Topic

-

“Opportunities mapping and preliminary project attractiveness analysis from financing perspective in Road sector in Northern region”.

TABLE OF CONTENT
 INTRODUCTION  Overview of Industry  History  Company Profile  SWOT analysis of the company  RESEARCH METHODOLOGY  Scope of study  Objectives of study  Limitations of study  DISCUSSION  Problems in the Industry  Current issues  Developments in the industry  Steps taken by the government  POLICIES & FRAMEWORK  Policies o Central Govt. o State Govt. o Tolling policy

 Legal Framework  INDUSTRY STATISTICS  Road network in India  Investments  National Highway  State Highway  Players of the industry  FINDINGS AND CONCLUSIONS

CHAPTER 1
INTRODUCTION

 Overview of the Industry:
Road: A road is a way or route for travelling from one place to another, build on a land. It is a basic mode of transportation used for moving between two places. According to planning commission of India, road transportation is vital for economic development of the country as transport sector contributes 6.5% (approx.) in India’s total GDP out of which 4.5% comes from road sector. According to them India has the 2nd largest road network in the world (3.3 million kms approx.) which carry 87% of the total passenger traffic and 53% of the total freight traffic which have made accessibility, flexibility of operations & door-to-door service easy. For the purpose of management and administration, roads in India are divided into the following five categories:
• • • • •

National Highways (NH) State Highways (SH) Major District Roads (MDR) Other District Roads (ODR) Village Roads (VR)

The National Highways are intended to facilitate medium and long distance inter-city passenger and freight traffic across the country. The State Highways are supposed to carry the traffic along major centers within the State. Other District Roads and Village Roads provide villages accessibility to meet their social needs and also the means to transport agriculture products from village to nearby markets. Major District Roads provide the secondary function of linkage between main roads and rural roads.

In India planning and financing of road is the responsibility of central government and state governments. Central government is responsible for National Highways throughout the country (there are around 300 national highways in India), and state government for state highways and major district roads. Expansion of rural roads is largely under PMGSY (Pradhan Mantri Gram Sadak Yojna), but their implementation is the responsibility of the respective state government.

The Ministry carries out the operations of National Highways through three different agencies, they are State Public Works Department (PWD), Border Roads Organization

(BRO) and National Highways Authority of India (NHAI).The daily management of most national highways in states are looked after by the respective PWD's. The BRO is primarily concerned with construction and maintenance of roads in border areas, also known as General Staff (GS) roads. The BRO has linked the border areas of North and North East with the rest of the country. It has played a vital role in developing the road network in states like Bihar, Maharashtra, Karnataka, Rajasthan, Andhra Pradesh, Andaman and Nicobar Islands, Uttarakhand and Chhattisgarh. Nearly 46,884 km of National Highways is managed by the concerned PWD's and BRO.

Road Network in India:

According to the Ministry of Road & Transport Highway (MoRTH), National Highways in India constitutes around 70,000 kms, which is only 2% of the total roads in India but it carries approx. 40% of the total traffic on Indian roads, while State highways and MDRs carry another 40% of the traffic and accounts for 18% of the road length.

Road transport is most frequent mode for freight traffic and passenger traffic. It is estimated that 53% of the total freight and 87% of the total passenger traffic is carried by roads. In 2000-01, roads accounts for 47% of the total freight traffic, which increased to 52% in 2010-11. Comparatively, the railways, which contributed 39% in 2000-01 to the total freight transport, declined to 36% in 2010-11.

 History:
Roads are definitely a cost efficient and popular mode of transport. It stretches across the length and breadth of a country and can be used by different sections of society. It helps in the movement of men and material from one mode to another.

It forges national unity and is instrumental in the nation’s socio economic development. It acts as a support system to other means of transport like railways, shipping, airways etc. Hence a well developed roadway is vital for promoting commercial interest of the country. During the first century AD the Mauryan Empire, one of the most successful empires and among the largest, had roads which connected many important centers. They are mentioned as many and connecting many important trade centers. The Greek ambassador, Megasthenes, was sent to Chandragupta Maurya’s court and he recorded a Rajamarga or the king’s highway which was also a trade route and a precursor to the modern grand trunk road. It was nearly 22 km wide and 2,400 km in length with a pillar every 1.8 km. It had trees, wells and rest houses on either side. Any traffic jam on the Rajamarga was liable to punishment! And of course it goes without saying that maintenance of roads was a significant feature of Mauryan administration. The first evidence of road development in the Indian subcontinent can be traced back to approximately 4000 BC from the ancient cities of Harappa and Mohenjo-Daro of the Indus Valley Civilization. Around the 1st Century AD, the ancient Silk Road came into being, which passed through northern India and China. Ruling emperors and monarchs of ancient India constructed numerous brick roads in the cities. One of the most famous highways of medieval India is the Grand Trunk Road. The Grand Trunk Road began in Sonargaon near Dhaka in Bangladesh and ended at Peshawar in modern-day Pakistan. In India, it linked several important cities from Kolkata in the east to Amritsar in the west, while passing through the cities of Patna, Varanasi, Kanpur, Agra, Delhi, Panipat, Pipli, Ambala, Rajpura, Ludhiana, and Jalandhar. During the colonial period in the 19th century, the British upgraded the existing highway network and built roads in many treacherous areas such as the Western Ghats. Sixty years since Independence, India has made tremendous progress with respect to it transport system. The accelerated growth rate in the economy has helped the nation to bridge distance. The architect of the change is the development of thousands of km of

world class roads, dedicated freight corridors and improvement in rural roads. Immediately after Independence, India did not have the luxury of well networked roadways. The British had left behind only 4 lakh km of roads that linked major cities and the rural heartland. So the government then formulated a two pronged strategyimprove connectivity and provide infrastructure that stimulated economic growth.

Unfortunately resources were meager (deficient in quantity) and the government was finding it difficult to sustain progress. As a result the quality of roads was poor and would often deteriorate after the monsoons. The establishment of the National Highways Authority of India (NHAI) in 1988 dramatically changed the future of roadways in India. The NHAI brought about standardization in terms of quality and management became more efficient. In the eighth plan the government gave the sector lots of incentives like customs free import of capital goods and freebies like tax holidays. The government came up with a proposal for an ambitious project called Golden Quadrilateral to connect the country through two different corridors the North-South and East-West corridor extending to a length of 25,000 km. It was funded by the World Bank and Asian Development Bank. The government came with a special cess on petrol and diesel to finance the project. The landscape for roadways changed dramatically after this. The number of roads have nevertheless not kept in pace with the increase in vehicles. So a phenomenon that has come to stay for a while is the traffic jam. These jams are steadily increasing in volume and time and threaten to engulf most of the city traffic in the urban centers and so alternative modes of transport are coming up. And yet amidst all this, many roads retain their charm, some because of the many trees on either side of them, some because of their quaint names and some others because of their majestic appearance. Rajpath, the road leading down from Rashtrapathi Bhavan, the presidential house in Delhi, to India Gate is a majestic one.

 Company Profile:
o

OVERVIEW OF LARSEN & TOUBRO INFRASTRUCTURE FINANCE

L&T Infrastructure Finance Company Limited (L&T Infra) is promoted by the engineering and construction conglomerate Larsen & Toubro Limited (L&T) and L&T Finance Holdings Limited (a subsidiary of L&T). L&T Infra, incorporated in 2006, is registered as a Non Banking Financial Company (NBFC) under the Reserve Bank of India (RBI) Act 1934, and is among the select few financial institutions classified as an Infrastructure Finance Company (IFC). It was set up with an initial capital of 500 crores (US$111 million) and has expanded at a rapid rate since inception. L&T Infra provides a wide range of customized debt & equity products as well as Financial Advisory Services for the development of infrastructure facilities in the country with a focus on power, roads, telecommunications, oil & gas and port sectors. L&T Infra functions with high Corporate Governance standards and Independent Directors constituting 50% of its Board and the key committees. As a testimony to its strong credentials and sound operating performance, L&T infra enjoys AA+ credit ratings by both CARE and ICRA. L&T Infra operates from is Mumbai, Delhi, Chennai and Hyderabad centers - and is managed by a team of experienced banking professionals, under the guidance of an eminent Board drawn from both L&T and banking industry.

o THE ORGANISATION - L&T Infra: L&T Infrastructure Finance Company Ltd. (“L&T Infra”), is a 100% subsidiary of Larsen & Toubro (L&T) an AAA rated engineering and construction conglomerate having initial equity of INR.5 billion. L&T Infra was incorporated as a public limited company under

the Indian Companies Act, 1956 and commenced its business in January 2007 upon obtaining Non- Banking Financial Company (NBFC) license from the Reserve Bank of India (RBI). L&T Infra is L&T Group’s visionary foray into the financing of Infrastructure sector. It will play the role of an activist financier in the infrastructure sector and has adopted a business model which offers complete financial solutions to the borrower. The company would not raise any funds by way of public deposits, substantive part of the regulatory framework is inapplicable, and applicable compliances are mostly procedural in nature. The types of projects, proposed include, Roads, Energy, Ports, Railways, Aviation, Shipping, Oil & Gas, Capital Equipment Financing – viz. Oil Rigs, Mining Equipment etc., SEZs, Urban Infrastructure, and Value Added Commercial Infrastructures etc. L&T Infra invests in medium sized projects with project costs typically between Rs. 1000 million and Rs.1500 million. Projects of this size are not likely to attract significant non-economic hindrances and therefore the chances of successful development and operations of these projects are high. L&T Infra will also enable investment into a larger number of projects, thereby reducing the specific projects risks. L&T Infrastructure Finance Co., Ltd. provides financial solutions. The company offers term loans, mezzanine debt, leasing, equity, preference capital, and hybrid capital. It funds infrastructure segment. L&T Infrastructure Finance Co., Ltd. operates as a subsidiary of Larsen & Toubro, Ltd. L&T Infrastructure Finance Company Limited (L&T Infra), offers financing options for projects, equipment suppliers and allied activities for Power, Transportation, Telecommunication, Oil, Gas & Chemicals, Capital Equipments, Urban Infrastructure, Agriculture Infrastructure, Tourism Infrastructure and Social Infrastructure.

Infra + Finance = L&T Infra
Expertise in Infra + Experience in Finance = L&T Infra Finance

L&T’s Dominance  As contractor in infra  In Infra equipment manufacturing L&T IDPL  Major developer in Roads, Ports, Airports, Urban Infra New Initiatives  Power  Aviation  Ship Building

L&T Finance  Major force in infra equipment finance & SME  Forward integration  10 years of successful track record

L&T Infra  Result of focus on financial services  Use the domain expertise of L&T in infra and experience in finance gained over years

 

L&T Infra was set up as a separate co. to ensure focus on infra financing. It is 100% subsidiary of L&T Ltd., and has received NBFC It is dedicated to developing and financing of Infrastructure It is the largest capitalized subsidiary of L&T with an initial It has been rated LAA by ICRA for Long Term Borrowing It has offices at Mumbai, Delhi & Chennai. It is managed by a team of accomplished professionals under

license in Jan 2007.  Sector.

equity outlay of Rs. 500 crores.  Program.  

the guidance of an eminent Board.

o BOARD COMPOSITION:

Name
Mr. Y. M. Deosthalee Mr. B.V. Bhargava Dr. R.H. Patil Mr. Richard Tinsley Mr. N. Sivaraman Mr. K. Venkatesh

Designation
Chairman Independent Director Independent Director Independent Director L&T Nominee L&T Nominee

o

MANAGEMENT TEAM

Suneet K Maheshwari – Chief Executive  27 years in advisory and financing of infrastructure projects at ICICI Bank, Feedback Ventures & SREI Ramesh Bhujang – Head, Risk & Asset Management  29 years in financial sector in India & abroad at AFIC, IDBI, UTI & UBI Anand K Gore - Head, Project Finance  22 years in industry, corporate and project finance at ICICI Bank, Essar Steel & Lloyds Steel Virender Pankaj – Head (North)

17

years

in

industrial/

project

finance,

advisory

and

developmental banking at State Bank of India

o BACKGROUND AND PROMOTERS:  The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry.  L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry.  Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity.  Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark, would not have dreamt, as they were learning about India in history classes that they would, one day, create history in that land.  In 1938, the two friends decided to forgo the comforts of working in Europe, and started their own operation in India. All they had was a dream. And the courage to dare.  Their first office in Mumbai (Bombay) was so small that only one of the partners could use the office at a time!

 In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities.  Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognized as a reliable fabricator with high standards.  The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand.  Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected.  In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and glass.  In 1945, L&T signed an agreement with Caterpillar Tractor Company, USA, for marketing earthmoving equipment. At the end of the war, large numbers of warsurplus Caterpillar equipment were available at attractive prices, but the finances required were beyond the capacity of the partners. This prompted them to raise additional equity capital, and on 7th February 1946, Larsen & Toubro Private Limited was born.

 Independence and the subsequent demand for technology and expertise offered L&T the opportunity to consolidate and expand. Offices were set up in Kolkata (Calcutta), Chennai (Madras) and New Delhi. In 1948, fifty-five acres of undeveloped marsh and jungle was acquired in Powai. Today, Powai stands as a tribute to the vision of the men who transformed this uninhabitable swamp into a manufacturing landmark.  In December 1950, L&T became a Public Company with a paid-up capital of Rs.2 million. The sales turnover in that year was Rs.10.9 million.  Prestigious orders executed by the Company during this period included the Amul Dairy at Anand and Blast Furnaces at Rourkela Steel Plant. With the successful completion of these jobs, L&T emerged as the largest erection contractor in the country.  In 1956, a major part of the company's Bombay office moved to ICI House in Ballard Estate. A decade later this imposing grey-stone building was purchased by L&T, and renamed as L&T House - its Corporate Office.  The sixties saw a significant change at L&T - S. K. Toubro retired from active management in 1962.  The sixties were also a decade of rapid growth for the company, and witnessed the formation of many new ventures: UTMAL (set up in 1960), Audco India Limited (1961), Eutectic Welding Alloys (1962) and TENGL (1963).

 By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1973 had become one of the Top-25 Indian companies.

 In 1976, Holck-Larsen was awarded the Magsaysay Award for International Understanding in recognition of his contribution to India's industrial development. He retired as Chairman in 1978.  In the decades that followed, the company grew into an engineering major under the guidance of leaders like N. M. Desai, U. V. Rao, S. D. Kulkarni and A. M. Naik.  Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence.  For an institution that has grown to legendary proportions, there cannot and must not be an 'end'. Unlike other stories, the L&T saga continues... o SPONSORS BACKGROUND –IN BRIEF – L&T Ltd.

• • • • • • • •

Set up in 1938 by two engineers: Henning Holck- Larsen & Soren Kristen Technological leader in domestic Engineering & Construction and Enhancing global presence with focus on Middle East and China Widely recognized for quality products & services and industry best Professionally managed Company AAA Credit Rated 12 Operating Companies under 6 Operating Divisions to manage overall L&T Infra – 100% Subsidiary of L&T Ltd

Toubro from Denmark Switchgears

practices

business

O VISION • To be the 'Institutional Partner of Choice' for end-to-end Financial Solutions in the infrastructure space. O MISSION • • • • Partner our customers in developing infrastructure facilities by offering total financial solutions. Create long-term value for our customers through superior product structuring by capitalizing on our knowledge pool. Be an organization that promotes continuous learning & innovation by fostering an entrepreneurial work culture. Be a valued partner in the financial community by setting new standards.

O CORE VALUES • Performance Driven

• • • • •

Innovation Integrity Excellence Customer Focus Mutual Respect

o TECHNOLOGY: In every sphere of L&T's operations, technology is the key enabler, reinforcing its leadership position, and sustaining its competitive strengths. While for some, technology is a means to an end, for L&T, technology represents endless possibilities.

o CORPORATE SOCIAL RESPONSIBILITY (CSR): L&T believes that the true and full measure of growth, success and progress lies beyond balance sheets or conventional economic indices. It is best reflected in the difference that business and industry make to the lives of people. Through its social investments, L&T addresses the needs of communities residing in the vicinity of its facilities, taking sustainable initiatives in the areas of health, education, environment conservation, infrastructure and community development. The company proactively provides assistance in situations such as natural calamities and assists victims of nature's fury or social neglect. Many social initiatives are undertaken in partnership with government agencies and NGOs.

o POLICIES • LENDING POLICIES

As such, our Company maintains its own internal credit policies and approval processes, which are developed and implemented according to the underlying nature of its operations and the particular nature of its customers and products.

INVESTMENT AND CREDIT POLICY AND APPROVAL PROCESS Our Company manages its own investment and credit approval process in accordance with its internal infrastructure finance investment and credit policies, which are approved by the board of directors of our Company. A dedicated Investment and Credit Committee ("Infrastructure ICC") oversees the application of, and compliance with, these policies, and retains the sole responsibility for approving advances made by our Company at meetings generally convened once in every two week cycle.

Eligibility and Policy Objectives Public sector and private sector companies, public-private sector SPVs under PPP initiatives, partnership firms, unincorporated joint ventures (but only where the joint venture partners are incorporated entities) and trusts and societies (aimed at establishing educational or medical facilities or for commercial purposes) are eligible borrowers from our Company.

The policy objectives of our Company include, amongst others – • building a business model in conformity with the RBI's policies and guidelines for NBFCs, and that would optimize the benefits thereof for our stakeholders; • building a sound and diversified asset portfolio through risk-pricing based lending and growth-oriented early-stage investments, with the aim of earning superior returns on capital employed; and • Optimize the risk-return profile of the infrastructure loan portfolio with an emphasis on credit quality, supervision, timely collection and well-defined exit options from investments.

Project and Credit Assessment Process Before presenting a proposal for approval to the Infrastructure ICC, a dedicated team within the project finance segment, and a separate project development team, appraises the proposed project for which funding is sought and conducts due diligence investigations on the project and project sponsor. The following aspects • • • • • • • of the project are assessed –

the project sponsor and the project group; the industry and sector in which the project is being undertaken; the nature of the project and structure of the concession; technical feasibility evaluation of the project; commercial and economic viability evaluation; credit checks and due diligence with the existing lenders and / or bankers of the sponsor(s) and or Credit Information Bureau (India) Limited; interaction with the key management personnel of the project group and sponsor to understand their perspective on the project and sector-specific commercial considerations and business dynamics;

• • •

risk identification, risk allocation, risk mitigation and risk pricing of the transaction; site visits are undertaken by the appraising team to ascertain what local factors would have an impact on the project's viability; in the case of projects which require viability gap funding under a Government scheme, we ensure that due commitments from the relevant Government agencies for such a facility are in place;

• •

arrangements for the monitoring of the project and project assets by competent external technical agency, where considered necessary, are put in place; and in respect of specialized asset leases such as aircrafts, ships and oil rigs, an assessment of the residual values thereof is undertaken with the help of external agencies.

Once the proposal has been assessed, the Infrastructure ICC makes a determination on the size of the exposure to be taken, based on the findings of the assessment process, and by reference to our Company's exposure norms to an individual company, group or industry. Our Company has developed an internal ratings model, which is similar to models used by external rating agencies in terms of methodology and rating scales. Accordingly, all credit proposals are evaluated and their internal ratings presented to the ICC as an input for its decision-making process. Also, these internal ratings are periodically reviewed, based on operational performance and external developments, if any.

Repayment Schedule: The repayment of loans and facilities is normally fixed on a case-by-case basis, depending on the nature of the project, its projected cash flows and the maturity profile of our Company's own funding mix. A pre-payment premium may be charged in case of early repayment of the facility. However, any post-approval changes in the repayment schedule would conform to the provisions of a "Schedule of Delegation of Powers for Investment and Credit approvals and Portfolio Management", as approved by the Infrastructure ICC. Exit Option: The fundamental element of the projects that our Company funds is the availability of clearly defined exit opportunities from the investments we make. As such, all of our equity investments, convertible instruments, mezzanine debt and any similar financial products, as well as operating leases, should necessarily have clearly identified (and agreed upon by the customer, where applicable) exit options. Any recommendation to exit – particularly when earlier than as provided for in the documentation – would be based on a detailed evaluation by our project finance team of the commercial merits of exiting the investment, and would conform to the provisions of the "Schedule of

Delegation of Powers for Investment and Credit approvals and Portfolio Management”, as approved by the Infrastructure ICC. In addition, and in the case of operating leases, due diligence is carried out in conjunction with technical teams on the status of the assets and its residual values at the time of exercising such exit options. Security: The project assets typically form the security for the credit facilities we provide. The details of the security to be charged in favor of our Company are stipulated by the Infrastructure ICC and suitably reflected in the security documents in the credit approval process. The security package for each facility is structured in such a manner so as to adequately cover the risks associated with the facility. In the case of structured products, facilities can be approved by the Infrastructure ICC without requiring conventional security on the basis of a suitable financing structure and with comfort from other covenants such as a ceiling on overall debt-equity ratio, escrow account mechanism, negative lien agreement, pledge of shares or assignment of rights. In cases of funding which are serviced entirely from project revenues, escrow and / or water-fall arrangements are acceptable to support the security provided. In the case of loans made for specific infrastructure assets, the security is normally an exclusive or pari passu charges on the underlying assets to be financed. For shortterm interim loans such as bridge finance facilities for infrastructure projects and / or the acquisition of assets, the security is generally in the form of a hypothecation of movables, corporate / personal guarantees and / or pledges of shares, as well as other forms of security considered sufficient by the Infrastructure ICC. Appropriate processes to create enforceable security in the form of a mortgage and or hypothecation are rigorously followed. The margin requirements for different types of security are decided by the Infrastructure ICC from time to time, and exceptions, if

any, will be handled in accordance with the guidelines of the Infrastructure ICC. Documentation Our Company only makes disbursements on the completion of all requisite legal documentation. • • The documentation process seeks to ensure that:

our customers' obligations are clearly defined and established by the documents; the charges created on our customers' assets as security for the debt and / or other facilities provided are suitably registered and maintained, such that it is enforceable at all times during the term of the loan provided; and

our rights to enforce the security for the recovery of the debt and / or facilities provided (including committed return thereon, if any), through a court of law or other applicable forum, is as extensive and unambiguous as possible under relevant statutes of limitations in jurisdictions of India as well as in the countries where the assets are registered or located.

We evolve and adopt standard documentation and commitment processes for various products and services we offer. For each structured finance facility, specific covenants are designed in consultation with our legal counsel. Where any deviation from the terms of the standard facility documents is warranted, approval of the appropriate authority in accordance with the "Schedule of Delegation of Powers for Investment & Credit Approvals and Portfolio Management" approved by the Infrastructure ICC, is obtained. In addition, the Schedule prescribes specific procedures for the execution of standard facility agreements and documentation in respect of the creation of interim and final security. Such documentation, aimed at protecting our rights to recourse against the underlying security, is completed and in the process, all prevailing laws and regulations of relevant jurisdictions are observed and reflected in the documentation. In addition, we also ensure that comprehensive insurance of the secured assets is in place, and that such insurance policies are kept updated and valid. The insurance

policies are typically issued to our infrastructure customers, and assigned in favour of our Company and any co-financiers sharing the security on a pari passu basis, where applicable, as the loss-payees. o Fair Practice Code Introduction Pursuant to Reserve Bank of India (RBI) ’s Circular DNBS (PD) CC No.80/03.10.042 /2006-07 of 28 September 2006, issued to Non-Banking Financial Companies (NBFCs), the Board of Directors may adopt a Fair Practices Code at its meeting to be held on 12 January 2007 in Mumbai. The draft Code, as proposed herein below, is in conformity with the Guidelines on Fair Practices Code for NBFCs as contained in the aforesaid RBI Circular. Fair Practices Code: The Company’s business would be conducted in accordance with prevailing statutory and regulatory requirements, with due focus on efficiency, customer-orientation and corporate governance principles – all of which form part of LTIFC’s Board approved Investment and Credit Policy. In addition, the Company would adhere to the Fair Practices Code in its functioning, the key elements of which are as follows:

Applications for Loans and their Processing:
o

Loan application forms shall include necessary information, which affects the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other NBFCs can be made and the borrower can take an informed decision. The loan application form may also indicate the documents required to be submitted with the application form.

o

The Company shall devise a system of giving acknowledgement for receipt of all loan applications. Further, generally, the time frame within which the loan application will be disposed of would also be indicated in the acknowledgement.

Loan Appraisal and Terms/Conditions: The Company shall convey in writing to the borrower by means of approval letter or otherwise, the amount of loan approved - along with the terms and conditions, including the annualized rate of interest and method of application thereof. It would keep the acceptance of these terms and conditions by the borrower on the Company’s files.

Disbursement of Loans including Changes in Terms and Conditions conditions - including disbursement schedule, interest rates, service charges, prepayment charges etc. The Company shall also ensure that changes in interest rates and charges are affected only prospectively. A suitable provision in this regard shall be incorporated in the loan agreement. Decision to recall / accelerate payment or performance under the agreement shall also be in consonance with the loan agreement. The Company shall release all securities on repayment of its full dues or on realization of the outstanding amount of loan subject to any legitimate right or lien for any other claim the Company may have against its borrowers. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which the Company is entitled to retain the securities till the relevant claim is settled/ paid.

o The Company shall give notice to all its borrowers of any change in the terms and

o

o

General for the purposes provided for in the terms and conditions of the loan agreement

o The Company shall refrain from interference in the affairs of the borrower except

(unless new information, not earlier disclosed by the borrower, has come to the notice of the Company).
o

In case of receipt of request from the borrower for transfer of borrowal account, the consent or otherwise - i.e., objection of the Company, if any - shall be conveyed to the borrower within 21 days from the date of receipt of any request. Such transfer shall be as per transparent contractual terms in consonance with law. In the matter of recovery of loans, the Company shall not resort to any harassment – such as persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc.

o

o The Company shall have a Grievance Redressal Forum comprising senior management team – namely, the CEO, VP - Risk Management & operations and CFO - to resolve disputes arising, if any, in this regard. The said forum will meet within a period of 3 weeks from the date of receiving any grievance intimation. (It shall ensure that all disputes arising out of the decisions of lending by the Company’s functionaries are suitably heard and disposed of at least at the next higher level.) The said forum shall provide the highlights of the issues and redressal if any to the Board of Directors for their review and compliance at each subsequent meeting.

Wide Dissemination and Periodic Review: The Company shall put the above Fair Practices Code outlined hereinabove on its web site, for the information of various stakeholders. The Company would also review and refine the Code, as may be required periodically - based on its own experience and fresh guidelines, if any, to be issued by the RBI in this regard. o FOCUS SECTORS:

L&T Infra offers attractive financing structures for projects, equipment and for other infrastructure development requirements in the following industry segments:

Power
• • • • •

Captive & Merchants Power Plants Transmission & Distribution Projects Small and Medium Sized Hydroelectric Projects Independent Thermal & Renewable Energy Projects Integrated Coal / Lignite Mini

Transportation
• • • •

Projects for National Highway Authority of India State Highway Projects Intercity Road Projects Urban / Rural Roads Ports And Shipping Ports

• •

Port Development Projects Port Handling Equipments

Ship
• •

Bulk Carriers Tankers Railways / Container Trains

• • •

Rail Corridor Development Acquisition of Wagons and Containers Railway Bridges

Urban Infrastructure
• • • • •

Water Supply Sewerage Solid Waste Management SEZs IT Parks

Agri Infrastructure
• • •

Mega grain procurement centres and silos Large cold storage Cold chains Oil & Gas

• Exploration • Extraction • Transportation

Telecommunication
• •

Passive Infrastructure Telecommunications & Broadband

Social Infrastructure
• •

Hospitals Educational Institutes

 SWOT Analysis (L&T Infra):
• Strengths:  AA+ rating by CARE and ICRA  Large Capital base  Long term commitment of Larsen & Toubro ltd.  Relationship driven  Active support to clients from project development stage
 Deep understanding of the Indian infrastructure sector

 Full range of financial products  High corporate governance standards  Speedy response to clients’ requirement • Weakness:  Newly established company (incorporated in 2006). • Opportunities:  Infrastructure development including road sector has a vast scope in future as the large part of the country lags infrastructural development.  In coming days L&T Finance Holding (parent company of L&T Infra finance co. ltd.) is coming up with their IPO. • Threats:  Since the infrastructure sector has large opportunities, the company has to face cut-throat competition from various national and international companies like

HCC, NCC, J.P Associates, Gedem Construction Company, GMR Infra, Roko Construction ltd., Gammon India Ltd. Etc.  Other companies borrowing funds from L&T Infra finance company ltd might not be able to repay back the interest and principle amount on time.

CHAPTER 2
RESEARCH METHODOLOGY

 Scope of the study:
 The scope of the study is to find out the opportunities mapping and project attractiveness analysis in road sector in northern region from a view of financing.  This study can be used by various companies financing and investing in the development of infrastructure mainly in road sector in northern region in India.

 This study tells about the opportunities that are coming in near future in road sector.  It tells about policies and procedures of the government in the road sector from financing perspective.

 Objective of the study:
 To study the road sector in India.  To find out how the financing procedure takes place for the development of roads in north region in India.  To find out the opportunities that are mapping in road sector from financing perspective.  Another objective of the study is to understand the working of the financial institutes towards the development of road sector.

 Limitations of the study:
 Some investment options looking feasible today may not be feasible in future due to certain happenings in the environment.  Accuracy of the study depends upon the accuracy of the sources from where the data is collected.  Another limitation is that the study is done on the collection of secondary data which is updated once in a while.

CHAPTER 3
DISCUSSION

 Problems in the Industry:
Expansion of road infrastructure has not kept pace with demand. Growing costs of infrastructure and long completion schedules have constrained expansion of road

network. Vehicle population increased by 11% between 1952 and 2002, while road network increased by 4.3%. During the same period the number of HCVs increased by 7 %. It is noteworthy that under personalized modes three-wheelers and cars have grown at an annual rate of 10.5 % and 9.4 % respectively during 1991 to 2004 and also the weak enforcement of existing regulations which have a bearing on safety and environment. There are significant barriers towards inter-state movement of freight and vehicles which impose heavy economic and social costs. According to the planning commission of India, the growth of vehicular traffic on roads has been far greater than the growth of the highways. Between 1951 and 2010 the vehicle population grew at a compound annual growth rate (CAGR) of close to 11 per cent compared to CAGR of 4.3 per cent in the total road length with National Highway segment increasing by a mere 2.1 per cent. A noteworthy aspect has been a step-up in the growth of national highway network in recent years which has grown at CAGR of more than 5 per cent with total vehicle population growing at close to 10 per cent CAGR. Composition of vehicle population in India reveals preponderance of two-wheelers with a share of more than 71 per cent in total vehicle population, followed by cars with 13 per cent and other vehicles (a heterogeneous category which includes 3 wheelers, trailers, tractors etc.) with 9.4 per cent. However, the share of buses and trucks in the vehicle population at 1 per cent and 5 per cent respectively is much lower compared to China. With a rising income and inadequate urban public transport system, in particular, the personalized mode of transport is likely to grow in importance in the coming years. Several of the factors leading to the relative high growth in road transport are structural. These include more dispersed industrial and business location patterns and increased need for just in time deliveries. Second, the sector is composed of many small private operators in a highly competitive and dynamic environment. Structurally, railways are confronted with the changing pattern of industrial production and geography away from traditional industries and clusters towards a more dispersed pattern embodying high value and low volume manufactures.

The following points states the problems faced by the Road Industry:
 Lack of sufficient maintenance funds is responsible for poor maintenance of road

network and riding quality, due to this the transport throughout is severely eroded. The commercial vehicles are also to do only 200 to 250 km on average per day incurring high VOC (Vehicle Operating Cost) as compared to 500 to 600 km per day in the developed countries.  The targets and the available sources of funds indicate a very big financing gap and, given the need for fiscal prudence and the competing claims of other sectors, it would not be possible to generate budgetary resources of the magnitude indicated.
 In India most of the Highways/ Roads need proper planning and adequate

maintenance. In terms of capacity to sustain present traffic volume and load they are of inadequate structural specifications. They are being misused by users and inhabitants. Effective traffic rules and public awareness is not there. There are two reasons, one is insufficient funding for roads and the second is non availability of effective 'Roads and Road Users Act' and its enforcement.  The borrowings from external agencies like the World Bank, ADB, bilateral and commercial sources also contribute to the fiscal deficit. They also add to the country’s external and public debt. The scope of such borrowing is also limited as most institutions have country exposure limits and the available resources have to be allocated among different sectors.
 In few states construction of roads of 3 m width, 16 cm crust thickness with two

coats surface dressing is in practice. As per IRC code these roads are unsuited even for a single commercial vehicle per day.
 The Indian road network has increased from 0.4 MK (Million Kilometer) in 1951

to 3.30 MK. Much of the increase in the road network has come through the construction of rural roads built to provide connectivity to remote rural areas.
 In, India category wise road shares are Primary Roads i.e. National Highways-

1.58%; Secondary Roads i.e. State Highways and Major District Roads-13.12%

and Village & Other Category Roads-85.30% of total length. While the traffic share of Primary and Secondary Roads is about 90% of the total road traffic.
 Despite the impressive growth in road traffic and vehicles population, there has

not been a matching growth of the highways network, both interims of the length and breadth as well as their quality. This is mainly due to less availability of funds for road construction and maintenance, which in real terms, have not increased substantially.
 The total economic loss due to road accidents is estimated to be over Rs. 4000

crores per year.

In India, Highways/ Roads are being exploited. Expenditure in terms of road revenue generated is about 35%, while is USA, JAPAN, Germany is 96%, 128%, 82% respectively, similar trend is in UK and Australia.

 In few states construction of roads of 3 m width, 16 cm crust thickness with two

coats surface dressing is in practice. As per IRC code these roads are unsuited even for a single commercial vehicle per day.

 Current Issues
Private sector exposure has been below the expected levels. This is primarily due to reasons like reluctance of the private sector to participate in long-term projects, land acquisition problems and difficulty in toll collection in the operating phase in certain stretches. Although the Indian transportation infrastructure is one of the largest in the world, it is far from being the best. The population of the country is almost four times that of the U.S and has one of the highest growth rates in the world. The existing transportation system is not adequate to sustain the current rates of economic and industrial development in the country. Demand has constantly outstripped the supply of transportation over the last fifty years. Compared to the U.S., the amount of freight traffic carried by highways in India is quite meager. This is partially due to poor surface quality of the roads. The Indian automobile industry today manufactures a large variety of multi-axle vehicles with turbo charged engines, but most of these

are currently exported. The Indian industry needs large freighters to transport goods. The automobile industry has necessary facilities to manufacture them in sufficient quantities. The inadequate road infrastructure hence acts as an economic bottleneck impeding growth of both these industries. The following points states the current issues faced by the Industry: Travel Time: The average speed on Indian highways is around 45 km/h, which is

less than half of that on the U.S. Inter-State system. Most road surfaces are flexible pavement bitumen, with bearing capacities one fourth of the U.S. Inter-State highways. There is a need for improvement in this area. However, it may not be desirable to go in for an intricate system of expressways for freight and passenger traffic. It would be economically sound for the country to maintain a high share of railways in the overall surface transportation system. Also, construction and upgrading of roads requires major capital investments that may not be available. Hence, it might be better to go in for selective upgrading through identification of suitable higher priority corridors. The 2011 Road Plan proposes construction of about 12,000 km of expressways. Seven years after the plan commencement, India has yet to see this starting in any major way. A major factor hampering road construction is availability of funds.

Maintenance: The other major issue in freight transportation is increased use of

containers. Larger sixteen wheel trucks and combination vehicles are replacing the old six wheel trucks. These heavier vehicles need higher bearing capacity of the pavement. Most roads in India currently have a bitumen pavement. This was initially adopted over concrete because high bearing capacity was not needed for passenger movement. Most military equipment in India is transported on rail, unlike the U.S., where the Inter-State roads were constructed to enable movement of heavy tanks and artillery. Use of heavy axle-load trucks has led to rapid deterioration in surface quality. Since immediate upgrading of all the major highways is neither required nor economical, there is a need for evolution of an adequate maintenance and monitoring system. Use of heavy axle trucks would have to be restricted to certain roads, where alternate rail facilities are not available. A suitable strategy might be to restrict such trucks to roadways identified for upgrading in the 2011 Road Plan. This

would have to be coupled with improvement in the railway transportation system in areas where modal shift is desirable. An integrated approach would be necessary in this context.

Reliability: Due to increased scales of production and higher inventory costs, the

Just-In-Time (J.I.T.) approach is becoming increasingly popular in India. A number of perishable commodities are being transported over longer distances. Hence there is a need to increase average speeds on highways through improvement in the surface quality and increase the existing capacity. Road transportation needs to be faster and more reliable. Addition of more lanes and removal of bottlenecks may solve the problem in some cases; alternate strategies may be required in others. The Government has to be more accountable in terms of the funds collected and spent on roads. Over the last financial year, the total Government expenditure on roads was just 10% of the total revenue earned from road transportation. This figure is very low compared to U.S. (85%) and most other countries.

Poor quality roads & highways: In India most of the national highways are just

two lanes or even lesser. The design of the highways is a matter of great importance since only properly designed highways can withstand the pressure created by heavy vehicles. Apart from being narrow they are also highly congested since quite a large part of India's freight is carried on these highways.

Rural areas have bad roads: Most of the rural areas in India do not have access to

all weather roads and hence have a tough time during the monsoons. This problem is more significant in the northern and northeastern part of the country. The government in its 11th five year plan has allotted Rs 100,000 crores for the construction and maintenance of roads in villages.

Urban areas are severely congested: Traffic is one common problem in most of

the metropolitans today. Cities like Mumbai, Delhi, and Kolkata are extremely congested during office hours. This is mainly because of industrialization and the sudden rise in vehicle ownership over the last few years.

INDIAN ROAD SECTOR STATISTICS UNITS Length of Roads Kilometers Main Roads Kilometers Paved Roads Percentage (%) Access to All-Season-Roads Percentage (%) Road Density Km/1,000 sq. km.

As of 2010 3,516,452 666,452 47.3 61 1115

Development in the Industry:
Awarding under NHDP by National Highway Authority of India (NHAI) accelerated in 2009-10 due to the resolution of policy issues that brought clarity towards bidding and implementation of national highway projects. NHAI awarded 3,213km of project in 2009-10.

o

Phase-wise progress of NHDP

Phases I and II: Majority work completed Phase I mainly comprises Golden Quadrilateral (GQ), ports connectivity and other stretches. Phase II comprises North-South and East-West Corridors (NSEW). Both phases have mainly been executed an cash contracts. In Phase I, only 3 % of the total length remains to be completed. In Phase II, out of the total length of 7,300 km, the balance 500 km is expected to be awarded by 2012-13. Over the next 5 years (2010-11 to 2014-15), an investment of Rs. 194 billion is expected in both phases.

Phase III: Maximum awarding over the next few years This phase involves four-laning of two-laned roads that mainly connect state capitals and important places to GQ and other key corridors. Work on ground 9,098 km, out of the total length of 12,109 km, is likely to be completed between 2010-11 and 2014-15 at an estimated cost of around Rs. 1,041 billion, with bulk of the remaining portion s expected to be completed by 2016-17.

Phase IV: Awarding to gain traction Phase IV involves improvement of national highways to two lanes. The total length of this phase is 20,000 km. Around 9,400 km of the stretches have been identified by NHAI. With a view to providing balanced and equitable distribution of the improved/widened highways network throughout the country, NHDP-IV envisages up gradation of 20,000 kms of such highways into two-lane highways, at an indicative cost of Rs.27,800 crores. This will ensure that their capacity, speed and safety match minimum level for national highways.

Phase V: Awarding on fast track This phase involves six-laning of existing four-lane national highways.

The total length of this phase is 6.500 km, out of which 4,974 km is expected to be constructed during 2010-11 and 2014-15 at an estimated cost of around Rs. 638 billion. The government aims to implement all projects under this phase on BOT-Toll basis, as traffic on these stretches is attractive for private players. Moreover, the concessionaire is allowed to collect toll on the existing four-laned highway from the date of financial closure of the project, which results in cash inflows even before commencement of construction. In 201011, we expect most of the projects in this phase to be awarded under BOT-Toll model.

Phase VI: Development of expressway With the growing importance of certain urban centres of India, particularly those located within a few hundred kilometers of each other, expressways would be both viable and beneficial. The Committee on Infrastructure has approved 1000 km of expressways to be developed on a BOT basis, at an indicative cost of Rs.16, 680 crores. These expressways would be constructed on new alignments. Phase VII: Other highway projects This phase includes ring roads, flyovers and bypasses on selected stretches of national highways. The development of ring roads, bye passes, grade separators and service roads is considered necessary for full utilization of highway capacity as well as for enhanced safety and efficiency. For this, a

programme for development of such features at an indicative cost of Rs.16, 680 crores, has been approved.

Mega Projects Mega projects and the eastern peripheral expressway were announced by government in 2009-10. Nine mega projects have been identified with the length of each project varying from 390 km to 700 km. Out of the nine mega projects, feasibility study for the Kishangarh-UdaipurAhmedabad stretch is in underway. CRISIL Research estimates an investment of Rs. 423 billion and 2,930 km of stretches to be completed over the next 5 years (2010-11 to 2014-15). Expressway The government has outlined a new expressway programme, which

plans to build 18,637 km of Greenfield national expressway by 2022. The programme will be implemented in three phases with four-laned and six-laned expressways. Stretches in these phases have been identified based on the traffic density on nearby stretches, economic activity in the surrounding areas and financial viability.

o

State roads State roads constitute around 18% o the country’s total road network, handling around 40% of the road traffic. State road comprise state highways, MDRs and rural roads, which don’t come under the purview of PMGSY. These significantly contribute to the economy of mid-sized towns and rural areas and to the country’s industrial development by enabling movement of industrial raw materials and products. Over the last 5 years, there has been significant growth in the construction of rural roads, both in volume and value terms, there has been a 53% compounded annual growth while in volume it has been 30%. Rural roads connectivity is a key compound of rural development as it promotes access to economic and social services, thereby increasing income

levels and productive employment opportunities in India. However, despite efforts at the central and state levels through various programmes, about 40 % of the country’s population is still not connected by all-weather roads. In places with connectivity, the quality of roads remains poor due to poor construction and lack of maintenance.

To address this, the government launched PMGSY to provide all-weather access. PMGSY is centrally sponsored scheme; however, the responsibility of implementation is with the respective state governments.

Rural Roads: Year-wise break-up of length constructed

Rural Roads: Expected length to be constructed

Steps taken by the Government:
The government’s increasing focus on infrastructure is expected to invest Rs. 6.3 trillion over the next 5 years (2010-11 to 2014-15) in the roads and highways sector. National highways are expected to comprise a major share of the total investments at 43% followed by state highways (30%) and rural roads (27%). Further, the public sector will play a crucial role, funding around 69% of the road projects, with the remaining 31% financed by the private sector.

Present Scenario: It would be appropriate to briefly touch upon the present scenario of the Highway projects in India, which would reflect the true state of affairs: 1. Construction Industry: The lack of well-developed highway contracting industry is the most important factor, which came in way of up gradation of highway system in the country. Increasing use of modern tools of management via computer programming and cost control methods is to be accelerated. The domestic contractors are still not geared up for undertaking large size projects and were not exposed to International Competitive Bidding (ICB). 2. Quality construction: A new concept of ‘Quality Assurance’ has gained currency lately. It is an important requirement of the day and this cannot be achieved without adequate interest and a sense of commitment by the engineers and contractors. However, we are still not in a position to guarantee quality Highways. Often, the life of newly constructed work is less than what obtains elsewhere in the world. 3. Design Approach: The empirical method of pavement design adopted by the highway department has worked well for low traffic volume roads. The increase in frequency of traffic is causing failure which is hardly covered in the present design approach. This calls for a review of the present design system and adoption of more rational approach. 4. Cost and Time Overruns: Cost and time overruns have been afflicting most of the projects. The analysis of projects undertaken by the Ministry of Programme Implementation has identified

main reason for this as inability to use right management technique or failure to apply the same in the matter of implementation. Emerging Scenario: With advanced technology and fully mechanized construction of highways with quality control standards highway construction work has become highly complex and requires very high degree of planning and monitoring in addition to execution of the work with heavy construction equipment requiring construction management skills of a very high order. Since highway construction has become highly capital intensive and fiscal resources being always short, there is an urgent need to have a groups of entrepreneurs comprising of skilled contractors, professional consultants and financiers for highway projects.  Need for private sector participation: The National Highway system suffers from various deficiencies of capacity constraints, payment crust, geometric features and safety features. About 19,000 Km of National Highway has single lane carriageway, which need to be widened to two-way carriageway as per NH standard. It has been assessed at the time of formulation of Tenth Five Year Plan that removal of deficiencies on existing highways network will require huge resources of around Rs.1,65,000 crores. While government is providing increasing budgetary allocations for projects in highway sector and has taken major up-gradation initiatives in high density corridors, it has not been possible to allocate sufficient funds matching the need due to competing demands from other sectors. In flow of private sector funds thus, is expected to bridge the gap of demand and supply to some extent.

The nation has been losing Rs. 15,000 crores per annum due to congestion and other bad functional conditions of roads leading to avoidable excessive consumption of fuel and increase in vehicle operating costs (wear & tear). The investment could come from domestic or foreign firms opting for Build, Operate and Transfer (BOT) concept. Improvement in credit rating of the country due to impressive economic growth could induce confidence in foreign investors and could further encourage foreign direct investment. Hence, private investment is now inevitable in the Road sector to provide additional road capacity to match the demand and price these facilities. Therefore, there is an urgent need to tap new avenues of financing for improvement to country’s road network.  Legislation by Government of India: Government of India (GOI) has made some laws in the road sector; some of them are as follows:  Road sector has been declared as an industry to facilitate commercial borrowing.  The Government has amended the National Highways Act, 1956 to provide for the legal framework for private sector participation. Under the amended Act, it is possible to: o Assign to the private entrepreneur responsibility for implementation and operation of projects for specified period given by an agreement with the Government. o Authorize the entrepreneur to collect and retain the users’ fee (toll). o Authorize entrepreneur to regulate traffic on BOT road. o Punish any person encroaching and misusing the highway developed by the entrepreneur.

 Initiative by Government: (NHAI) In 1988 the National Highway Authority of India Act was enacted by the Parliament, which provided for the setting up of a central Authority for the Development, maintenance and management of National Highways vested to it. The authority became operational in 1995 with the appointment of a full time Chairman and Members. NHAI is an autonomous organization under the Ministry of Surface Transport has been entrusted with task of executing externally aided projects as well as implementation of private sector participation in the National Highways. Among its other functions is to develop wayside amenities on National Highways. The NHAI provided with a capital of Rs. 7 billion (US$ 234 million) to leverage funds for Road Development from the capital market. The mandate of NHAI under the Act is briefly as under: • • • Develop, maintain and manage National Highways vested in it by Collect fees on National highways, regulate and control the plying Develop and provide consultancy and construction services in

the government. of vehicles on National highways for its proper management. India and abroad and carry on research activities in relation to the development, maintenance and management of Highways or any other facilities thereat. • • Advice the Central Government on matters relating to highways. Assist on such terms and conditions as may be mutually agreed

upon, any State Government in the formulation and implementation of schemes for highway development.

Initiatives Taken by Government to Encourage Private Participation In view of the budgetary constraints and in order to bring in new management techniques as well as latest technological inputs, to improve the efficiency, productivity and to bring-in competitiveness in providing highways services to the road user, the scope for private sector participation, both domestic and foreign, in the road development programme is quite large. Following Initiatives have been undertaken: Policy The government has adopted the following policy measures in order to encourage Private Sector Participation. The major extracts are as follows: • Amendment in the National Highway Act, 1956 to provide for the

building, maintenance, management and operation of the National Highways by private agencies for stipulated periods, and authorize the levy of fees to cover their costs and generate reasonable rates of return. • • • • • Declaration of the road sector as an industry. Provision of capital subsidy up to 40 percent of project cost to make Duty free import of high capacity and modern construction equipment. 100 per cent tax exemption in any consecutive 10 years out of 20 year of Provision of encumbrance free site for work, i.e., the Government shall

projects viable.

operations. meet all expenses relating to acquisition of land and other pre-construction activities. • • • Foreign Direct Investment up to 100 per cent in road sector. Easier External Commercial Borrowing norms. Higher concession period up to 30 years in specific cases.

• •

Right to collect and retain toll. Four lane sections (both, budgetary as well as privately funded) to be o Toll in perpetuity.

tolled. • •

Revision of fee linked to Wholesale Price Index (WPI). Risk sharing: o o o Private sector to be compensated for Force Majeure. NHAI to provide short-term credit for temporary short fall in Foreign exchange risk sharing pattern being worked out.

revenue due to reduced traffic diversion. •

Detailed Guidelines for BOT projects issued. o Emphasis on transparency, competitiveness and fair contract conditions.

Tax/Fiscal Concessions The government has introduced various tax and fiscal concessions in order to encourage Private Participation. These are broadly classified as follows:

Concessions available for enterprise undertaking any project • o o • Under section 80(1)(A), corporations operating infrastructure facilities 100% deduction in profits for the tax purposes. Such deduction to run for a continuous 10 out of 20 fiscal years at the

have been offered:

assessee’s choice. Reduction in the rate of import duty in respect of specified construction plant and equipment.

Concessions available for Lenders/Investors • As an incentive to financial institutions to provide finance for the

infrastructure projects, deduction upto 40% of their income derived from financing of these investments is available provided the amount is kept in a special reserve. • Exemption for infrastructure funds from Income Tax on the incomes from dividend, interest on long term capital gains of such funds or companies from investments in the form of shares or long term finance in any enterprise set up to develop, maintain and operate an infrastructure facility. • Subscription to equity shares or debentures issued by a public company formed and registered in India and the issue is wholly and exclusively for the purpose of developing, maintaining and operating and infrastructure facility, will be eligible for deduction equal to 20% of the tax payable by the subscriber. In case of such investment, the limit of Rs.60,000/- per year under Section 88 has been raised to Rs. 70,000/-. Availability of Long Term Finance The Government of India and Reserve Bank of India have decided to establish an Infrastructure Development Finance Company (IDFC), with an authorized capital of Rs. 5,000 crores. The IDFC will be a direct lender, refinancing institution and provide financial guarantees for the infrastructure projects. Government Support The government will carry out all preparatory works for the projects identified for private investment and meet the cost of following items: • • Detailed feasibility Study. Land for right-of-way and enroute facilities.

• Relocation of utility services, resettlement and rehabilitation of the affected

establishment. • Environmental clearances- not necessary for existing routes.

Land acquisition procedures streamlined.

CHAPTER 4
POLICIES & FRAMEWORK

 Policies  Central Government:
• Policy measures for private participation: In order to encourage and facilitate private sector investment and participation in the roads sector, the central government has undertaken policy measures and provided fiscal incentives within the sector: o 100% Foreign Direct Investment (FDI) will be allowed in road sector projects. o Dispute resolution will be in line with the Arbitration and conciliation Act 1996, based on UNCITRAL provisions. • Concession structure – NHAI projects New Model Concession Agreement (MCA) for BOT toll-based projects has been prepared. The MCA identifies risks and specifies the terms and conditions for sharing between the private player and the government. • Awarding of contracts: The future road projects would be awarded on BOT-toll, BOT-annuity and cash contracts concurrently, and not subsequently. The selection of the concessionaire, under the new MCA, is based on open competitive bidding. All project parameters such as the concession period, toll rates, price indexation and technical parameters are clearly stated upfront. Prequalified bidders are required to specify only the amount of grant sought by them. The bidder who seeks the lowest grant is awarded the contract. In some cases, instead of seeking a grant, a bidder may offer to share project revenues with the NHAI. In this case, the bidder offering the highest revenue share wins the contract. • Grant:

The maximum grant provided will be 20% of the project cost. In case the grant is inadequate for making a project commercially viable, an additional grant up to a maximum of 20% of the project is to be provided. The entire grant would be disbursed to the concessionaire during the construction period. • Concession fee: Concession fee is the amount concessionaire agrees to share with the NHAI out of the revenues of road project on the date of commercial operations date (COD). The premium would increase by 5% in each year of the concession period. • Concession period: The concession period is typically 20 years, but may vary depending on the volume of existing and projected traffic for specific projects. o The provisions provide for an increase in the concession period by 1.5% (subject to maximum of 20 %) for every 1% in shortfall in traffic. While provision that provides for reduction in the concession period on increase in traffic has been removed in interest of road players and bankers. o In case the daily passenger car units (PCU), traffic exceeds the design capacity of a stretch, yielding an assured equity IRR of 16% to the concessionaire and a maximum extension of 5 years would be allowed. • Construction period: The time required for construction (typically 24-30 months) is included in the concession period. A concessionaire starts earning revenues from COD. This incentivizes the concessionaire to complete construction ahead of schedule. • Financial closure: A time limit of 180 days is set for achieving financial closure by the concessionaire. In the event of failure, the bid security is forfeited.

The NHAI has introduced an additional condition for bidding road projects. Developers would be barred from bidding for new projects if there or more NHAI (BOT) projects are pending financial closure. However, if a bidder convinces NHAI about surety of arrangement of funds for the project, it can bid for more projects.

Obligation of NHAI: The obligations of NHAI are: (i) To acquire and hand over the possession of 80% of the land required for the project till the letter of award (LOA) and balance 20% to be handed over within 90 days of project award (ii) Obtain all environment clearance for the project before financial closure is achieved (iii) NHAI will ensure that no competing road is constructed where NHDP is being implemented. NHAI will have to compensate the concessionaire if this is breached.

 State Government:

States such as Maharashtra, Madhya Pradesh, Gujarat, Rajasthan, Karnataka, etc. have set up State Road Development Corporations (SRDCs) for the development and implementation of projects. In order to encourage private sector participation states such as Maharashtra, Rajasthan, Bihar, Punjab, Haryana follow their own MCA. The comparison of policies across states is shown in the table below.

Comparison of policies across States

 Tolling Policy:
Toll charges are based on the rates notified by the government. The New Tolling Policy came into force in December 2008 with effect from April 1, 2008. The key parameters in the policy are:

New Tolling Policy

Other Features in this policy include: • • • • Uniform rates for public and private funded projects Categorization of vehicles in five different types Change in base rates for four or more laned national highways Introduction of toll rates for two-laned national highways

 Legal Framework: • Central Level Initiatives:
Administration of roads has to go hand in hand with the jurisdiction of the Central Government and State Government. Some of the legislations governing the roads sector are: o Indian Tolls Act, 1851 This act enables the government to levy tolls on public roads and bridges within certain rates. Certain states have modified this Act to enable toll collection by private investors in road projects. o Land Acquisition Act, 1894 The Act empowers the center or state governments, and its agencies, to acquire land required for the construction of highways, by paying compensation. o Dispute Settlement Act, 1940 Any dispute between the government and a domestic enterprise has to be settled through arbitration as per the Act. A dispute between the government and a foreign enterprise has to be settled either in accordance with the Dispute Settlement Act, 1940 or in accordance with the provisions of the United Nations Commission on International Trade Laws (UNCITRAL). o National Highway Act, 1956 Legislations about national highways are as per the National Highways Act (NHA), 1956. The NHA authorizes the Central government to notify any highway as a national highway, and also assigns it the responsibility of developing and maintaining national highways. o Motor Vehicle Act, 1988

It is a Central legislation that consolidates and rationalizes the various laws regulating road transport in the country. The levy of road usage charge on the vehicles is governed by either the respective motor vehicle tax acts or equivalent acts. o National Highway Authority of India Act, 1988 The National Highway Authority of India (NHAI) Act was passes in 1988. The act provides for the constitution of an authority for the development, maintenance and management of national highways in India. The Act specifies that the principal function of the authority would be to develop, maintain and manage national highways (or any other highway) entrusted to it by the Central government. The functional profile of NHAI, as in the Act, includes: 1. Surveying, developing, maintaining and managing national highways and related facilities. 2. Regulating and controlling the movement of vehicles on these highways 3. Collecting fees/charges on behalf of the Central government

• State level initiatives:
To stimulate private sector participation in roads project, several state governments have taken favorable initiatives such as making appropriate amendments to the Motor Vehicles Tax Act (Gujarat, Maharashtra, Rajasthan and Karnataka), the Indian Tolls Act (Madhya Pradesh and Andhra Pradesh) and enacting infrastructure developments acts (Andhra Pradesh and Gujarat).

• Ownership:
The government usually owns the roads; it also has the right to develop and maintain them. However, in case of BOT projects, the right to develop, maintain, collection and retention of tolls [known as RoW (Right of Way)] is given to the

concessionaire of the project. However, even in such cases the ownership of the roads is not transferred to the concessionaire. These projects are transferred back to the government at the end of the pre-determined concession period.

CHAPTER 5
INDUSTRY STATISTICS

 Road network in INDIA:
According to the Ministry of Road & Transport Highway (MoRTH), National Highways in India constitutes around 70,000 kms, which is only 2% of the total roads in India but it carries approx. 40% of the total traffic on Indian roads, while State highways and MDRs carry another 40% of the traffic and accounts for 18% of the road length. Road transport is most frequent mode for freight traffic and passenger traffic. It is estimated that 53% of the total freight and 87% of the total passenger traffic is carried by roads. In 2000-01, roads accounts for 47% of the total freight traffic, which increased to 52% in 2010-11. Comparatively, the railways, which contributed 39% in 2000-01 to the total freight transport, declined to 36% in 2010-11.

Freight and Passenger Movement

Up-gradation of National Highway: National highways have been upgraded from single lane and double lane to four lanes. Single lane roads decreased from 35% on 2004-05 to 30% in 2008-09, whereas double lane roads have reduced from 56% to 53% during same period. Between 2004-05 and 2008-09, four lane roads have increased from 9% to 17%.

Percentage of National Highways in term of width

 Investments:
Road planning and financing in India is the responsibility of the Central and State Government, with the centre responsible for construction, operation and maintenance of national highways, and state for state highways and major district roads (MDRs). In rural roads, expansion is largely under PMGSY, which is a centrally sponsored scheme, while implementation is the responsibility of the respective state governments and panchayats.

With the government increasing its focus on infrastructure development, different researches estimates investments of Rs. 6.3 trillion in the road sector between 2010-11 and 2014-15. Of this, the share of national highways would be 43% followed by state roads and rural roads at 30% and 27%, respectively.

Trends in road sector investment

Planned Investment in Road Sector

Financing of NHAI

 National Highway:
The National Highway network has expanded considerably since Independence. Major growth was between 1993 and 2008, with almost 37,000 km being added to the national highway network.

The National Highway development Programme (NHDP) has been the key driver in expanding the country’s road network. The NHDP encompasses up-gradation, rehabilitation and broadening of existing national highways.

The programme is primarily executed by National Highways Authority of India (NHAI), with the Public Works Department (PWD) of the various states and the Border Roads Organization (BRO) also executing some stretches. The NHDP is being implemented in seven phases. Phases II, III and V are under execution whereas implementation under Phase VII commenced in July 2009. Phase IV and VI are at various stages of planning and bidding.

NHDP Phases

Details of NHDP projects (Phase-wise)

Source: NHAI

Source: NHAI

Source: NHAI

Source: NHAI

Source: NHAI

 State Highway:
State roads constitute around 18% of the country’s total network and handles around 40% of the total road traffic. State roads comprise state highways, major district roads (MDRs) and rural roads that do not come under PMGSY. These represent the secondary system of road transportation in the country, providing linkages with national highways, district headquarters of the state, and important towns, tourist centres and minor ports. I have now taken an example of Rajasthan to identify the opportunities mapping and preliminary project attractiveness analysis from financing perspective in road sector in Rajasthan.

• RAJASTHAN:

Out of the total road network in Rajasthan, 62% are surfaced roads. Within the states, rural roads account for 87% of the total road network while national and state highways along with MDRs account for the remaining 13%. Since the public-private partnership (PPP) model in road development has been wellestablished in Rajasthan, policy framework like Tolling Policy etc are in place.

Rajasthan Public Works Department (RPWD) and Rajasthan State Road development Corporation (RSRDC) are the two implementing agencies for state highways and major district roads. RSRDC implements BOT contracts and RPWD is responsible for executing cash contracts. In 2004, the Government of Rajasthan set up the Road Infrastructure development Company of Rajasthan Ltd (RIDCOR), a 50-50 joint venture with IL&FS, for developing and maintaining BOT road projects. currently, the company is implementing a 1,200 km Mega Highway Project; the Rajasthan Government is contributing 20% of the project cost. Project Mix in Rajasthan:

Out of the total completed and under implementation state road projects, 86% are BOT contracts and remaining 14% are cash contracts.

Proportion of BOT contracts is higher than cash contracts Local players such as Balaji Constructions, Krishna Constructions and MS Kumar Constructions mainly execute cash contracts in Rajasthan. Local players such as Chetak Enterprise, MSK projects, Mitra Infra Projects and Atlanta Constructions execute bulk of BOT contracts. Size of Project: Average size of the project, in terms of length implemented, in Rajasthan is around 23 km I cash contracts and 125 km in BOT contracts. In terms of cost, the average size is Rs.50 million in cash contracts and Rs. 1,750 million in BOT contracts.

Upcoming road projects in Rajasthan: Mega Highway Project II has been proposed on BOT basis. Seven corridors with total length of 1,267 km worth Rs. 12,580 million have been identified. The Department of economic Affairs has approved all seven projects under viability gap funding to the extent of 20% of project cost. RIDCOR will implement Mega Highway Project II.

Rajasthan PWD is likely to implement a total length of 127 km of cash contracts worth Rs 542 million through the Inter State Connectivity Fund.

 Players of the Industry:
In India, there are number of companies working for the construction of roads. Different agencies like Public Works Department (PWD), Border Roads Organization (BRO),

National Highways Authority of India (NHAI), Ministry of Road & Transport Highway (MoRTH) etc. offers and passes the tender to these companies for constructing roads in different parts of the country, which come under them. The names of some of such companies are listed below:1. Larsen & Toubro Infra. 2. Hindustan Construction Company. 3. Maytas Infra Ltd. 4. Patel Engineering. 5. Reliance Infrastructure. 6. Punj Lloyd. 7. IRB Infrastructure Developers. 8. GMR Infrastructure. 9. IVRCL Infra.

10. Nagarjuna Construction Company ltd.
11. KMC Constructions. 12. Soma Enterprise.

13. Gammon India Ltd. 14. Sadbhav Engineering ltd.
15. Gyatri Projects ltd. 16. Madhucon projects pvt. ltd.

17. Progressive Construction ltd. 18. KNR Construction ltd.
19. Ashoka Buildcon.

20. Simplex Infrastructure ltd. 21. Oriental structural engineers’ pvt. Ltd. 22. Era infra engineers ltd. 23. Gujrat state road development Corp. ltd. 24. IRCON International ltd.
25. Tantia Construction ltd.

26. Vishal Infrastructure. 27. Keti Construction ltd.

28. G.R Infraprojects ltd. 29. Abhijeet Infrastructure ltd.
30. SEW Infra.

31. Vijai Infrastructure ltd.
32. Vijay constructions.

33. Lanco Infratech ltd. 34. Essel Infra Projects ltd.
35. JMC Project. 36. Navayuga Engineering Co. ltd. 37. GVK development project ltd. 38. IL & FS transportation ltd. 39. IDFC Ltd.

40. N.K.C Projects Pvt. Ltd. 41. Devi Enterprises Ltd. 42. BSPCL Infrastructure ltd. 43. SREI Infrastructure finance ltd.
44. Jaiprakash associates. 45. MSK projects (India) ltd. Etc.

Players Track Record: CRISIL Research analyzed 19 of the largest players based on parameters such as number of projects in NHDP executed by each player, and project size in terms of cost. These players were further evaluated on total projects under implementation, project mix, gearing, experience in all contracts and build-operate-transfer (BOT)

contracts, average time overrun in execution of NHDP projects, and track record in terms of completion of projects.

More than 50% of the ongoing project portfolio of players such as Larsen & Toubro (L&T), Soma Enterprise, KMC Constructions, HCC, IVRCL, Reliance Infrastructure, IRB, Gammon India, Punj Llyod, GMR, Sadbhav Engineering, Madhucon Projects, Ashoka Buildcon, and Patel Engineering are BOT contracts. On the other hand, players like Nagarjuna Construction Company (NCC), Progressive Constructions, KNR Constructions and Simplex Infrastructure have more than 50 of their ongoing projects in cash contracts. HCC and Gammon India, which have the highest gearing levels at 6.6 and 5.6 times, respectively, have their projects portfolios, skewed towards BOT contracts. The average delay in executing BOT projects is 5 months. L&T, Patel Engineering, NCC, and KNR Constructions exhibit high experience ratio. Experience ratio depicts the player’s experience in relation to the total projects under execution, i.e. a higher percentage of completed projects vis-à-vis ongoing projects. It also indicates the ability of the company to execute projects in time. L&T, Patel

Engineering, NCC, and KNR Constructions have high proportion of completed road projects against projects under implementation, indicating adequate experience in execution of road projects. Out of the total 19 projects of L&T, 16 projects have been completed, out which 11 were cash contracts and five BOT contracts. Also, companies such as Patel Engineering, NCC and KNR Constructions have completed more than 50% of the projects. Companies such as Progressive Constructions, HCC, Gammon India, Gyatri Projects, KMC Constructions, Punj Llyod, Sadbhav Engineering and Simplex Infrastructure have seen delays in the majority of cash contracts projects, with an average time of 28 months. Most of the cash contracts have been delayed on account of implementation issues like land acquisition, environmental clearances and utility shifting. However, BOT contracts are 22 months and 6 months, respectively.

Delhi, Rajasthan Uttar Pradesh etc. have witnessed delays of around 18 months in implementation of NHDP projects. Projects have faced time overruns due to the adverse law and order situation. Land acquisition and clearance issues have also led to the execution delays, particularly in states like Delhi, Bihar, Orissa and UP. • Player’s Profile: The profiles of the few players of the industry like Larsen & Toubro, Patel Engineering, Nagarjuna Construction Company (NCC), KNR Constructions and HCC etc. are shown in the picture below.

 Larsen & Toubro Ltd:

 Patel Engineering Company Ltd:

 Nagarjuna Construction Company Ltd:

 KNR Constructions Ltd:

 Hindustan Construction Company Ltd (HCC):

CHAPTER 6
FINDINGS & CONCLUSIONS

 Findings:
Road Industry is India is facing the problem of insufficient funds, which are necessary for the development of roads in the country. For proper planning and maintenance of roads, the government of India has made an authority named National Highway Authority of India (NHAI), and has amended the NHAI Act, 1956 for this purpose. To overcome the problem of insufficient funds, the government has decided to borrow funds from private sector and have taken many steps to encourage private sector participation. On the development side, there are many projects awarded by NHAI which are under implementation. At National level projects at 7 different phases, mega projects and expressway projects are under implementation and at State level different projects at different states are under implementation. Government of India has taken various steps to encourage Private Sector Participation like: • • • • •

Duty free import of high capacity and modern construction equipment. 100 per cent tax exemption in any consecutive 10 years out of 20 year of Foreign Direct Investment up to 100 per cent in road sector. Right to collect and retain toll. Declaration of the road sector as an industry. Provision of capital subsidy up to 40 percent of project cost to make

operations.

projects viable. Etc. On the other side there are many problems which are being faced by the road industry. Expansion of road infrastructure has not kept pace with the growing demand due to increasing cost and delays in schedules. The road industry faces many problems such as:

• • • •

Poor maintenance of road network. Targets and the available sources of funds indicate a very big financing gap. Inadequate planning of roads and highways. Rapid increase in the traffic on roads. Increase in traffic is far more than increase in roads in the country.

Few companies like Larsen & Toubro, Patel Engineering, Nagarjuna Construction Company, KNR Construction, Hindustan Construction Company etc. have been actively participating in this area for the development of road industry.

 Conclusions:
It is concluded that development of road industry is essential for the economic development of the country as the road sector contribute approx. 4.5% to the country’s total GDP. There are a lot of financing opportunities which are arising in the road sector in northern region. But there is lack of sufficient funds with the government, which is necessary for the development of roads in the country. For this purpose, the government has encouraged private sector to participate and invest the required capital for the construction of roads. Due to increasing traffic at higher pace and delay in completion of projects, the road industry is unable to provide better and smooth roads to the region. Now, private sector is playing an important role in the development and construction of roads in the region. With various procedures & policies of the government, it is encouraging the private companies to participate in this project of construction and maintenance of roads.

Construction of roads is a time consuming process and it will take many years for India to meet its requirements of roads and fully develop the road sector.

BIBLIOGRAPHY

 Bibliography:
• • • • • • • •

www.morth.nic.in www.nhai.org www.infrastructure.gov.in www.planningcommission.com www.worldbank.com www.ltinfra.com www.wikipedia.com Crisil Research Report, 2010-11 to 2014-15 World Bank report on Infrastructure, 2010

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