre : Rs. 80 Lakhs.

 Reduction in acquisition cost : (13-6) x 15 x 0.8
= Rs. 84 Cr.

ii) Total area to be acquired : 776 acres

Approx. area acquired along

existing NH-67 (costly land) = = 310 acres.
40% of 776 acres
Savings due to substitution in = 310 x 0.5 = Rs. 155
alternative alignment (assuming Cr.
new remote lands are 50% of
average cost)

Thus it would be clear that the alternative model suggested will result in cost
saving of Rs 134 crores for the developer and Rs 239 crores for the NHAI.

The lower upfront capital investment will compensate for the lower toll revenues
since the toll is levied on lower traffic volume. If this trade off is still adversarial
for the viability, this can be addressed by a higher VGF transferred from the
saving due to lower acquisition costs. In the field the lower acquisition will reduce
objections and facilitate speedy implementation of project. The lower toll and
lesser travel distance / time will be in permanent public interest.

The analysis of the suggested alternative is as follows:

a) The upfront capital cost reduced by 25%, VGF increased by 33% and toll
revenues reduced by 40%. The other benefits (time & fuel saving) could not be
exactly quantified and factored in, as the exact data was not available.
b) After incorporating the variations, the revised FIRR comes to 10.9% and EIRR
is 27.9%. Although FIRR may fall short of the desired level, our opinion is that
when all the factors are fully factored in, the project would be viable
 POINTS TO PONDER
1) Economic output of saved land by reduced land acquisition &
development in new areas in the new alignment could not be factored
given the limitations of the framework.
2) The savings for NHAI is substantially higher than additional VGF and
the gap is left out of evaluation since the analysis is only on the viability
of the project considering the base work costs and the benefits. The cost
to the concessioning authority is not included in the overall analysis and
hence theoretically a solution with a low cost to developer and high cost
to NHAI would be termed viable while the vice versa would be termed
unviable.

Recommendations:
Our recommendation is to implement the project as per the revised alignment,
relocation of the toll plaza and increased VGF. Even if financially unviable,
considering the higher economic benefits, even the annuity option from NHAI can
be considered as the last resort option.

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