Project Report on

FINANCIAL MODELLING AND ANALYSIS OF PPP BASED HIGHWAY PROJECT IN

HYDRABAD, TN

Submitted to
Amity University Jharkhand

Inpartial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESSADMINISTRATION

By
RIYA MISHRA
ENROLMENT No. –A35101919014

Under the guidance of

DR. HARMEET KAUR

AMITY BUSINESS SCHOOL

AMITY UNIVERSITY
JHARKHAND RANCHI
 MAY 2019

DECLARATION

I,RIYAMISHRA, student of Master of Business Administration hereby declare that

the Project titled “ PROJECT FINANCE MODELLING AND ANALYSIS OF PPP
BASD HIGHWAY PROJECT IN HYDRABAD, TN ” which is submitted by me to
Department of Management, Amity Business School, Amity University Jharkhand, in
partial fulfillment of requirement for the award of degree of Master of Business
Administration, has not been previously formed the basis for the award of any degree,
diploma or other similar title or recognition.

Amity University Jharkhand, Ranchi

Date:

Sign. of the Student

Name of Student: RIYA MISHRA

Enrollment Number: A35101919014

 CERTIFICATE

On the basis of Project Report submitted by Name of student, student of Master of Business
Administration, I hereby certify that the Project Report “PROJECT FINANCE MODELLING
AND ANALYSYS OF PPP BASED EXPRESSWAY PROJECT” which is submitted to
Department of Management, Amity Business School, Amity University Jharkhand in partial
fulfillment of requirement for the award of the degree of Master of Business Administration is
an original contribution with existing knowledge and faithful record of work carried out by
him/her under my guidance and supervision.

To the best of my knowledge this work has not been submitted in part or full for any Degree or
Diploma to this University or elsewhere.

Amity University, Ranchi

Date:

Signature of Guide (Internal)

Name of the Faculty:
Assistant Professor:
Amity Business School Ranchi
Amity University Jharkhand,
Ranchi

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INTRODUCTION

The project title as “PROJECT FINANCE MODELING AND ANALYSIS OF

EXPRESSWAY PROJECT IN HYDRABAD, TN” with a view to review how Project
finance offer various benefit like opportunity for risk sharing with other stakeholder with the
assistance of contractual agreements and it also empowers the providers of fund to make a
decision the way to manage the free cash flows that's left after paying operational and
maintenance expense. Project finance is financing for giant capital intensive project such
hospital, road, power projects, mining project etc. In project finance funding is completed
using non recourse or limited recourse financial structure. The debt and equity wont to
finance the project are paid back from the income generated by the project. Or we will say
that project finance may be a loan structure that relies totally on project’s income for
repayment with the project’s assets, rights and interest held as secondary collateral. Project
finance attracts the private sector because companies can fund major projects off record. A
special purpose entity is made by the project sponsor and that they transfer only those assets
to the SPE which are necessary to capitalize the project. Special purpose entities are very
dominant a part of project financing and also for all the participants involved in project.
Project finance India is employed for both Greenfield and Brownfield projects like public
infrastructure (road, airports, metro, and rail), Energy related projects (solar, thermal, wind
and hydro), and construction, manufacturing etc. these are the foremost appropriate sectors
for project finance as they need low technological risk, a fairly predictable market. Project
finance is especially used for infrastructural projects to be built mainly by governments and is
additionally employed by companies which are entirely private

Green field project may be a project which is started from the scratch level means this is
often the method of making new infrastructure or factory means the project isn't constrained
by prior work. The project which is made in unused land where there's no need of demolish
or remodeling. Green field Projects are those where everything connected with the Project,
from identifying the location, to the event plan, auxiliary or support services, etc are all to be
done from the
Scratch. It can include infrastructure projects like metro project, airport project, construction
projects etc.

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Whereas, brown field projects is that the project which is started on the brown field site like
building, infrastructure or land which was operated in past but now it's not within the
condition of using it.

Special purpose vehicle:

Special purpose vehicle is a special kind of entity formed by the sponsor of the project with
the purpose to isolate the financial risk with assets and liability structure and position SPV is
formed for acting as a project owner in project finance. It’s additionally created to isolate
monetary risk. SPV is called as the project company which is formed for the project purpose
only and the parent company transfers only those assets to special purpose vehicle which are
required for the project.

Figure1. SPV

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Factors affecting project Finance

Project finance is a complex and also it involves risk so it's important to know the factors that
will help in minimizing the risk.

1. Understanding the scope of project and location- Project scope is a part of project
planning it determine specific project goal features function that line so before starting the
project it is important to understand the scope it is also important to understand the location
of a place where the project is going to take place like for the project of constructing
Highway it is important to evaluate the allocation like if there is any need of Expressway at
that particular location.

2. Recognize the value of Organization capabilities- Organization capabilities are

combination of skills Technologies and human capability that differentiate an organization
from other so it is important to access whether the organization have all this capabilities or
capabilities or capabilities or have all this capabilities or capabilities or not which is
important for constructing the project.

3. Review all the project document carefully- It is important to review the project
document that includes review of contractual agreement as a function and all other type of
information of project for analyzing the risk you also need to understand the nature of the
project while doing the documentation review you need to review all the necessary
documents that are related to the project.

4.Become expert in public private partnership- It is important to be very much aware

about public private partnership and also be aware about the benefits process and legal frame
work which is required for public private partnership as government now wants to hand over
the infrastructure projects to private company for PPP model is proven to be successful.

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5. Identify evaluate and monitor risk- Whenever you are going to start a project it is
important to evaluate how much riskier the project is leg whether the project will able to
generate return of the project will able to repay the debt or not so it is important to identify
evaluate and monitor the risk of the project which you are going to start.

6. Define the market entry strategy- this step is to understand manager that that is with
project financing it includes knowing about the competition in the market selecting the
contractors the need and value of the project political environment lowing the key players
collecting records of similar project information about the sponsors etc.

NON RECOURSE DEBT

Non recourse suggests that the creditors trust solely on special purpose company to repay that
loan or the opposite obligation out there. Obligation is recourse solely to the project
company. Non-recourse debt is also a kind of loan secured by collateral that is usually
property. If the recipient defaults, the institution will seize the collateral however cannot
search out the recipient for from now on compensation, albeit the collateral does not cowl the
entire price of the defaulted quantity. Non-recourse debt is riskier to the loaner than recourse
debt. Lenders charge higher interest rates on non-recourse debt to catch informed the elevated
risk. The loaner may not seize any assets of the recipient on the far side the collateral.

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COMPANY PROFILE:

Vardhan consulting engineers is a pioneer organization and it fulfills the current generation
needs of students and companies. They provide management and consultancy services for
small and medium size businesses. I really had a great learning experience with VCE, this
internship provides me the knowledge and skills required to become successful in my career.

It is a consulting company founded by group of engineers who have strong academic

background with decades of management experience while working in companies all across
the globe. VCE is providing solutions to the complex engineering, management and financial
issues of clients.

It provides engineering and project management consultancy to energy projects.

Specially Solar PV power project (Utility Scale Large Sized Projects), Pyrolysis Projects
(Plastic to oil services)

Services provided by them:

1. Feasibility Analysis, Detailed Project Report, Financial Analysis: They do the

feasibility analysis of different projects it analyses all the important factor of a project
like economic, technical and legal consideration to measure the profitability of the
project and also the company provides project report for the client project which is
very important for raising fund for the project.

2. Financial Closure through Debt or Private Equity for Project Finance: Financial
closure refers to the stage where all the condition of financing agreement is fulfilled
but the funds are not available. Financial closure is done when the entire tie up with
financial institution is completed and all the condition is fulfilled only the drawing of

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 debt is not done yet. In PPP projects financial closure shows the commencement of
concession period.
3. On-site and Off-site Project Management and EPC-Management Services
4.

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LITRATURE REVIEW

The paper is about preparing financial model of long term infrastructure project. A case study and
financial model is implemented using spread sheets Microsoft excel. And the cash flow of the
project is prepared. The author focuses on analyzing financial viability of three main primary
parties involved in PPP-BOT project i.e. SLR for financial institution and lenders. And all the three
parties are very important for successful infrastructural project.

The study is done on the mechanism of attracting funds for highway infrastructure construction
project through ppp. Financial strategy is presentable based on life cycle of the project that uses
project finance approach. And thus strategy can be used by the project company to raise capital
for ppp based highway projects. And according to the author debt capital is more attractive than
equity but getting debt capital as design stage is not easy but the contribution of sponsors and
government support allow the project company to get significant amount of borrowed loan.

The paper is about project finance model for small contractors. As construction project required
large working capital and there are very financial limited option available for contractor banks
and other lending institution to cover large working capital requirement. The current financing
structure is observed through review of literature and interviews. The paper shows that higher
growth rate can be achieved by using project financing in comparison to traditional fine of credit
arrangement.

The paper gives overview about project finance and the key features which distinguish it from other
method of financing such as corporate lending, securitization leveraged buyout (LBO) and venture

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capital. According to the research private and public sector parties leverage greater benefit
afforded by project finance.

The project with high leverage gets unrealistic result from CAPM. The research is done on 20
highway projects in Portugal to find use and limits of project finance of Capital asset pricing model
for calculating cost of capital with a overview of highway project. . It was founded that extremely
leverage PPP project demands the use of different approaches to find cost of capital of PPP based
highway project.

There are significant factors like change in progress payment, payment duration, financial position
of contractor, project delays and poor planning that affects the cash flow forecasting of
construction project. Acc to the author it is an advantage to have prior knowledge of cash
forecasting and and understand the impact of various cash flow factors.

According to Mohamadwastiy, 2019 Project finance is one of the most efficient mechanisms
enabling to accumulate various financial resources to implement investment on projects. The
project finance include various elements (participants, objects of financing, contracts, risk
management, infrastructure) which are closely interrelated and ensure the efficiency of financial
flows.

Ashish Sharma, 2019 who is the member of NHAI stated that National Highway authority of India
will try out project based funding for building highways under the engineering, procurement and
construction route as India’s highway development agency.

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METHEDOLOGY:

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PUBLIC PRIVATE PARTNERSHIP

A public private partnership is a long term contract between a private party and a government
entity for the provision of public service and development of public infrastructure in which
responsibilities and rewards are shared.PPP can be in wide range of sectors like Road,
energy, rails education and Health. A public private partnership may be a

government entity and a private-sector entity work together for mutual benefit.
P3 is government service which is funded and operated through a partnership of
state and one or more private sector companies for the creation or management
of infrastructure for public purpose for a specified period of your time on
commercial terms. Samples of PPP projects are Airports project, construction
project etc.

TYPES PPP CONTRACT

 BOT CONTRACT:

Build operate transfer contract is a model is used to finance large projects such as
infrastructure projects planned through public private partnership project. According to this
contract private partner has to build, operate, and maintain the facility for the specific period
which is being fixed according to the government. In most of the cases the arrangement of
finance is done by private partner and it can be recovered by revenue generated by the
project. As the private partner does not owns the property is has to pay monthly or yearly fees
to the public partner during operation period. For any issues related to the project government
will be responsible.

Example: construction of high way under NHAI

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 Table no.4: BOT model

 BOOT CONTRACT:

In this process the private authority is responsible for any issue regarding the road and its
development because they own it for concession period. They do not have to pay annual fee.

Example: toll plaza

Figure no.5: BOOT model

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There are number of typical characteristic which differentiate it from
conventional project approaches.

1.Funding sources- Traditional infrastructure project are funded by the national budget of a
country where the government selects a contractor and pays this contractor based on the
progress of construction this means that most payments are made up front during the
construction period. In PPP project private investors are financing the infrastructure but they
are not doing it for free. They expect to generate profit out of their investment which means
they have to be remunerated. There are typically two ways that private investor in PPP
project can generate return on their investment first private partners can be granted right to
collect fees from users collecting tools on highway for road projects for road projects
highway for road projects for road projects second the government can reimburse the private
partners walk through called as availability plan payments in case of availability payments of
availability payments the private operators are paid based on the availability of the Asset over
time over time of the Asset over time in the example of a highway project the government
made check at regular interval if the asset is available meaning in the road can be used and if
the acid meets the quality standards defined in the contract means the quality of the road
surface is meet the ability criteria. Government pays a fixed payment to the private operator if
at some point in time the Asset no longer fully meets today availability criteria then the
payment by the government is reduced. This approach serves as a great strong incentive for
the private partner to maintain asset performance over time so while in traditional
infrastructure projects payments are made up front it public private partnerships no public
funds are disbursed during the construction phase, payment to the private partners are spread
over the lifetime of the project once the project is operational

2. Duration- In traditional procurement the relationship between the government and private
contractor is till the construction phase is over. But in public private partnerships the
relationship continues far beyond completion of construction as the private partner is
responsible for not only building the infrastructure but also for operating it for a set number
of years typically more than 20.Correspondingly the public authority must monitor the of the

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private operator throughout the length of contract at the end of public private partnership
contract partnership contract, assets rights usually revert back to back to the public authority
and this is a major distinction between public private partnerships and the outright
privatization of public assets.

3. output v/s input- The third element that differentiates PPP from conventional projects are
defined in terms of output what we want to achieve while traditional procurement focuses on
input how to achieve what we want in case of Highway project this means that project
specification of public private partnership might refers to indicators of roads office quality
rather than to be specific details of good construction for an airport project and output could
be handling capacity of ten Million passengers by year whereas an input might Be two
terminals each at least 250000 square meters and so on using output specifications provide
the private sector with the opportunity to come up with innovative solutions for delivering the
public service which might result in significant cost savings this focus on output specification
requires a fundamentally different mindset and may necessitate adjustment from public
partners more familiar with conventional input oriented approaches.

4. Risk-While in traditional procurement more risk are born buy public sector in public
private partnership risk are shared among public and private partners for example in public
private partnerships the private sector usually supports the construction and operational risk
but what are these risks in any project there is always a risk debt construction and operational
cost may operational cost may exceed the estimated budget in a traditional procurement
model that financial risk is placed solely on the shoulder of government entity shoulder of
government entity of government entity in PPP project model risk is allocated to the private
partner charged with undertaking construction and operation this means that in a public
private partnership the public sector partnership the public sector public sector not exposed to
risk from potential cost over in public private partnership the risk are typically be viewed at
the outset and the project is structure to allocate risk to risk to allocate risk to the partners
who is best equipped to manage them.

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These are the four key differences between public private partnerships and traditional
procurement models

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 FINANCING OF PPP BASED PROJECTS:

Financing of PPP Projects is done through surpluses or borrowing or by private sector raised
fund by raising debt and equity finance.PPPs in infrastructure are financed on the basis of
project i.e. Project Finance in which lenders looks at the cash flow of the project for repayment
of debt. The lenders don’t need to depend on either equity sponsor or public sector for the
interest and principle payment. This reduces the financial risk of investors.

Figure no.: Source of financing for PPP projects

The pie chart shows financing of 163 PPP projects and it shows that PPP project mostly gets
funds from debt which is shown as 67% and 23% of fund is raised by private equity and 2% by
public entity and 8% by government subsidy.

So for raising funds from debt the lender wants to know the projected cash flow that will be
generated by the project. For this financial model is been prepared by taking certain possible
assumptions. So that the project sponsor can show to the lender that how much interest he will
receive and in how many days.

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Benefits of PPP (Public private partnership projects).

1. Attracts private capital- Public private partnership is viewed as a viable means to finance
project that would not otherwise be feasible due to public budget constraints. Public private
partnership projects are however not free private sector has to be sector has to be remunerated
for its investment using a public private partnership structure can provide short term financial
relief however this will onlyalliviate infrastructure funding issues to the extent that user fee
can be charged..

2. Additional revenue streams- Additional revenue can be generated from the public asset
speaking of additional revenue let understand with the example of an airport project from a
public perspective and Airport is mainly seen as a means to means to provide transportation
services two passengers and Airlines the private sector might be able to identify and develop
more efficiently at the source of revenue from this assets such as shops hostel car parks and
so on this revenue sources could serve to partly fund address structure investments.

3. Efficiency gain- Second benefit and key motivation for employing a PPP model is the
realization of efficiency gains through improved project delivery operation and management
and access to technology access to technology the goal is to improve the quality of Public
Service Delivery Service Delivery by taking advantage of private sector efficiency

4.Construction quality and adequate maintenance- Fourth benefit realized with the PPP
model involves the creation of long-term solution for the provision of public interest structure
through addressing issues such as poor construction quality and inadequate maintenance
indeed if you are responsible for operating an asset for 20 years you will make sure that the
asset is built properly similarly if your payment will payment will your payment will be
withheld if the Asset fails to meet the performance standards then you will be sure to allocate
sufficient resources to asset maintenance.

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5. Reduces the life cycle cost - PPP structure also create incentive to reduce the life cycle
cost of assets take our Highway example let's assume that there are two option to build the
road with the first option construction will be cheaper initially but maintenance cost will be
greater over the long term the second option may be more expensive in terms of construction
between have low maintenance cost over a long run in PPP project the private partner will
select option to because it integrates maintenance cost implication into the overall project
design and will be the cheapest alternative over the lifetime of the asset and key benefit of
PPP model relates to the transfer of risk to the private sector in transferring risk to the to the
to the private sector government finance and are protected that are often significant in
significant in often significant in significant in public infrastructure project.

Limitation of Public Private Partnership project-

1. Not suitable for all type of projects- Even in countries where PPP have been promoted
actively only a limited share a public projects has been pursued projects has been pursued
through this model

2. Do not work in factor with rapid chance- PPP do not work well in factors with Rapid
change suggest it but work better when there is a long-term predictable need of infrastructure
service the key question is this record is do you need the infrastructure to be serviceable for
the next 20 years if the answer is yes then PPP might be the solution.

3. Complex and high transaction cost- The structure complexity of PPP projects can create
High transaction cost the project must be big enough to justify such increase procurement
cost with this in mind some countries only consider the PPP model for project PPP model for
project with budget above a certain threshold just above a certain threshold for instance 20
million dollar.

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5.Lack of capacity of local companies to deliver this type of project- The local company
may not be may not be capable to deliver this type of type of project local companies might
not be equipped to manage this risk related to a PPP project PPP can also be sensitive from a
political point of view the public mind feel that the government is giving too much or is being
too generous with private sponsors in addition the establishment of PPP might concede with
the introduction of the user pay principal which can create public discontent in light of this
strong political support is critical for the success of PPP project finally PPP structure can be
relative and flexible and poor at accommodating change for intense it might be costly for the
public sector to modify project specification while the project has been awarded.

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CORPORATE FINANCE VS PROJECT FINANCE

Project finance is much more different from finance. Corporate financing refers to the
financial management of an overall company like deciding the financial model of the
corporate whereas project finance refers to taking financial decision for a specific project like
sources of funds. However these two causes you to understand about process of sourcing
money from financial organization or banks.

* Corporate Finance is introduced at the first stage of company. Project finance is usually
introduced after three years when the corporate needs expansion.
* In finance the financier looks for commercial proof of concept which is revenue. Just in
case of project finance their search for the project income.
* Because the corporate finance is introduced at early stage the danger of investor is far
above normal. In project finance risk is higher.
* In project finance financier gives loan by watching project assets as collateral. In finance
financier usually gives the loan on assets of the corporate.
* Project finance financier check out the income of project which is presented by the
financial modeling. Corporate Finance financier looks at the record of the corporate.

Project Finance minimizes the danger to the sponsoring companies as compared to Corporate
finance because the lender relies only on project revenue to repay the loan and it cannot chase
the opposite assets of the sponsor assets just in case of default.

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Financial modeling

Financial modeling as a tool for decision making tool nothing more than that let me elaborate
whenever you want to take any decision rather any sensible decision you need some data,
some information, some calculation that support your decision. In other word we can say that
financial modeling is a activity of preparing and entities future financial statement based on
the information you have right now about the business entity. Maybe you can use its past
three years financial information based on the current information that you have about the
industry and your thoughts, your conclusion about how future will unfold, how the sale of an
entity will increase how the demand for the particular product that the entities is producing
will increase or go down how the capital structure will change capital structure will change,
how the profit will come into the business, what are the Asset required to maintain the level
of sales based on all these things you try to estimate how the future financial statement of
any particular business will look like.

financial modeling is not only concerned with the financial statement it goes far beyond but
at the ground level this exactly is the definition the definition the definition of financial
modeling you are trying to trying to prepare entities future financial statement using the
information and your conclusion about the future that you have right now.

To prepare any financial model you need lots of data and for that best tool available right
now is Microsoft Excel. All the financial model can be prepared on any other spreadsheet
software also but there is no any other software as comprehensive and easy to use as MS
Excel. So it is most widely used in industry to prepare financial model that's why it is very
important to have a very good grip Excel simplify financial model.

Uses of financial model

1. To assess future operational performance of the business- In order to increase the sale
you need to increase the number of employees so in order to calculate project break even unit

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financial model is used that means is how many units to be sold where there is no profit no
loss situation.

2. Assessment of future financial performance- That means how your profit will be in
future means 3 years down the line what will be the be the profit margin, what are the things
that you need to achieve that profit.

3. To estimate capital expenditure- Capital expenditure that a project requires, how much
money need to be funded will be used, what all will be invested in the fixed assets what all
will be invested in current assets. For all fund required to fulfill future obligation it is
required to understand what all fund will be required in your future in your short term fund
requirement that is your working capital requirement as well as your long term requirement
maybe equity financing debt financing is used for getting funds from different firms.

4. To understand what is the cash flow generated by the project- You need to be very
precise about what are the free cash flow the project is generating so you can use financial
model to know what free cash flow our project is generating. Or you can also use financial
model to calculate value of the project our value of equity share that is enterprise value and
equity value.

5.Analysing certain ratio- You can also use financial model to do certain ratio calculation it
can be profitability ratio, liquidity ratio, solvency ratio, capital structure ratio and we can use
financial model and ultimately calculate various ratios analyzing trend of a business we can
also use financial model also use financial model financial model to understand how my sales
is growing how my profit are growing.

6.Performing senarios/sensitivity/stress analysis- You can also use financial model also to
understand how your sales is growing how much profit in growing even application of
financial model could be testing sensitivity analysis and scenario analysis all these terms
interchangeably but there is a difference stressed testing means putting up extensive pressure

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on a particular variable may be if your sales decline by 70 % what will be the condition profit
what will be the condition of your reserves what will be the condition of your expenses pro to
all these things need to be clear you can do sensitivity and scenario analysis worst case
scenario best case scenario.

How to build financial model

There are few steps to build financial model and these are theoretical steps which I have
explained here. These are the steps to prepare 3 statement models

1. Input historical information into Excel what are the facts and data in to Excel sheet
and using that fact that data and conclusion about how future will unfold to make
projection the first step is to get the data into Excel sheet

2. Determine the assumptions that will drive the forecast i.e how your revenue will
increase, how much cost will increase you need to find that things how much assets
you need. Put certain assumptions for example you know that your revenue will
increased by 10% every year from that 8% is based on quantity and 2% is based on
price. So you need to put in your assumption by looking into the historical
information to know how future will unfold.

3. Forecast income statement once you have assumptions about your revenue and cost
you can calculate your profit and loss and forecast capital assets. And for achieving
that particular sale you can find out how much you need to invest in the machinery
,how much you need to invest in particular kind of Technology, now you need to
forecast what are the assets you will be requiring that cost and that sale

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 forecast capital structure so to buy capital assets you need forms and funds can be sold in
two ways one is debt and one is equity so from where you will get your debt and at what
interest rate you will get your debt what will be the contribution of equity from where you
will get the equity you need to put in all these assumptions.

Forecast the balance sheet- Once you have your assets you are sources of fund then you can
forecast your balance sheet once you are done with your balance sheet only the cash thing
will remain

forecast cash flow statement-You can forecast your cash using cash flow statement as you
already have your PL account you already have your balance sheet other than cash so you can
forecast your cash using cash to statement last one is prepare output sheet as there must be
some reason for preparing financial model it could be assessing the capability of the project
it could be calculating the net present value of the project it could be calculating the rate of
return of the project you need to calculate that so at the end you need to prepare your output
sheet

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Figure1. Shows the framework of proposed financial model.

Input data on Model

1. Capital Expenditure (CAPEX)

2. O&M costs (OPEX)

Private Sector: IRR

Financial Output Financial party: DSCR
3. Tax rate.
Model

5. Interest rate
 Construction time.

6. Inflation Rate  Moratorium period.

Toll rate.
7. Depreciation.



9. Discount rate.

Model constraints

To develop financial model, there are some calculation steps that are discussed as follows.

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1. Assumptions:

 Project Information:

All the information which is required to prepare financial model are assumed forthe
preparation of model. Like for the preparation of financial model of public private partnership
based expressway project certain information are required which is not available as the
project is not been started yet so these information needs to be assumed.

 Capital Expenditure:

Capital expenditure is the expenditure acquires to buy long term assets such as
equipments, land and building this type of expenditure can be occurred to set up a new
business or for expanding existing business. This type of expenditure incurred for
increasing the earning capacity of the business or project.

Following capital expenditure incurs in expressway project.

A. Land Acquisition:

Expenditure is incurred for acquiring land for the purpose of expressway

construction under section 3 of NHS Act, 1956 by the Ministry of Road
Transport and Highways.

B. EPC Contract:

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 EPC stands for Engineering Procurement and construction contract which
undertakes for completing complex projects under this the EPC contractor
provides engineering designs, procure equipment etc. It is a special form of
project execution. The EPC firm provides complete package of resources which
is required to complete the project successfully. And once the project is
completed the EPC firm transfers the project to the actual owner of the project.

C. Law firm: Law firm advices the client company about the legal rights and
responsibilities .The law firm also represents the client company or project in
legal matter where legal advice are required.

D. Technical consultant: The role of technical consultant is to improve the use of

technology they are the expert in the field of computer science they are hired to
solve the technological problems and increase the efficiency of project.

E. Planning feasibility study: The cost incurred while doing feasibility study of
project to understand all aspects of a project, concept, or plan. And to become
aware of any kind of problems that could occur while implementing the project.
To determine whether the project is viable or not.

F. Interest during construction: Interest needs to be paid on the loan that finances
the project. So IDC (interest during construction) needs to be calculated until the
project is able to generate the revenue.

 OPERATING EXPENDITURE (OPEX):

Operating expenditure is the day to day expenditure that occurs during life cycle of a
project.

Following operating expense incurs during construction of ppp based expressway

project.

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 A. Operating staffs: Operating staff are the employees appointed by the owner
such as toll collectors and many other employees who works in toll booth so
monthly /weekly/ daily salary needs to be paid to them.

B. Labor and material for maintenance cost: It includes all the cost like repair
and maintenance, indirect labor etc.

C. Insurance and taxes: Insurance is a contract in which the risk gots transfer to
the insurance company means the project get financial protection from the
insurance company and for this the company needs to deposit some amount on
monthly basis which generate cost and also certain tax needs to be paid to the
government when you are carrying any project.

D. Financing Cost: Financing cost refers to the cost that is incurred by borrowing
funds and they are also called as borrowing cost. As there are two source of
financing fund:

Equity Financing

Debt financing

If the project is financed by equity than the equity investors wants capital gain and dividend
from their investment. And if the project is financed using debt than the project needs to pay
interest to the financial institution. So from this it is clear that none of the finance is free of
cost.

Borrowing cost include following cost other than interest and fees to be paid to the
debt financer;

 Amortization of discount and premium

 Amortization of other cost which are related to borrowings
 Foreign exchange differences and fees when the borrowings happen in foreign

currency.

 Financing Charges concerning financial asset.

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 So these are the financing cost which can occur while constructing expressway project.

 Inflation Rate: Inflation rate measures the change in price of good and services in the

economy when there is continuous rise in price of goods and services than it is called

as inflation and it decreases the purchasing power and the opposite of this is deflation

when there is continuous fall in price of goods and services. So the project holder

needs to assume certain rate of inflation by which price of goods and services might

increase in future while the construction of the expressway is going on.

 Debt/Equity Ratio: It is the ratio which shows how much the project is using debt

and how much equity for financing operating activity

D/E Ratio Formula and Calculation

DEBT/EQUITY= Total liabilities

Total shareholders’ equity

 Debt Rate: Debt rate is the rate at which the project will repay the loan amount to
the financial institution at certain time interval.
 Moratorium Period: Moratorium refers to the period during which lender do not
pay any EMI on the loan.
2. PRODUCTION COST:
A. OPERATING AND MAINTAINANCE COST: Operating and maintain ace cost
refers to total cost incurred in operating the toll plazas. It is houses, booths stations,
gates built for the purpose of toll collection
B. Corporate tax: Corporate tax is the tax imposed by the government to the private
companies on the profit they are getting. So the companies who are handling the
expressway project for certain period of time needs to give corporate tax.
C. Principal and interest and loan repayment: Production cost includes the rate of
interest and principal amount which need to be pay to the financial institution.

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In the following the formula for calculating equity IRR, Project IRR and DSCR are
described.

 Equity Internal rate of return: Equity IRR is internal rate of return to the investors
with the given period of time if the project is 100% funded by equity than project IRR
and equity IRR will be same. But in PPP project the project is funded by both sources
of financing that is equity and debt so the equity IRR and project IRR will be
different.
 Project Internal rate of return:

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