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PPP VGF IIFCL TA IIPDF O&M MCA NPV GHIAL MAHB GoI GoAP GoR AAI ICAO IRA NHAI SPV CA MCA SPCD LOA COD MOU - Public Private Partnership -Viability Gap Funding -Indian Infrastructure Finance Limited -Transaction Advisers -Indian Infrastructure Project Development Fund -Operation and Maintenance -Model Concession Agreement - Net Present Value - GMR-Hyderabad International Airport Ltd. - Malaysia Airports Holding Berhad - Government of India - Government of Andhra Pradesh - Government of Rajasthan -Airport Authority of India -International Civil Aviation Organization -Independent Regulatory Authority - National Highway Authority of India - Special Purpose Vehicle - Concession Agreement - Model Concession Agreement - Scheduled Project Completion Date - Letter of Acceptance - Commercial Operation Date - Memorandum of Understanding
Chapter 1 ABOUT THE STUDY
1.1 INTRODUCTION: In recent years countries around the world have met the challenge of developing and maintaining critical infrastructure by restructuring public utilities and expanding private sector participation in the infrastructure sectors. Recognizing the importance of adequate infrastructure services, and given the constraints on public budgets to finance these growing infrastructure needs, governments have sought to shift part of the burden of new infrastructure investment to the private sector. Government has been actively engaged finding the appropriate policy framework, which would give the private sector adequate confidence in investing into infrastructure projects and at the same time, have adequate checks and balances through transparency, regulation and competition. Consequently, Public Private Partnerships (PPPs) are being actively encouraged for execution, operation and maintenance of infrastructure projects in India. Over the lifespan of these projects the legislative, political, social, market and economic environment could all change significantly. This is especially the case in developing countries, where the social, political and economic conditions are unstable. Thus a high degree of risk and uncertainty surround PPPs and it is critical that adequate identification, assessment, and evaluation of these risks take place. These risks have a high degree of impact on the feasibility of the project, which is a key parameter in the successful implementation of the project. The concession agreement plays a very important role in PPP. The concession agreement provides a regulatory framework of how the PPP should be implemented. It defines the relation between the parties and can be considered as the core of PPP project. It addresses issues which are very important for the successful completion of project such as mitigation and unbundling of risks and allocation of risks.
Considering the importance of all the above, in this thesis, the various types of PPP models, concession agreements and risk management are studied. 1.2 SCOPE OF THE STUDY: In this thesis it has been attempted to study the • • • • Different types of PPP models Various risks associated with PPP and their impact on the feasibility of the project Concession agreements of PPP in three sectors viz. aviation, highways and urban infrastructure The provisions for risk mitigation in the agreements
An attempt to give some recommendations for risk mitigation and enhancement of productivity of PPPs has also been made. 1.3 METHODOLOGY OF STUDY: • • • • • • • Detailed literature survey Prepared rough draft on types of PPP models, various risks, its assessment and mitigation methods Obtained Case Study materials Detailed study of project and concession agreement of the cases Observations and Recommendations Preparation of pre-final drafts Final Report Writing
and maintenance of these facilities. in PPP the private sector assumes a greater role in the planning.2. combined with tight governmental budgets and public resistance to additional tax increases. the government has stepped up investments towards infrastructure through PPP. the government assumes the responsibility for operating and maintaining the facility.150 crore will have to come from private capital. PPPs are used to build new and upgrade existing public facilities. The Eleventh Five Year Plan has set an ambitious target of increasing total investment in infrastructure from around 5% of GDP in the base year of the plan 2006-07 to 9% by the terminal 2011-12. design. has made it essential for public authorities to turn to the innovative qualities and access to operating capital possessed by the private sector in order to fulfill responsibilities. 2. construction. Around 30% of the required investment of around Rs 2. which is based on a contract or concession agreement between a government or statutory entity on one side and a private sector company on the other side.056. After completing the facility. The confluence of rising infrastructure needs and social demands. operation. the government contracts with a private partner to design and build a facility in accordance with the requirements set by the government. Compared with traditional procurement models. The goal is to combine the best capabilities of the public and private sectors for mutual benefit.1 Design-Build (DB): Under this model.2 TYPES OF PPP 2.2. for delivering an infrastructure service on payment of user charges. This method is also referred to as Build-Transfer (BT) 2.2 Build Own Operate (BOO): 4 . provision of quality infrastructure becomes a must to maintain and continue towards higher growth trajectory. To meet this need.Chapter 2 PUBLIC PRIVATE PARTNERSHIPS 2. financing.1 INTRODUCTION: Public Private Partnership (PPP) project. For a country of India’s size.
4 Build-Own-Operate-Transfer (BOOT): The government grants a franchise to a private partner to finance.7 Design-Build-Maintain (DBM): This model is similar to Design-Build except that the private sector also maintains the facility.The government grants the right to finance. refurbishes it with its own resources. The private business refurbishes and operates the facility. 2.2. which retains ownership of the project.6 Design Build-Operate (DBO): A single contract is awarded to a private business which designs. and then operates it through a government contract.2. and operates the public facility. operate and maintain a project to a private entity. but the public retains legal ownership. 2. the facility ownership transfers to the public.2. build and operate a facility for a specific period of time. builds.2.8 Build-Develop-Operate (BDO): The private business buys the public facility.2. The public sector retains responsibility for operations. The private entity is not required to transfer the facility back to the government. 2. 2.2.9 Build-Own-Lease-Transfer (BOLT): 5 . build.3 Build Operate Transfer (BOT): The private business builds and operates the public facility for a significant time period.5 Buy Build Operate (BBO): The government sells the facility to the private business. Ownership of the facility is transferred back to the public sector at the end of that period. design. 2. At the end of the time period.2. 2. design. 2.
There may or may not be a transfer arrangement with regard to the added facility provided by the project developer.2. refurbishing. operate and maintain for a specific period as a franchisee.11 Develop Operate and Transfer (DOT): DOT can be said to be a contractual arrangement whereby favourable conditions external to the new infrastructure project which is to be built by a private developer are integrated into the arrangement by giving that entity the right to develop adjoining property.2. enjoy some of the benefits created by the investment such as higher property or rent values.13 Rehabilitate Own and Operate (ROO): ROO can be said to be a contractual arrangement whereby an existing facility is turned over to the private sector for refurbishing and operation with no time limit on ownership. 2.12 Rehabilitate Operate and Transfer (ROT): ROT can be said to be a contractual arrangement whereby an existing facility is turned over to a private entity to refurbish. 2. 2.2. on the expiry of which.The government grants the right to finance and build a project which is then leased back to the government for an agreed term and fee.2.10 Contract Add and Operate (CAO): CAO can be said to be a contractual agreement whereby the project developer adds to an existing infrastructure facility which it rents from the government and operates the expanded project over an agreed as a period franchise. it can continue to operate the facility in perpetuity. the legal title to the facility is turned over to the government. 2.14 Lease Renovate Operate and Transfer (LROT): 6 . erecting and consuming it within the host country. The facility is operated by the government. As long as the operator has not violated the franchise. and thus. At the end of the agreed tenure the project is transferred to the government. 2.2. The term is also used to describe the purchase of an existing facility from abroad.
Once the facility is completed. while the private sector operates the facility for a specified period. builds. In some countries. as follows: • • • Stimulate economic growth Improved and expanded infrastructure services that would not be there otherwise Technology transfer. with the key challenge being to devise arrangements that are predictable and sustainable. on such terms and conditions as may be agreed to with the government for recovering the costs with an agreed return and thereafter.16 Design-Build-Finance-Operate/Maintain (DBFO. 2. the facility is transferred to the public sector. DBFO/M covers both BOO and BOOT. the private sector designs. operates and/or maintains a new facility under a long-term lease. DBFM or DBFO/M): Under this model. Infrastructure is essential to supporting economic growth.LROT can be said to be a contractual arrangement whereby an existing infrastructure facility is handed over to private. transferring the facility to the government.2. At the end of the lease term. for a particular period of time for the specific purpose of renovating the facility and operating it for a specific period of time. while delivering better services. parties on lease. This model is also referred to as Build-Transfer-Operate (BTO). economic. Private sector participation in this sector offers clear benefits. the title for the new facility is transferred to the public sector.15 Design-Build-Operate (DBO): Under this model. training of local personal and development of national capital markets 7 . The Ministry of Power has adopted this route for the renovation of existing power plants. finances.2. and social agenda of many countries. 2. 2. the private sector design and builds a facility on the turn-key basis.3 BENEFITS OF PPP: The issue of private sector participation is high on the political.
• • • • • • • • • • • • • Competition and innovation Improved efficiency Faster implementation Relieving the government budget and borrowing Providing a benchmark with which to judge the public sector’s performance Better allocation of risk between the public and private sectors Improve service delivery Improve cost-effectiveness Increase investment in public infrastructure Reduce public sector risk Deliver capital projects faster Improve budget certainty Make better use of assets Private sector participation brings with it a more commercial approach to infrastructure provision. reducing political intervention. The Roles. distanced from their responsibility of providing the infrastructure service itself. can tackle other issues such as tariff reform. Governments. 2. Skill Requirements and Risks for public and private parties in different types of contracts are shown in the figure 8 .4 IMPLEMENTATION OF PPP PROJECTS: Implementation of PPP involves sharing of the risk from public to private party.
Fully Public Operation & Maintenance contract Design Build Operate Buy Build Operate Build Operate Transfer Fully Private Build Own Operate High Design Build Low Lease Develop Operate Build Transfer Operate Roles. regulatory institutions are being set up and strengthened. Therefore the government has come out with various initiatives such as: • • Scheme for financial support to PPP in infrastructure.5 FRAMEWORK FOR PPPS IN INDIA To address various constraints in the PPP model. Progressively.1 Risks of Private Parties in PPP Projects 2. and Risks of Private Sector Fig 2.viability gap funding (VGF) Scheme for financing viable infrastructure projects through a special purpose vehicleIndian Infrastructure Finance Company Limited (IIFCL) • • Establishment of the Indian Infrastructure Development Fund Empanelment of Transaction Advisers (TAs) for PPP projects 2.1 Viability Gap Funding (VGF) Scheme: The VGF Scheme of the government of India provides financial support in the form of grants to infrastructure projects undertaken on PPP mode-a capital grant at the stage of project 9 . more sectors have been opened to private and foreign investments levy of user charges is being promoted.5. several initiatives have been taken by the Government of India to create an enabling framework for PPPs by addressing issues relating to policy and regulatory environment. and fiscal incentives are given to infrastructure projects. Skill Requirements.
Another prerequisite for the applicability of the scheme is that the project should provide the infrastructure service against the payment of a pre-determined tariff or user charge. airports. the actual lending is governed by appraisal of the lead bank before financial closure of projects. a private sector company selected under a PPP initiative or a private sector company. 2.. sewerage. inland waterways. water supply. power. which become viable after receiving the VGF. An offshore SPV. The scheme restricts its applicability to ‘infrastructure service’.e.2 Indian Infrastructure Finance Company Limited (IIFCL): Indian Infrastructure Finance Company Limited (IIFCL) has been set up with the specific mandate to play a catalytic role in the infrastructure sector by providing long-term financing to infrastructure projects in India. international convention centres and other tourism infrastructure projects. Indian Infrastructure Finance Company (UK) Limited has been set up to utilise part of foreign exchange reserves for infrastructure development. seaports. IIFCL raises funds both from the domestic as well as external markets on the strength of the government guarantees. IIFCL finances only commercially viable projects. also finances those PPP projects. Lending by IIFCL is again restricted to projects involving ‘infrastructure services’. urban transport. financed and operated for the project term by a public sector company. railways. developed. IIFCL restricts its lending to only projects implemented i. Under this scheme. only out of its own budget. and are strictly restricted for the purpose of making the projects commercially viable. which includes roads and bridges. the support of the government in the mode of VGF shall not exceed 20% of the total project cost. The project company borrowing from IIFCL should be set up on a ‘non resource basis’ (should be a special purpose vehicle for the project). The scheme provides for option of seeking ‘n principle’ approval for financial assistance by the sponsoring entity.5. Under this scheme.construction. but the government or statutory entity may grant an additional 20%. The ministry of finance administers this scheme. IIFCL therefore. solid waste management and other physical infrastructure in urban infrastructure projects in special economic zones. These grants are either one time or deferred basis. The lead bank is responsible for regular monitoring and periodic 10 .
3 Indian Infrastructure Project Development Fund (IIPDF) Quality advisory services are fundamental to procuring affordable.5. IIFCL provides for funding viable infrastructure projects through long term debt. Ministry of Finance. Therefore. 2. For smooth conduct. or any other mode.4 Transaction advisers for PPP Projects 11 . The cost of procuring these transactions advisers for the PPPs is also significant. IIPDF is to assist project that closely support the best practices in PPP project identification and preparation as set out in guidance to be issued by the Department of Economic Affairs from time-to-time. IIFCL enters into a tripartite agreement with the lead bank and the project company for every individual project. thereby reducing the impact of costs related to procurement on their budgets. IIPDF has been created in the Department of Economic Affairs. IIPDF is the scheme for funding to cover a portion of the PPP transaction costs.evaluation of project compliance with agreed milestones and performance levels especially with respect to disbursement of IIFCL funds. and Government of India for supporting the development of credible and bankable PPP projects that can be offered to the private sector. or refinancing to banks and financial institutions for loans granted by them or with tenure exceeding 10 years. It has also been mentioned in the scheme that as the IIPDF matures with experience and time. be approved by the government. 2. which may be from time-to-time. The lead bank further takes the responsibility of disbursing the loans advanced by IIFCL and also the recovery of the same. IIPDF is corpus fund set up for the purpose of providing financial support for quality project development activities to the states and the central ministries.5. IIPDF is not aimed to act as a source of grant funding for the sponsoring authorities but to assist the sponsoring authorities with up to 75% of their project development expenses. a suitable autonomous legal structure is considered by the government for the management of the IIPDF. value-for-money PPPs.
12 .PPPs are still in their infancy stage in India. greater awareness of good examples and established procedures will certainly add execution clarity of the sponsoring entity and also will provide quality information to investors on PPP schemes and incentives. A systematic compilation of knowledge and experiences on PPP projects across sectors.
This chapter presents many of the risks involved and actions that can be taken to mitigate them. Promoters would invest in a project only if the risks in the project are less than the reward which the project fetches. • Insufficient Income from Fares or Tolls. it would be expected that that the concession company would request a cash compensation from the government for a deficiency in income from fares 13 .1 CLASSIFICATION OF RISK Understanding and addressing the risks of a PPP project early on is important for both the parties in PPP. Some of the risks in PPP are • • • • • • • • • Market and revenue risks.Chapter 3 RISKS IN PPP 3.1 Market and Revenue risks Revenue risk is the uncertainty in relation to the revenue that a project would actually generate.1. In the case of a PPP project operating under a government concession. The market and revenue risks that a PPP project may face can be grouped into the three broad areas discussed below. Design risks Construction risks Operating risks Financial risks Political risks Legal risks Environment risks Force Majeure risks 3. PPP projects carry several risks that are unique to this type of delivery system in addition to the risks associated with more traditional assignments.
the risk would be within the control of the grantor. as they may be affected by an extended concession period. request authority to increase tolls or fares. needs review its role carefully as it relates to traffic and earnings forecasts for a PPP project.or tolls. This is an inherent risk in the project as it is very difficult to conclusively ascertain that damage to the facility is actually caused due to the defect in the design parameters or the very design itself. They include: 14 . In the event of the design parameters being stipulated by the grantor of the concession or license. Construction risks are associated with PPP projects. to the extent possible. It is important for the PPP contractor to obtain a commitment from the government.1. more traditional construction projects and the simpler forms of design/build projects. or extend the concession period. 3. In addition. In the event that the government has not offered to provide such additional compensation. Generally it is the design contractor who is responsible for the design aspects of the project. with respect to anticipated traffic levels and to negotiate a sufficient compensation arrangement for deficiencies. • Insufficient Traffic. • Insufficient Income from Other Operations.3 Construction Risks The construction risks are essentially a bundle of various individual risk factors that adversely affect the construction of a project within the time frame and costs projected and at the standards specified for the facility.1. Here it is necessary to identify its risks clearly with respect to cash flow or its returns. 3.2 Design Risks This risk relates to any defect in the design of the infrastructure facility or the design requirements stipulated for the project. In this case. including alternate uses of major portions of the concession facility. similar opportunities exist for requesting the government to provide cash compensation for deficiencies and/or extending the concession period. the concession company would have opportunities to increase rents or pursue different business strategies.
This risk accrues to the concession company primarily and may result in claims on insurers or the party causing the damage. These risks affect the concession company directly. This is the flip side of the prior risk. This risk flows directly to the concession company.1. This is a risk to the concession company. which may attempt to mitigate the risk either by a new injection of equity or subordinated debt from the sponsors. • Environmental Damage. the concession company may draw down standby finance from project lenders. (A major issue is that design requirements in PPP projects are different than those for a traditional owner. Except for termination of the concession by the concession company. Force Majeure Event. The available actions are to either claim liquidated damages from the contractor or draw down standby finance from the project lenders. these risks flow directly to the concession company. This risk accrues to the concession company primarily and would result typically in a claim to the project insurers. This risk is to the contractor. • Increased Financing Costs. • Contractor Default. with the primary mitigating measure being claim of liquidated damages from the concession company. • Cost Overruns and Time and Quality.4 Operating Risks Some of the risks that we may face in a PPP project apply also when we are providing operations and maintenance (O&M) -type services. These risks may flow to both the government and concession company. These risks flow directly to the contractor and the concession company and represent a potential area of future disputes. which may claim liquidated damages from the contractor or make a claim against the contractor’s performance bond and bonding company.) • Cost and Scope of Identified but Unspecified Work and Variations. Alternatively. Available actions include claims under expropriation legislation or claims by the concession company of liquidated damages from the contractor. • Default by Concession Company.• Land Expropriation. • 3. Some of the risks and actions available to the concession company include: 15 .
Operation cost overrun: The operating costs exceed the original estimates Operating Contractor Default: The concession company may terminate the operations and maintenance contract and appoint a new O&M contractor Force Majeure or Environmental Damage: In this type of event. Force the project to bear additional financing costs. Prices and user fees charged to local users or customers will most likely be paid for in local currency. since exchange rates are particularly unstable in many developing countries or countries whose economies are in transition. for example. with some loans extending over a period of several years.5 Financial Risks Financial risks fall into these categories: • Exchange rate risk relates to the possibility that changes in foreign exchange rates alter the exchange value of cash flows from the project.1. This risk may be significant in infrastructure projects given the usually large sums borrowed and the long duration of projects. in which case the concession company could make claims of damages against that party. fixed-rate bonds) to reduce the interest rate risk. the finance package may include hedging facilities against interest rate risks. 3.1. while the loan facilities and sometimes also equipment or fuel costs may be denominated in foreign currency. In addition. • • • • Default: The default may be caused by the actions of a third party.• Performance risk: The completed facility cannot be effectively operated or maintained to produce the expected capacity. In addition to exchange rate fluctuations. 3. This risk may be considerable.6 Political Risks 16 . output or efficiency. the project company may face the risk that foreign exchange control or lowering reserves of foreign exchange may limit the availability in the local market of foreign currency needed by the project company to service its debt or repay the original investment. by way of interest rate swaps or interest rate caps. • Interest rate risk. Loans are often given at a fixed rate of interest (for example. the concession company would most likely place a claim with its insurers because risks of this type would be normally insurable.
which can result not only in adverse affects on the financials of a project but may also cause a closure of any work or operations of and in relation to the facility. 3.The project company and the lenders face the risk that the project execution may be negatively affected by acts of the contracting authority (Government).1. These risks are generally within the control of the construction. 3. another agency of the Government or the host country’s legislature.1. and the operation and maintenance consortium. 3. This risk has increased due to the presence of strict legal liability in relation to such environmental incidents.1.8 Environment Risk These are risks relating to occurrence of environmental incidents during the course of implementation of the project.9 Force Majeure Risks 17 .7 Legal Risks Some of the legal risks that a PPP project can face are related to: • • • • • • Title/lease of property Ownership of assets Corporate and security structure Financial failure or insolvency of concession company Breach of financing documents Enforceability of security. Such risks are often referred to as political risks • • • • • • • • Nationalisation of project Changes in law Development approvals Adverse government action or inaction Payment failure by government Increases in taxes Political force majeure (including changes in government) Termination of concession by government (or unplanned competition).
the mechanism of managing and mitigating such risks cannot be categorically stated as they vary with each project and the circumstances surrounding each project. The defining of force majeure events. nationalization. These risks generally arise due to causes extraneous to the project.These risks are regarding the events that are outside the control of any party and cannot be reasonably prevented by the concerned party. However. floods. these include: • • • Natural force majeure events Direct political force majeure events Indirect political force majeure events Natural force majeure events comprise of all events that can be attributed to natural conditions or acts of God such as earthquakes. These risks should be shared equally among the parties. 3. cyclones and typhoons. Indirect political force majeure events are events that have their origins in political events but are not project specific such as war. riots etc.2 RISK MITIGATION: 18 . Direct political force majeure events are events attributable to political events that are specific to the project itself such as exploration.
19 .2. • Prevent unjust enrichment by Developer: The government should ensure that the private parties vested with the control and operation of a public service or a public facility should not abuse their position to unjustly profit from the venture at the expense of public money. • Certain Costs: The government should ensure that the cost of construction.3. operation and maintenance of the infrastructure facility are certain and can adequately balance the requirements of the private developer and those of the general users or consumers and the lenders. operation and maintenance of the required infrastructure facility at specific standards. within a certain time frame and ensure its transfer at certain standards.1 Risk Mitigation Steps Table 3.2.2 RISK MITIGATION STRATEGIES: • Infrastructure Facility: The main aim of the government should be to ensure the construction. upon the developer obtaining the agreed returns.1 Identify risk Identifying the events or Actions which Effects the Viability of the Project Determine severity of risk In Case the Event occur the effect of the same on the cost / time of the project Allocate the risk Identifying and allocating the risk to the party who can manage it best Mitigate the risk Steps / actions which can be taking to reduce the chances of the event occurring Price the risk Cost of the risk addressing have to be determined 3.
• The government should provide for a suitable legal framework and policies within which the specific concerns relating to the development of infrastructure projects through private participation and bankability of projects can be addressed. • Environment: The government should ensure that the facility is constructed. It should be kept in mind that the commercial return would be derived over a long period of time and at the risk of a high degree of upfront investment.• Prevent Abuse of Monopoly: The government should ensure that the private developers do not abuse their natural monopoly position in respect of the provision of an infrastructure facility and that they exercise their rights specifically vested with a public character in the interests of the public. • The private developer should not become the basket for storing all risks simply on the basis that it is obtaining a commercial return. operated and maintained with the minimum possible impact on the environment or an acceptable level of impact on the environment. as a public utility. • Rehabilitation and Social impact: The government should ensure that the persons displaced by the implementation of a project are adequately rehabilitated and the social impact of the project is ascertained prior to its planning and implementation as to provide for suitable mitigation measures. • The government should support the development of infrastructure projects as it does not have the revenue or the technical resources to develop the required infrastructure in various sectors. This also enables the government revenues from becoming 20 . • Return of the Facility to Public: The government should ensure that the facility is transferred for use to the public after the satisfaction of the terms on the basis of which private participation had been based.
• Bankability: The project and the documentation should be bankable so as to enable the developer to arrange for the required debt facilities to implement the project. Thus. there is a great conflict of interest between the government as the service provider and government as the grantor of 21 . • Provision of level playing field: In most infrastructure sectors. The developer should not be straddled between the various documents with risks it has no control over or is not capable of absorbing. • Return on Investment: The project and the documentation should be capable of providing an adequate return to investors in the project. The aim of the developer should be to ensure that project costs can be determined and controlled in a certain manner. • Control over the Revenue Stream: The special purpose vehicle should have adequate control over the revenue stream to create security in favour of the lenders. • Certainty of Costs: Each application. • Distribution and Management of Risk: The documentation in relation to the project should be such so as to enable passage of various risks that are not within the control of Special Purpose Vehicle but it has been allocated to it under the main concession or license. the risks allotted under the concession or license should flow down to the various contractors under the relevant documentation with the contractors.free from the demands of providing such infrastructure facilities and at the same time allowing for the development of such facilities. • Vesting of Adequate Rights: The special purpose vehicle should be vested with all the rights required for enabling it to develop the project. each risk and each uncertainty has an attached cost. This includes the right to create adequate security in favour of the lenders. This is a universal necessity in order to justify any private investment in any venture.
the concession. There should be specific arrangements provided for minimizing the adverse impact of such a potential conflicts of interests. 22 .
The concession (or project) agreement sets the stage for risk allocation for the underlying project agreements. Although the construction contractor and the operator are not parties to the concession agreement. 23 .CHAPTER 4 CASE STUDIES 4. concession fee. Therefore. The objective of a Concession Agreement shall be to secure value for public money and provide efficient and cost effective services to the users. and financial support from the Government. dispute resolution. It also deals adequately with other important concerns such as user protection. Hence in this chapter we would first discuss how a concession agreement has to be drafted for a better execution of the project. and termination etc. It is important for the concession company and the construction contractor and the operator to identify and appropriately deal with any risk or obligation set out in the concession agreement. transparent and fair procedures. The concession agreement addresses the issues like obligations between the principal parties. force majeure. Any mismatch in risk allocation is most likely to result in adverse contractual (and monetary) consequences for those parties who have not adequately priced in or managed those risks.1 INTRODUCTION An understanding between a company and the host government that specifies the rules under which the company can operate locally is known as Concession Agreement. the drafting of a concession agreement shall be done with a great care. During the bid preparation and contract negotiations phase. revenue. conditions. representations and warranties. charges. it is crucial that there is a co-ordinate approach towards finalising the project documents from the concession agreement down to the construction contract and operation and maintenance agreement. Later a detailed study of concession agreements of two different projects is done. rights. the final form of concession agreement shall reflect the design and construction risks and the operational risks that are accepted by the construction contractor and the operator and will "flow down" or "step down" into the underlying project agreements.
on the other hand. reduction of transaction costs. allocation of risks and rewards. transparent and fair procedures. For sustaining private investment in up gradation and maintenance of the Infrastructure projects on PPP basis. Rationale for phased development The four critical elements that determine the financial viability of a Highway project are traffic volumes. The MCA also elaborates on the basis for commercialising highways in a A comprehensive planned and phased manner through optimal utilisation of resources on the one framework is a hand and adoption of international best practices on the other. and financial support from the Government. user fee. However. This framework addresses the issues which are typically important for limited recourse financing of infrastructure projects. the inflow of investment will depend on a comprehensive policy and regulatory framework necessary for addressing the complexities of PPP.2 OVERVIEW OF THE FRAMEWORK The highways sector in India is witnessing a significant interest from both Transformation domestic as well as foreign investors following the policy initiatives taken by of the highways the Government of India to promote Public Private Partnership (PPP) on sector is essential various models. symmetry of obligations between the principal parties. precision and predictability of costs and obligations. concession period and capital costs. revenue streams for a Highway project can be assessed with reasonable accuracy. The objective is prerequisite to secure value for public money and provide efficient and cost effective PPP services to the users. As the existing highways have dedicated traffic and the Government has prescribed the user fee for uniform application across India. force majeure.4. and termination. It also deals adequately with other important concerns such as user protection. such as mitigation and unbundling of risks. can be extended only marginally for 24 for . a precise policy and regulatory framework is being spelt out in a Model Concession Agreement (MCA). The concession period.
These issues would be subjected to in-depth examination and reflected in a Manual of Standards and Specifications that would form part of the standard documents associated with the MCA. and would hence and cost-effective result in a curtailed programme of highway development. would restrict the ability of the Government to leverage a larger pool of will be affordable extra budgetary resources. and they would seek an appropriate capital grant/subsidy from the National Highways Authority of India (Authority) in order to reduce the capital cost for arriving at an acceptable rate of return.improving project viability as the growth of traffic would not permit unduly long concession periods. As an alternative. comparatively shorter concession periods may be stipulated so that the Authority can augment the capacity when it is due. it is important to rely on cost effective designs and to combine them with a phased investment programme to enable a more efficient and sustainable programme of highway development. greater would be the compulsion of project sponsors to seek larger grants from the Authority. limited expansion of highways should be provided with further expansion after 7-12 years depending on realistic projections of traffic growth. In the given scenario. capital cost is the only variable that is available for the bidders to determine the financial viability of a project. In any case. In view of the foregoing. As three of the four above-stated parameters are predetermined. Where traffic intensity is comparatively low. 25 . is comparatively low from the Concessionaire’s perspective. including private investment. higher the capital cost. This. the net present value (NPV) of projected revenues after say. Up gradation of designs and standards. construction of bypasses in urban and semi-urban areas and other improvements may also be planned in phases depending on traffic intensity. 15 years. The emphasis should be on phased development rather than on providing high cost projects for catering to the projected growth in the long term. Phased development in turn.
parameters will Only the core requirements of design. as these have a direct bearing on the level of service for users. cease when full capacity of the road is reached. leading to maximisation of toll revenues. Concession period The guiding principle for determining project-specific concession period is the carrying capacity of the respective highway at the end of the concession period.Concession period will be specific basis depending on the volume of present and linked to projected projected traffic. traffic Toll paying users should not be subjected to congested highways and the Concession should. therefore. unless further augmentation is built into the MCA. Cost efficiencies would occur because the shift to output-based specifications would provide the private sector with a greater opportunity to innovate and optimise designs in a way normally denied to it under conventional input-based procurement techniques. the framework focuses on the ‘what’ rather than the ‘how’ in relation to the delivery of services by the Concessionaire. construction. 26 . the technical parameters proposed in the MCA are based mainly on output Technical specifications. The time required for construction (about two years) has been included in the concession period so as to incentivise early completion. the Concession Period is proposed to be determined on a project. As such. the users In sum.Technical parameters Unlike the normal practice of focussing on construction specifications. This would provide the requisite flexibility to the Concessionaire in evolving and adopting costeffective designs without compromising with the quality of service for the users. operation and maintenance focus on the of the Project are to be specified and enough room would be left for the level of service for Concessionaire to innovate and add value.
the Concession Fee to be paid by the Concessionaire will be on an ascending revenue-sharing basis. it will increase by an additional 1%.will listed bidders will be required to specify only the amount of grant sought by be the norm them. Concession The rationale for the above fee structure is that in the initial years. and short. 27 .Selection of Concessionaire Competitive Selection of the Concessionaire will be based on open competitive bidding on single bidding. price parameter indexation and technical parameters are to be clearly stated upfront. Recognising this cash flow pattern. Where such be assistance is inadequate for making a project commercially viable. Grant It is proposed that based on competitive bidding. Over the years. Concession fee Concession Fee will be a fixed sum of Re. revenue the Concessionaire will have an increasing surplus in his hand owing to the streams can sustain it declining debt service and rising revenues. During the tenth year. a bidder may offer to share the project revenues with the Authority. however. Grants must This would help in bridging the viability gap of the PPP projects. toll rates. an fully leveraged additional grant not exceeding 20 per cent of the project costs may be given during the period following the commissioning of the Project. 1 per annum for the first nine years of the Concession Period. All project parameters such as the concession period. instead of seeking a grant. the Authority should provide a capital grant of up to a maximum of 20 per cent of the project cost. In exceptional cases. The bidder who seeks the lowest grant should win the contract. debt fee should be levied when service obligations would entail substantial outflows. the Concession Fee will be equal to 1% of the project revenues and for each subsequent year.
Conversely. been assigned to the private sector. as it is best suited to and mitigation is manage them. therefore. such as the rate of growth of traffic. the MCA provides for extension of the concession period in the event of a lower than expected growth in traffic. nor specify the penal consequences for failure to do so. Project risks have. a shortfall of 5% in the target traffic after 10 years will lead to extension of the Concession Period by 7. failing which the bid security 28 . The transfer of such risks and responsibilities to the private sector would increase the scope of innovation leading to efficiencies in costs and services. The Risk commercial and technical risks relating to construction.75% thereof. On the other hand. Financial close Unlike other agreements for private infrastructure projects which neither define a time-frame for achieving financial close. operation and alleviation maintenance are being allocated to the Concessionaire. however. Other commercial risks. It is generally recognised that economic growth will have a direct influence on the growth of traffic and that the Concessionaire cannot in any manner manage or control this growth rate.Risk allocation As an underlying principle. is private investment significantly mitigated as the Project Highway is a natural monopoly where existing traffic volumes can be measured with reasonable accuracy. and to the extent it is capable of managing them. an increase of 5% in the target traffic will reduce the Concession Period by 3. the concession period is proposed to be reduced if the traffic growth exceeds the expected level. By way of risk mitigation. The MCA provides for a target traffic growth and stipulates an increase of up to 20% in the Concession Period if the growth rate is lower than projected. Thus.5% thereof. are critical to also being allocated to the Concessionaire. the MCA stipulates a time limit of 180 days (extendable up to another 120 days on payment of a penalty). risks have been allocated to the parties that are best suited to manage them. all direct and indirect political risks are being assigned to the Authority. The traffic risk. On the other hand.
A higher indexation would also add determined great to uncertainties in the financial projections of the project.shall be forfeited. Project implementati enabling financial close within the stipulated period. the said indexation of 40 per cent is considered adequate. which is achievable only if all the parameters are well defined and the requisite preparatory work has been undertaken. The above elements would be examined further and firmed up during the proposed review of the toll policy. A higher level of indexation is not favoured. The MCA provides for indexation of the user fee to the extent of 40 per cent thereof linked to WPI. The MCA represents the comprehensive framework necessary for User fee A balanced and precise mechanism for fixation of user fee has been specified for the entire Concession Period since this would be of fundamental importance in determining the revenue streams of the project and. its viability. Since repayment of domestic debt would be neutral to inflation. this is a tight schedule. By prevalent standards. This approach would also address the present trend per agreed timeframe where infrastructure projects do not achieve financial close for long periods. At the time of second with care and phase. The user fee shall be based on the rates to be notified by the Government. Adherence to such time on schedules will usher in a significant reduction in costs besides providing the must commence as over-due infrastructure. however. Local traffic It is proposed that the highways should be allowed to be used by local residents 29 . therefore. as that would require the users to pay more fee for a declining (more congested) level of service when they should be User should be receiving the benefit of a depreciated fee. a one-time increase in toll rates would be allowed for precision neutralising inflation occurring between project commencement and second phase.
without any payment of tolls (owing to the absence of an alternative road) until free service lanes are provided. must be Operation and maintenance ensured Operation and maintenance of the Project Highway is proposed to be governed by strict standards with a view to ensuring a high level of service for the users. police assistance. in accordance with the tolling policy. Frequent users should be entitled to discounted rates. the Concessionaire will be required to subject the Project Highway to Quality and specifications relating to the level and safety of service for the safety of service users. operational performance would be the most important test of service delivery. 30 specified tests for ensuring compliance with the . Before commencing the collection of user fee. and any violations thereof would attract stiff penalties. undertaken within a specified limit. This would ensure local support for the project and avoid any legal challenge or local opposition arising out of easement rights. Additional works may be financial close. The MCA also provides for traffic regulation. only if the entire cost thereof is borne by the Authority. emergency medical services and rescue operations. In sum. The MCA provides for an elaborate and dynamic mechanism to evaluate and upgrade safety requirements on a continuing basis. Construction Handing over possession of at least 80% of the required land and obtaining of environmental clearances are being proposed as conditions precedent to be satisfied by the Authority before Captive local residents The MCA defines the scope of the project with precision must be and predictability in order to enable the Concessionaire to exempt from user charges determine his costs and obligations.
therefore. namely. Pre(a) when termination occurs as a result of default by the determined Termination Concessionaire. In particular. as neither the Concessionaire nor the lenders can use the highway in any other manner for recovering their investments. 90 per cent of the debt will be protected payments (b) In the event of non-political force majeure such as Act of should 31 to private infrastructure projects. Termination payments have been quantified precisely as compared to the complex formulations in most agreements relating Political force Concessionair majeure and defaults by the Authority are proposed to Qualify e will be protected for adequate compensatory payments to the Concessionaire against and thus guard against any discriminatory or arbitrary action political actions by the Government or the Authority. The MCA accordingly provides for such substitution rights. Force Majeure The MCA contains the requisite provisions for dealing with force majeure events. Lenders will have the right Termination of In the event of termination. the project debt would be fully protected by the Authority in the event of termination. the MCA provides for a Substitution compulsory buy-out by the Authority. It is the project revenue streams that constitute the mainstay of Maintenance standards their security.Right of substitution In the highways sector. it affords adequate protection to the Concessionaire against political actions that may have a material adverse effect on the project. The lenders would. . require assignment and will be substitution rights so that the concession can be transferred to enforced another company in the event of failure of the Concessionaire strictly to operate the project successfully. the project assets do not constitute adequate security for the lenders. except for two situations. Further.
90 per cent of the debt provide Predictability beyond the insurance cover will be protected. operation and maintenance is proposed to be undertaken through an Independent Engineer (a qualified firm) that will be selected by the Authority through a transparent process. Support and guarantees by the Authority By way of comfort to the lenders. the MCA also provides for appointment of additional or concurrent auditors. As a safeguard.God (normally covered by insurance). however. Monitoring and supervision Day-to-day interaction between the Authority and the Concessionaire has been kept to the bare minimum following a ‘hands-off’ approach. all financial inflows and outflows of the project are proposed to be routed through an escrow account. Monitoring and supervision of construction. To provide enhanced security to the lenders and greater stability to the project operations. been provided for ensuring full accountability of the Concessionaire. Checks and balances have. a loan assistance from 32 . and the Authority shall be entitled to intervene only in the event of default. as they would play a critical role in ensuring financial discipline. a A credible and public sector consulting firm may discharge the functions of fair arrangement the Independent Engineer. besides improving the efficiency of project operations. Its independence would provide added comfort to all stakeholders. If required. for The MCA provides for a transparent procedure to ensure supervision is essential selection of well-reputed statutory auditors.
which can upset the revenue streams of the project. and indemnity. a floor level in present and projected traffic has also been stipulated. defects liability. As a safeguard against leakage of revenue share. the proposed framework addresses the issues that are likely to arise in financing of highway projects on BOT basis. Private participation should improve efficiencies and reduce An effective dispute resolution mechanism is critical Support and guarantees by the Authority are essential 33 . Conclusion Together with the Schedules. aimed at accelerating growth. Miscellaneous A regular traffic census and annual survey has been stipulated for keeping track of traffic growth. The proposed regulatory and policy framework contained in the MCA is critical for attracting private investment with improved efficiencies and reduced costs. Guarantees have also been provided to protect the Concessionaire from construction of competing roads. redressal of public grievances and disclosure of project documents. change in law.the Authority has been stipulated for supporting debt service obligations in the event of a revenue shortfall resulting from political force majeure or default by the Authority. suspension of rights. Sample checks by the Authority have also been provided for. Additional toll ways would be allowed. insurance. but only after a specified period and upon compensation to the Concessionaire by way of an extended concession period and reduced concession fee. The MCA also addresses issues relating to dispute resolution.
costs 34 .
Concession Period: 30 years from the date of commencement of the operation on extension basis EPC Contract: The main EPC contractors were Larsen & Toubro for airside and landside works. in association with Aviaplan of Norway and STUP of India. Operation and Maintenance of the Hyderabad International Airport Location: Shamshabad. 2478 crores Consultancy services: COWI A/S. Construction. and China State Construction & Engineering (Hong Kong) for the construction of the passenger terminal building and the ATC Tower. Consortium: GMR-Hyderabad International Airport Limited (GHIAL) is a joint venture company promoted by GMR Group (63%) with Malaysia Airports Holding Berhad (MAHB) (11%). India Client: Ministry of civil aviation. Government of Andhra Pradesh (13%) and the Airports Authority of India (13%) as the other consortium partners. Completion Period: Within 36 months from the date of commencement of work (Phase I) 35 . engineering / architectural design and tender documents for the construction of the new airport. GHIAL won the bid to develop and operate the Greenfield international airport at Shamshabad in Hyderabad through an international competitive bidding process conducted by the Government of Andhra Pradesh and the Government of India in 2003.3 Case Study: HYDERABAD INTERNATIONAL AIRPORT LIMITED Project: Development. The in-flight catering contract was awarded to LSG Sky Chef and Sky Gourmet. Government of India. Menzies Aviation Plc was chosen for the development and operation of cargo facilities. Andhra Pradesh.4. provided consulting services for preparing the master plan. Total project cost: Rs.
a joint sector company established for the purpose of implementing the project. acting through the secretary.The detailed overview of the concession agreement is as follows. Definitions and Interpretations The agreement starts with definitions and interpretations wherein the terms that are followed in the next part of the agreement are well explained and abbreviations are expanded. The definitions given here are applicable to the whole agreement except to the extent that the context otherwise requires. It is the endeavor of the parties to develop an international standard airport where all airport activities are carried out in a timely manner with requisite performance standards. Scope of the project The concession agreement defines the scope of the project to the point clearly covering every detail though in a brief way. it is critical that the terms and conditions upon which such a project will be implemented are set out and therefore the parties enter into this concession agreement. In the context of a project being undertaken through a public/private sector approach. The scope of the Project: • • • The development and construction of the Airport on the Site in accordance with the provisions of the Agreement. ministry of civil aviation of government of India and Hyderabad international airport limited. The operation and maintenance of the Airport and performance of the Airport Activities and Non-Airport Activities in accordance with the provisions of the Agreement The performance and fulfillment of all other obligations of HIAL in accordance with the provisions of the Agreement Grant of Concession 36 . This agreement is made in New Delhi on 20th day of December 2004 between the president of India. providing clarity and avoiding ambiguity.
if and to the extent required by any Applicable Law Concession Fee The Parties agree that HIAL shall.This is a clause whereby the Government of India grants HIAL the exclusive right and privilege to carry out the development. banks and exchanges and shopping malls. passengers. It explains gross revenue and what all it consists of. the time of payment. meeting facilities. departure and/or handling of aircraft. real estate. maintenance. baggage. design. business centres. interest and taxes etc. theme parks. subject to the same being within the framework of this Agreement and not being contrary to the terms and conditions of this Agreement provided that. construction. The agreement also permits HIAL to give service provider rights for carrying out few activities and businesses to any person subject to such terms and conditions as HIAL may determine are reasonably appropriate. 37 . Recognition of Rights The rights of the HIAL are defined as follows: (a) Any activity or business related or ancillary to the activities referred In the concession or which HIAL considers desirable or appropriate to be carried on or engaged in connection therewith (b) Any activity or business in connection with or related to the arrival. financing. cargo and/or mail at the Airport. golf courses and other sports and/or entertainment facilities. restaurants. commissioning. conference venues. in consideration for the grant by GoI of the Concession to pay to GoI a fee amounting to four per cent (4%) of Gross Revenue annually on the terms specified in this Article The concession fee clause clearly defines each and every part of the concession fee explaining the meaning of every term and what it actually covers. and (c) Any activity or business in connection with or related to the development of the Site or operation of the Airport to generate revenues including the development of commercial ventures such as hotels. payment account nad provisional payment. amusement arcades. operation and management of the Airport subject to and in accordance with the provisions of this Agreement and Applicable Law. trade fairs.
comply with and perform all its obligations set out in this Agreement and shall not instruct any statutory body under the direct control and direction of the Ministry of Civil Aviation to take any action that would constitute a breach of this Agreement if such body were party to this Agreement in place of GoI. at its own cost and expense undertakes. or improved or upgraded into. About the Non-fulfilment of Conditions Precedent the agreement says that if the condition precedent set out has not been satisfied in full or not been waived by the date falling twelve (12) months after the date of this Agreement. 1937. have the right to extend the date for satisfaction or waiver of the conditions precedent by such period as the Parties may agree. At any time prior to the date specified. of Andhra Pradesh. the Parties shall. • • GoI shall limit its responsibilities to the permissions within its domain and not take any responsibility for the permission within the domain of Govt. by mutual agreement in writing. HIAL or GoI shall have the right to terminate this Agreement by giving twenty-one (21) days' notice in writing to the other Party and upon expiry of such notice this Agreement shall terminate without any consequent cost or consequence upon either Party. an International Airport within an aerial distance of 150 kilometres of the Airport before the twenty-fifth anniversary of the Airport Opening Date. 38 . The receipt by GoI of irrevocable notice from HIAL and its Lenders that Financial Close has occurred which notice shall be final and binding on the Parties The clause also explains Obligations to Satisfy Conditions Precedent.Conditions precedent It says that the provisions of this Agreement shall take effect and become binding on the Parties from the date upon which the following conditions precedent are satisfied in full: • • Amendments to the Aircraft Rules. No new or existing airport shall be permitted by GoI to be developed as. Obligations Of Goi The obligations of the government are clearly defined in this clause as follows: • GoI shall.
after a complete and careful examination. it has. HIAL acknowledges and hereby accepts the difficulties. expenses. risks and hazards that are likely to arise or may be faced by it in the course of the performance of its obligations in this Agreement. This disclosure by the parties shall be without prejudice to their respective rights and contention. in a manner which discriminates against the Airport or HIAL in a way that provides other Major Airports with an unfair competitive advantage when compared to the Airport or HIAL. made an independent evaluation of the Scope of the Project and has determined the nature and extent of the difficulties. Representations and Warranties • In this clause. • DISCLAIMER: HIAL acknowledges that prior to the execution of this Agreement. which are required by Applicable Law for the performance of the Project. that neither HIAL nor GoI shall be responsible for or made to account for such costs. The lock-in restrictions to which the shareholding of Sponsors and State Promoters are subject to are also given. each Party represents and warrants to the other Party that it has the power and authority to validly execute and deliver this Agreement and it is subject to the laws of India during the term of this Agreement.• Post commencement of operations of the Airport GoI shall not act. • HIAL shall at all times obtain and maintain all Clearances and Approvals. • With regard to the representation and warranties made by either party. Many such warranties and representations are given by both the parties and some additions warranties are given by HIAL to GoI about the shares and shareholding pattern of HIAL. temporary residence. as the case may be. or omit to act. each party undertakes to disclose to the other party any alteration/ change in the Representation and Warranties made within a period of seven days of the occurrence of such change/ alteration. 39 . licenses and permits (including immigration. work and exit permits). including registrations. loss of profit and/or claims made by third parties in connection with or pursuant to such closure. liabilities. • From and with effect from the date on which Airport Opening occurs GoI will ensure that the Existing Airport shall not be open or available for use for civil aviation operations.
plant and equipment. • HIAL will ensure that the Works will comprise only materials and goods which are of sound and merchantable quality and which are manufactured and prepared in accordance with Applicable Law and that all workmanship shall be in accordance with Applicable Law and with Good Industry Practice applicable at the time of construction and/or installation. fire protection. • HIAL will organize the Site during the period of construction with regard to safety precautions. materials. delivery of goods. test and commission the Initial Phase. allocation of space for contractors' and sub-contractors' offices and compounds and the restriction of access to the Site to authorised Persons only. complete. HIAL shall ensure that the Works shall conform with the Specifications and Good Industry Practice. construct. procure. security.risks and hazards associated with the Scope of the Project and hereby agrees that GoI shall not be liable for the same in any manner whatsoever to HIAL. risks and hazards accepted by HIAL shall exclude any obligations for which GoI is responsible pursuant to the terms of this Agreement. maintenance of competent personnel and labour and industrial relations and general site services including. 40 . control of pollution. Good Industry Practice and Applicable Law. without limitation. transportation. Construction Of The Airport The clause states the following: • • HIAL shall review the Master Plan every five years HIAL shall design. • For the avoidance of doubt the difficulties. in accordance with the Master Plan. access to and on the Site. and remedy any defects in respect thereof.
in accordance with the Standards and renew. GoI. • • GoI and HIAL after mutual discussions may enter into arrangements to jointly provide aviation security services at the Airport. keep in good operating repair and condition in accordance with Good Industry Practice and. GoAP and the other Relevant Authorities providing the Reserved Activities. replace and upgrade to the extent reasonably necessary. the Airport which for these purposes shall exclude any systems or equipment to be operated and maintained by AAI in accordance with the terms of the Communication Navigation Surveillance/ Air Traffic Management Agreement.Airport Operation and Maintenance • This clause says that HIAL shall at all times comply with Applicable Law in the operation and maintenance of the Airport and will operate. customs. • In order to assist HIAL and GoI achieve their objectives under this Agreement a joint coordination committee shall be formed comprising HIAL. repair and other works shall be carried out in such a way as to minimize inconvenience to users of the Airport. regulation or international treaty obligations as in force from time to time. immigration and quarantine procedures shall be established by GoI. shall not impose limitations on aircraft movements at the Airport or otherwise restrict the capacity at the Airport. • Subject to any law. • The clause says that HIAL shall keep the Airport open at all times for the take-off and landing of aircraft unless and so long as HIAL is unable to do so as a result of a failure by any Relevant Authority to provide a Reserved Activity and it shall be responsible for. GoI confirms that it shall provide meteorological services at the Airport in accordance with the practices established or recommended from time to time pursuant to the Chicago Convention and on the same terms as it provides such services at all other Major Airports. maintain. GoI shall follow a policy of non-discrimination with regard to the classes or descriptions of air traffic that are permitted to use the Airport and subject to regulation by Regulatory Authority or under Independent Regulatory Legislation. • The Parties wish to develop and operate the Airport to standards consistent with those achieved at other leading international airports and in this regard. All maintenance. and 41 . at its own cost.
HIAL ceases or substantially ceases the operation of the Airport for more than forty-eight hours. in respect of Tax. what the airport charges consist of and payment of taxes. other than in accordance with its rights under this Agreement and not being due to GoI or any Relevant Authority. • • The Airport Charges shall be consistent with ICAO Policies. drainage and telephone. other than the facilities and services in respect of which Regulated Charges are levied. at the request of either Party GoI will meet with HIAL to discuss and agree a plan and the appointment of a joint operation and management committee. water. Prior to Airport Opening HIAL shall seek approval from the Ministry of Civil Aviation for the Regulated Charges. without the written consent of GoI. without limitation. • Subject to Applicable Law. insurance and the provision of all services or utilities to or at the Airport such as electricity. • If following the Airport Opening Date. no Person other than HIAL. 42 . sewerage. • If at any time prior to the date the IRA has the power to approve the Regulated Charges HIAL wishes to amend such charges it shall seek consent from the Ministry of Civil Aviation for such amendments. Charges This clause details about the parties having right to impose charges.promptly pay. all expenses incurred by it in respect of the operation of the Airport including. refuse collection. gas. any Service Provider Right Holder granted a relevant Service Provider Right or the AAI may impose any charge or fee (a) in respect of the provision at the Airport of any facilities and/or services which are included within Airport Activities or (b) in respect of the movement of passenger. to procure that operation of the Airport recommences as soon as practicable. foul water. or vehicular traffic on the Airport or the Site. which shall be based on the final audited Project cost. • HIAL and/or Service Provider Right Holders shall be free without any restriction to determine the charges to be imposed in respect of the facilities and services provided at the Airport or on the Site. The Regulated Charges set out in Schedule 6 shall be the indicative charges at the Airport.
• If HIAL fails to effect and keep in force all insurances for which it is responsible pursuant hereto. as HIAL may reasonably consider necessary or prudent in accordance with Good Industry Practice. No insurance shall be cancelled. Maintenance of Insurance • HIAL shall effect and maintain at its own cost. Force Majeure This clause shall apply if the performance by any Party of its obligations under this Agreement is prevented. Accounts and Audit The clause says that HIAL shall maintain books of accounts recording its income and expenditure. and pay such premia and recover the costs thereof from HIAL. hindered. with any obligation under or pursuant to this Agreement and they shall not be required to perform their obligations to the extent that the performance by either Party of its obligations under this Agreement is prevented. • HIAL shall furnish to GoI. impeded or delayed in whole 43 . modified or allowed to expire or lapse until the expiration of at least forty-five days notice of such cancellation. hindered or delayed in whole or in part by reason of Force Majeure. as soon as reasonably available. shall be paid on a priority basis prior to any disbursements by HIAL to any party including Lenders. GoI shall have the option to keep in force any such insurance. It shall provide to GoI two copies of its Balance Sheet and Profit and Loss Account along with a report thereon by its Statutory Auditors. in accordance with Applicable Law. at all times the insurances required under the Financing Agreements and such additional insurances. • The clause says that neither Party shall be liable for any failure to comply. copies of the insurance policies and evidence that the insurance premia have been paid in respect of such insurance. or delay in complying.• All Taxes as may be due and payable by HIAL pursuant to Applicable Law. receipts and payments. and assets and liabilities. copies of such policy certificates. modification or nonrenewal has been provided by HIAL to GoI.
The default may also lead to termination according to the terms given in the clause. HIAL default events.e. it shall notify the other Party in writing of such date and the nature and expected duration of such event of Force Majeure. • • The Affected Party shall take all reasonable steps to prevent. 44 . Within a reasonable time following the date of such notice of such event of Force Majeure. if either Party desires to invoke such event of Force Majeure as a cause for delay or failure in the performance of any obligation hereunder. loss. The clause clearly explains when GoI and HIAL can terminate the contract Liability and Indemnity This clause explains about the liability of HIAL and GoI and compensation payable and limit. indirect. The clause also speaks about the default i. GoI Default Events. if any legal proceeding is initiated in any court or tribunal against them relating to this Concession Agreement. liability or damage suffered for incurred by any user(s) at the Airport or any other Person(s) or otherwise and arising out of or in connection with the design. • As soon as reasonably practicable but not more than 72 hours following the date of commencement of any event of Force Majeure. expense.. maintenance and operation of the Airport and Non-Airport Neither GoI nor HIAL shall be liable for any special. construction. the time allowed for the performance of any such obligations shall be extended accordingly. • HIAL alone will bear any responsibility there may be for any cost. reduce to a minimum and mitigate the effect of the event of Force Majeure. incidental or consequential damages arising out of or in connection with this Concession Agreement. the Party having invoked such event of Force Majeure as a cause for such delay shall submit to the other Party sufficient proof of the nature of such delay or failure and its anticipated effect upon the time for performance. consequences of default. • GoI and HIAL will be obliged to give information to the other party. but without limitation.or in part by reason of Force Majeure and in particular.
validity or enforceability of such provision under the law of any other jurisdiction will. liability or damage as aforesaid. 1996 and in accordance with the UNCITRAL rules (the "Rules") by three arbitrators appointed in accordance with the Rules. invalid or unenforceable in any respect under any law of any jurisdiction. Partial Invalidity If at any time any provision of this Agreement is or becomes illegal. loss. to the extent feasible. reduction in return or other financial burden. liability or damage in connection with its development or operation of the Airport.If as a result of Change in Law. Any decision or award of an arbitral tribunal appointed shall be final and binding upon the Parties. No Partnership 45 . HIAL suffers an increase in costs or reduction in net after tax return or other financial burden. the aggregate financial effect of which exceeds Rupees ten million in any financial year. an increase in the charge to be levied on users of Airport to mitigate the adverse effect of a Change in Law. HIAL shall in the first instance and in accordance with Applicable Law. take all reasonable steps including. loss. conciliation and reference to arbitrator. be affected or impaired and the legality. validity and enforceability of the remainder of this Agreement shall not be affected. validity or enforceability of the remaining provisions nor the legality. The parties shall use their own respective reasonable endeavors to settle any dispute. Any Dispute which the Parties are unable to resolve within a period (as the Parties may agree) of the written notification by one Party to the other of the existence of a Dispute shall be finally determined by arbitration in accordance with the Indian Arbitration and Conciliation Act. in any way. Dispute Resolution This clause describes negotiation. neither the legality. HIAL may notify GoI and propose amendments to this Agreement so as to put HIAL in the same financial position as it would have occupied had there been no such Change in Law resulting in such cost increase.
No Party shall have any authority. Time is of the Essence Time shall be of the essence of this Agreement. 46 . the day of the act. India. periods or times of day mentioned which may be substituted for them in accordance with this Agreement. Computation of Time Times referred to in this Agreement are times in Hyderabad. In computing any period of time prescribed or allowed under this Agreement. If the last day of the period so computed is not a Business Day. event or default from which the designated period of time begins to run shall be included. unless expressly conferred in writing by virtue of this Agreement or otherwise and not revoked to bind any other Party as its agent or otherwise. both as regards the dates. then the period shall run until the end of the next Business Day.
KISHANGARH EXPRESSWAY Project: Strengthening the existing two lanes and widening it to six lanes in the Jaipur Kishangarh stretch of NH-8 Client: National Highway Authority of India (NHAI) Consortium: The consortium is formed by the GVK group and B. Total project cost: Rs.9.302 crore debt.211 crore Equity support grant from NHAI Rs. 48 .615 crore funded by Rs. Completion Period: For both the contracts (L&T and BSCPL) it was 24 months ending 28th March 2005.193 crore was picked up by a consortium of 8 banks.5 and M/s Seenaiah & Company (Projects) Limited for the stretch KM 313. The total cost of the EPC contract given to L&T Limited ECC division was Rs.4. a part of the debt component amounting to Rs.5 to KM 313.296 crore while the cost of the contract awarded to BSCPL was Rs. The EPC contract was a fixed time fixed price contract.5 to KM 363. The Consortium won the bid and had signed the Concession Agreement (CA) with NHAI on May 8. which also acted as the arranger for the entire debt. The project achieved financial closure on March 17.239crore.101 crore Equity.Seenaiah and company (Projects) Ltd (BSCPL) known as GVK Jaipur Kishangarh Expressway Private Limited (GVK) which is a Special Purpose Vehicle (SPV). much ahead of SPCD of 14th September. Subsequently. Concession Period: 20 years including the construction period of 30 months. Rs. L&T later joined the Consortium. Financial Advisor: IDFC. 2003 with IDFC having sanctioned the entire debt. 2005.4 Case Study: JAIPUR . EPC Contract: GVK entered into EPC agreement with M/s Larsen & Toubro Limited.ECC division for the stretch KM 273. 2002 for the development and implementation of the Project. GVK has decided to carry out O&M function on its own.
273/500 to Km. Performance Security A performance security of Rs. financing. Conditions Precedent The concessionaire has to obtain all the permits for a certain period of time from the state and central government.Detailed study of the concession agreement of Jaipur . the client has the right to hold the performance guarantee till the Commercial Operation Date or till the breach is cured. funds constituting the financing package. Tolling contract. operation and maintenance of the project highway which shall include strengthening of the existing two lanes of NH-8 from Km. If the concessionaire is in breach of this agreement. procurement. which shall contain all inflows and outflows of cash on account of capital and revenue receipts and expenditures. engineering. Obligations of the Concessionaire 49 . performance security. The concessionaire has to provide all the financial documents. O&M Contract. Definitions and interpretations The agreement defines all the terms that are used in this agreement whose meaning remains the same throughout until stated specifically at any other part of the agreement. the EPC contract. An Escrow account has to be created by the concessionaire within 60 days from the date of signing this agreement. copies of the resolution system adopted by the board of directors etc. after which it shall be granted way leaves required in connection to project such as right of way for alignment and permissions to enter and utilize the site for the construction as stated in the agreement. fees collected by concessionaire during operation period. six lanng thereof in accordance with the specifications and standards. the NHAI is entitled to terminate the agreement. construction. 366/200. to NHAI.100 million has to be paid to NHAI within 120 days failing which.Kishangarh Expressway Scope of Project The consortium has been given limited liability to enter into the concession agreement in agreement to the LOA for undertaking the design. fees collected by NHAI in exercise of its rights shall be deposited in the account.
The concessionaire shall submit the project completion schedules, scheduled completion date, design and engineering before starting the construction and the project documents within seven days of their execution and shall not make any replacements or amendments without prior notice to NHAI. If any replacements have to be made, a 30 days prior notice to NHAI shall be given. The concessionaire has to promptly remove all the surplus construction and wastes from the project site for neat construction. It has to provide a regular report of the progress of work to NHAI. It has to also acquire any real estate which shall be used for additional facilities in the project site. Obligations of NHAI NHAI shall give the concessionaire the right to access the site without any encumbrances, provide facilities like water, electricity etc, to assist the concessionaire in obtaining necessary permissions at the cost of concessionaire and to regulate the traffic. It even allows the concessionaire to conduct any tests on the highway without causing any problem to the traffic prior to the start of the project. Independent Consultant NHAI shall appoint an independent consultant initially for a period of four years and the appointment shall be given within 120 days from the date of agreement. NHAI may terminate the appointment of the Independent Consultant at any time subject to appointment of their replacement by another Independent Consultant. If the concessionaire finds that the independent consultant is not fair in his duties or is not efficient, it can make a written representation to NHAI. First the concessionaire and the consultant are called for a meeting by the NHAI to resolve the dispute amicably. If the dispute is not solved by this way, it shall be resolved in accordance with the dispute resolution procedure. Monitoring and supervision of construction Proper monitoring of the quality of work is done frequently by testing the work whenever required by the independent consultant. If the project completes with small items of work yet pending, the concessionaire shall ask the consultant to issue a provisional certificate along with a list which shall contain the list of all works yet to be completed (punch list). Then the 50
concessionaire along with payment for damage of Rs. 200,000 shall be given a period of 120 days. If the NHAI is not satisfied with the results of the tests conducted, it shall not issue the completion certificate. It shall notify the concessionaire within7 days and the concessionaire shall take respective measures to correct the damages after which the completion certificate shall be issued. If at all the progress of the work was observed to be slow an immediate notice from NHAI was given to the concessionaire and the concessionaire was required to inform within 15 days what steps would be taken by it to expedite the progress. If the Concessionaire fails to achieve any Project milestone other than Project Completion, within a period of 90 (ninety) days from the date set forth, then it shall pay Damages to NHAI at the rate of Rs.1,000,000 (Rs. One million) per day until such milestone is achieved. If the suspension of project is caused by
Any reason other than default or breach of the Agreement by the Concessionaire including breach of any of the obligations of the Concessionaire under this Agreement, the Preservation Costs shall be borne by NHAI;
Reason of default or breach of this Agreement by NHAI the Preservation Costs shall be borne by NHAI; or Reason of any Force Majeure Event, the Preservation Costs shall be borne by the Concessionaire save and except to the extent otherwise expressly provided in force majeure clause
Completion The Completion certificate to the concessionaire shall be given when the project is complete and is open to the traffic until which the concessionaire shall not be entitled to levy or collect any fee. If the project shall not be completed by the scheduled date the concessionaire shall pay an amount of 0.01% of the total project cost per week and if this exceeds 12 months from the scheduled date then NHAI shall be entitled to terminate this agreement. Change of Scope Any additional work to be performed by the concessionaire shall be informed by the NHAI in a written document known as “Change of Scope Order”. The concessionaire can accept the 51
additional only if it does not exceed 5% of the total project cost and if it does not adversely affect the Commercial Operation Stage. Operation and Maintenance
The Operation and Maintenance of the Highway shall be done by the concessionaire or by its O&M contractor so that safe, smooth and uninterrupted flow of traffic can be ensured and the tolls and fees can be collected. The O&M contractor shall even maintain the highway by resurfacing the pavements, repairing the structures, horticulture, extension of any existing pavements, bridges etc.
It even shall have the responsibility to maintain a public relations unit to interface with and attend to suggestions from users, media, government agencies etc. During the operation period the concessionaire shall not carry out any material change unless it is required to operate the highway with the standard specifications.
The concessionaire shall not close any lane of the project highway for undertaking maintenance or repair works except with prior written approval of the NHAI. The concessionaire shall seek the approval at least seven days before the scheduled date of close of the highway.
NHAI shall grant permission for the above within 5 days of the receipt of the request. The concessionaire shall reopen the lane within the stipulated time mentioned in the permission. For any delay caused by the concessionaire in reopening the lane, it shall be charged at Rs. 10,000 per day for every 100m stretch until the stretch is been re-opened for traffic.
The consultant shall inspect the work of the concessionaire every month and prepare an O&M inspection report which shall be submitted to both the parties. The concessionaire within 30 days of the receipt of this report, shall modify the defects and shall resubmit its report to NHAI once in every fortnight.
the Concessionaire shall be entitled to receive from NHAI by way of Termination Payment an amount equal to 90% of the Debt Due and the entire Subordinated Debt less due insurance claims. • Political Force Majeure Events (change in law. else one half of the same shall be reimbursed by the NHAI. In this case the concessionaire shall bear the cost directly related to project if that is to the extent of insurance claims. In this case the force majeure cost shall be reimbursed by the NHAI only if the concession period is not extended. In such a case the payments are made as follows. the concession period shall be extended to a period till which the force measure subsists. If a force majeure event occurs after the financial close and before COD. expropriation or compulsory acquisition etc. blockade. radioactive contamination. If a force majeure event occurs before Financial Close there shall not be any termination unless such a situation extends to 180 days of 365 days and the date of the financial close shall be extended by the period for which such force majeure event shall exist. In such a case the parties shall bear their respective costs. Each party shall bare its own cost. volcanic eruption or fire. earthquake. industry wide or state wide or country wide strikes. any public agitation which prevents collection of fees for more than 7 days continuously in an accounting year). strikes or boycotts other than those by the contractor or concessionaire). 53 . cyclone. For avoidance of doubt.Force Majeure Force majeure events are classified as three different types in this agreement. • Indirect Political Force Majeure Events (war. lightning. • If the Termination is on account of a Non Political Event. if any. O&M Expenses and all other costs directly attributable to the Force Majeure Event. They are : • Non Political Force Majeure Events (floods. Force Majeure Costs shall not include loss of Fee revenues or any debt repayment obligations but shall include interest payments on such debt. invasion. If such a situation arises after the COD.). Termination of the agreement is done if the force majeure occurs for more than 180 days continuously. The concessionaire shall try to collect the fees from the users but if it fails to do so the concession period shall be extended by the period for which the collection of fees remains suspended. armed conflict.
No party is liable to other party in respect of any loss. 120% of the subordinated debt and 150% of the equity. cost expense. Termination Termination of the agreement can take place • • If the concessionaire fails to achieve Financial Close If the concessionaire fails to achieve any project mile stones other than Scheduled Project Completion Date within the set date and fail to cure it in a period of 180 days from the date of its occurrence. If the concessionaire is in a material breach and if it has cured it before termination. 110% of the equity spent on the project • If the termination is on account of a direct political event.• If the termination is on account of a Indirect Political Event. The affected party is excused for not performing its obligations only if it makes reasonable efforts to mitigate the limit of damage to the other party. the concessionaire shall be entitled to receive the total debt less due insurance claims. If the affected party is able to resume from its obligations it should give a written notice stating that affect and then can resume from its performance. outstanding subordinated debt. In such a event if the parties are unable to agree in good faith about the occurrence of a force majeure. claims that may arise out of such force majeure. • • • If the concessionaire is in Material Breach If the shareholding of the consortium members falls below the minimum prescribed If the concessionaire is adjudged bankrupt or insolvent 54 . such a dispute shall be settled by following the dispute resolution procedure. damage. The affected party cannot claim for any payment during such an event except if it has informed in writing to the other party regarding such an event within 7 days after it knew about the event. then the concessionaire has to pay to the NHAI compensation equal to all the direct additional costs incurred by NHAI in one lumpsum or in 3 equal semi-annual installments with an interest of 2%. The concessionaire shall be entitled to receive total debt due.
The second inspection shall be done between 9 months and 12 months prior to the expiry of the concession period. • NHAI repudiates this Agreement or otherwise evidences an irrevocable intention not to be bound by this Agreement. Such payments have to be made by way of credit to the Escrow account. Within 30 days after the completion of the inspection a report shall be submitted to the independent consultant after which if any renewals to be done shall be made.The concessionaire may give a written notice of termination to NHAI if • NHAI is in breach of this Agreement and such breach has a Material Adverse Effect on the Concessionaire and NHAI has failed to cure such breach or take effective steps for curing such breach within 90 (ninety) days of receipt of notice in this behalf from the Concessionaire. If the Concessionaire terminates the agreement because of an NHAI event of default. Within 90 days from the initial inspection a report is submitted to independent consultant and any renewal works shall be done. it is entitled to receive from NHAI • • • The total debt due 120% of the total subordinated due 150% of the equity These payments have to be paid within 30 days of a demand made by the concessionaire. Defects and Liabilities The first inspection of the project highway and all project facilities shall be done between 30 and 36 months prior to the expiry of the concession period. • GOI or GOR or any Governmental Agency have by an act of commission or omission created circumstances that have a Material Adverse Effect on the performance of its obligations by the Concessionaire and have failed to cure the same within 90 (ninety) days of receipt of notice by NHAI in this behalf from the Concessionaire. 55 . • NHAI has delayed any payment that has fallen due under this Agreement if such delay exceeds 90 (ninety) days.
If still the dispute is not solved the chairman of the board of directors of NHAI tries to settle down the dispute. the dispute is taken to the notice of the arbitration board which consists of three members of which two are appointed by the parties individually and the third arbitrator shall be appointed 56 .Change in Law If there is any change in law due to which the concessionaire suffers a financial burden which exceeds Rs. then it shall notify NHAI and propose amendments in the agreement so as to maintain its financial position and vice versa. If still the parties are not happy with the solution. it is first informed to the independent consultant who tries to solve the dispute in a amicable manner. Dispute Resolution If there is a chance of a dispute to arise between the two parties. 10 million.
etc. The concession agreement specifies technical parameters for construction. All direct and indirect political risks are allocated to the authority/government. Land and environmental clearances continue to be provided by the government. such as mitigation and unbundling of risks. The transfer of these risks is expected to result in innovations and efficiencies in costs and services. reduction of transaction cost. compensatory payments to concessionaire in case of force majeure situations. One of the key features of this concession agreement is that the risks have been allocated to the party best suited to handle them as risk alleviation and mitigation is considered to be critical for private investment. It also states that detail design studies are to be undertaken by the concessionaire based on the core requirements given by the NHAI. minimum interaction between the 57 . Some of the key features include protection against force majeure events. The commercial. allocation of risks and rewards. default by the NHAI or in the event of an additional tollway/competing road etc. precision and predictability of cost and obligations. transparent and fair procedures and financial support from the government. force majeure and termination. It also deals with other concerns such as user protection. technical and traffic risks are also assigned to the concessionaire.1 OBSERVATIONS The framework involved in the concession agreement addresses issues which are typically important for limited resource financial of infrastructure projects. compulsory buy-out by the government in case of termination. tolling mechanism. symmetry of obligations between the principal parties. While the technical and commercial risks are still assigned to the concessionaire. concession period.Chapter 5 RISK MITIGATION 5. Project risks have been assigned to the private sector to the extent it is capable of managing them. Other responsibilities of the government include compulsory buyout in case of contract termination. The concession agreement allocates risks to the best party suited to manage them as against the earlier policy of the concessionaire bearing the maximum risk. the direct and indirect risks are borne by the government authority. revenue-sharing agreements between the government and the concessionaire.
stipulation of a regular traffic census and annual survey for keeping track of traffic growth etc. After a detailed study of the concession agreements the following provisions in the concession agreement for risk mitigation have been observed: • The concession agreement clearly specifies and defines the rights of the either party thus avoiding risks of conflict and interference between the parties. it has provisions which clearly impose the damage on the party which causes the damage • The concession agreement states the default of both the parties in detail and mentions the remedies and consequences of the defaults which covers the construction risk • Clauses on insurance are well designed to cater for the environmental damage and reduction of construction risk 58 . for example land acquisition to private party avoiding political risks etc. all financial flows to be routed through an escrow account to provide security to lenders and greater stability to project operations. It clearly defines the right of each party thus allocating particular rights to one party which can handle. The obligations are so designed that a symmetry is maintained in the obligations between the parties • In the agreement. • To cater for the design risk. monitoring vision to be done by an independent engineer. It allocates risk to the party that is best suitable to handle that risk. each Party represents and warrants to the other Party that it has the power and authority to validly execute and deliver this Agreement and it is subject to the laws of India during the term of this Agreement avoiding legal risks. • It clearly specifies the obligations of both the parties and clearly defines the responsibilities each party is limited to.government and concessionaire. 5.2 STUDY OF PROVISIONS FOR RISK MITIGATION IN THE AGREEMENTS The concession agreement has provisions for risk mitigation in various clauses.
• • The clause on force majeure gives protection against the force majeure risks There are clauses which cater for the operations and maintenance risks such as cases when operating costs exceed the original estimates or when completed facility cannot be effectively operated or maintained to produce the expected capacity. • In order to avoid market and revenue risk. output or efficiency • Exchange rate risk and interest rate risk are reduced by clearly mentioning the currency exchange 5. The developer should not be straddled between the various documents with risks it has no control over or is not capable of absorbing.3 RECOMMENDATIONS FOR RISK MITIGATION THROUGH CONCESSION AGREEMENT: • The documentation in relation to the project should be such so as to enable passage of various risks that are not within the control of Special Purpose Vehicle but it has been allocated to it under the main concession or license. the risks allotted under the concession or license should flow down to the various contractors under the relevant documentation with the contractors • Concession agreements need to be more transparent and inclusive of public acceptance for the success of the project for the satisfaction of the end users. the concession agreement should clearly give the solution for insufficient income from fares or tolls and insufficient traffic • The MCA should have provisions for selecting the competent bidder who can procure the funds required for the project within the stipulated time to cater for the financial closure risk • The concession agreement should be extended by the government if the land acquisition time taken by the concessionaire is more than the estimated time 59 . Thus. • The documents incorporating the risk sharing framework enable the investor to evaluate the risks and decide whether and how to participate in the bidding process.
Clearly this requires a big push from the Ministry of Finance and RBI in terms of dedicated pipeline for funding PPPs 60 . PPPs still run more than ordinary business risks like Political Risk. financial. tax. clarity is clearly missing in understanding and structuring a PPP framework from a strategic. Large Private Equity prefer participating at grow stage when the cash flows are visible. Greenfield Risk. Green-field Risk.Proper provisions must be provided in the concession agreement to cater for Regulatory Risk. and the very nature of the PPPs are that they are front-loaded with huge capital. ports and airport projects. What India needs is venture capital at preoperative stage once the definitive agreements are signed with the government. • Many lenders have already shot over the headroom in the infrastructure space leading to many projects facing delays in financial closures. and their mitigation for successful implementation of PPPs. Financial Closure Risk. Chapter 6 CONCLUSIONS AND RECOMMENDATIONS 6. Regulatory Risk. Execution Risks. long gestations.the government Ecosystem still ignores the Risk Matrix and their multiplier effect on projects and their viability. Execution Risk. cash flow visibility typically after 4 to 7 years and steady cash flows during the concession. • Risk capital is still averse. Feasibility Risk etc.1 LIMITATIONS • Currently the PPP model has not matured largely due to lack of clarity and assurances in terms of the stakeholders interests derived from the revenue models so far developed for roads. Feasibility Risks etc and the interplay of this could be in geometric proportions leading to disproportionate RiskReward and unfavorable investment ecosystem. • At a conceptual level. legal and business perspective • • PPP structures are still skewed towards the largest monopoly.
In this regard. ensuring objective bid evaluation combined with reasonable scope for timely remedial action to cure any failure on part of the concessionaire. There should be a clear dispute resolving mechanism in order to resolve any disputes arising between the Government and the promoters There is need for a stronger institutional mechanism in the areas if policy. The applicable income tax benefits should be made automatic or built into the concession agreement Infrastructure Coordination Committee should be constituted in order to clear projects at national level The States should also float Special Purpose Vehicles (SPVs) to attract strategic investors for commercially viable projects. operation and Maintenance in order to promote private projects in the entire sub sectors of Infrastructure. The Developer should be given the autonomy in handling and executing the projects. The approach 61 . • An integrated approach for addressing the regulatory framework of PPPs is required as the regulatory framework is interlinked with the issue of regulated monopolies. As PPPs can also achieve social and environmental objectives. regulation. • Any approach to determining capital outlay for the PPPs should endeavour to balance the conflicting objectives of allowing market driven resource allocation.Despite all the challenges.2 RECOMMENDATIONS • • The Public Private Partnership agreements clearly need to specify the role of the State and the Developer. Public Private Partnerships have become increasingly attractive as reflected in many global infrastructure initiatives. • • • • • • The project risks need to be identified up-front. The risks should be distributed among stakeholders with mitigation mechanism. 6. PPPs can emerge as a major mechanism to raise the standard of living of the society. it is imperative that the operation and maintenance performance criteria be fixed.
3 CONCLUSION Public Private Partnerships are aimed in large part at increasing the delivery of services in an era of public financial constraints by using resources of the private sector for 62 . etc. World Bank. integrator and development.finally adopted must take into account the degree of maturity the industry has achieved. • Setting up of independent regulator. the future scenarios based on the past experiences of other countries and comparable sectors. bundling.) should be set up on Public –Private Partnership mode for the purposes of direct investment or lending for Project SPVs • There should be collective understanding about the political constraints of the government and the commercial obligations of the private promoters. competitive partnership. • Globally a variety of new and innovative PPP infrastructure delivery models have been developed in recent years to address various challenges posed to PPPs in specific situations and sectors. Some of these hybrid PPP models are alliancing. Governments should consider providing guarantees towards foreign exchange risk on behalf of the sponsor so that project cost is minimized on account of interest cost • • • Project Development Fund should be developed to cover the cost of: Preliminary due diligence. For capital-intensive projects. as also the features specific to the project under consideration • • Grading of developers and contractors by reputed rating agencies and the pre-qualification should be based on technical and financial evaluation. PPP cell and policy at state level to closely monitor PPPs 6. land acquisition and statutory clearances The Government should be encouraged to sign MOUs on projects with a Special Purpose Vehicle (SPV) Investment by multilateral institutions (like IFC. • The government should consider progressive levy of appropriate user charges and tax holidays to investors to boost the growth of PPP projects.
including a general assessment of the support for the project by the various stakeholders: public. political. it has been limited because for a variety of reasons. We observe that successful PPPs have well-defined roles that both improve the quality and quantity of transportation and provide at least a normal profit to private participants. government (civil service). considering whether the project was extended or the parties undertook additional projects (success breeds success). looking at adherence to initial forecasts (on-time.public aims. while firms aim for profit. by providing more service for less government outlay. Despite all the challenges. Public Private Partnerships have become increasingly attractive as reflected in many global infrastructure initiatives. and considering more objective assessments of whether the project served the public good (was efficiency. the environment. equity. demand realized). However. PPPs involve the sharing of risks and responsibilities between public and private sectors. the government is ideally concerned with maximizing welfare. In that sense. and the experience of users and non-users alike improved?). on-budget. 63 . and private. As PPPs can also achieve social and environmental objectives. We measured success across a number of criteria. PPPs can emerge as a major mechanism to raise the standard of living of the society. Public Private Partnerships represent a flexible solution to establish infrastructure services. there is a clear reluctance of the public sector to fully privatize services. The risks of course are that the public and private sectors have different interests. Moreover. it aims to improve the efficiency of service delivery.
Public Private Partnership in National Highways. Times Journal of construction and Design of India.. ARTICLES 1) Rohit das.’ Projects’.in/hial/CA_HIAL_singned_20122004. 2) Prasanna Chandra (2002). http://civilaviation.pdf 2) “Concession agreement of Jaipur-Kishangarh Expressway”. Vitasta Publishing Pvt.nhai.nic. (January 2008). Ltd.org/fvb. Garcia. Indian Infrastructure Journal (November 2008).BIBILOGRAPHY RECOMMENDED READINGS 1) “Concession agreement of Hyderabad international airport”. “Organized policies”. New Delhi. Reinaldo C. Kathy Carlson. Planning commission BOOKS 1) Yogendra Sharma (2008). “Public Private Partnership in Infrastructure”. pg 32-36 2) “Enabling framework for PPP”. pg 34-38 3) David Levinson. http://www.. “A Framework for Assessing Public Private Partnerships” 64 .pdf 3) “Model Concession Agreement”. Tata McGraw-Hill Publishing Company Ltd. New Delhi.
in/infrastructure/state_level.org 7) www.1st March).in 8) www.php 6) www.“Public Private Partnerships – The big push”. Infrastructure today Journal of India. pg 53 WEBSITES 1) www. (February 2009).gov.4) Overview (23 rd February .infrastructure.pppindiadatabase. Infrastructure today Journal of India.nhai.airporttechnology. (February 2009). “PPP Push. of India 5) Cover story. pg 50-52 9) R Ramakrishnan. “PPP works for India”.in 4) www. Infrastructure today Journal of India.civilaviation. pg 41-44 7) Sunil Srivastava.com 3) www. (February 2009). “Partnership mode”.com 2) www.gov.Stimulating Growth through PPP and Infra projects”. Infrastructure today Journal of India.pppinindia.nic. “Railways.finmin.nic. (February 2009). (February 2009). pg 48 & 49 8) Shrinivas V Kowligi. Infrastructure today Journal of India.com 65 . “Urban Development-Moving Urbania”.in 5) http://business. Weekly on Projects Info.The track forward”. pg 26 & 27 and 39 & 40 6) Siddhartha Das.
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