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Government of India

Ministry of Road Transport and Highways

Guidelines for Investment in Road Sector

Not just roads... building a NATION

Index
Executive Summary Current Scenario Financing National Highway Projects Public Private Partnership in Highway Development Revenue Risks and Mitigation Overview of Successful Projects Policy Framework Foreign Direct Investment Policy Tax Environment Repatriation of Investments and Profits Earned in India Administrative Framework About NHAI Annexure 4 5

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11 26 29 31 33 35

41 43 45 47

For National Highways Authority of India

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we have endeavored to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Deloitte refers to Deloitte Touche Tohmatsu India Private Limited

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Guidelines for Investment in Road Sector

Executive Summary
The National Highway network of the country spans about 70,934 km. The National Highway Development Project (NHDP), covering a length of about 54,000 km of highways, is India's largest road development programme in its history. In many ways, this ambitious and path-breaking initiative of the Government of India, which began in the late 1990s acknowledged the importance of private sector in India's infrastructure development. The consistent policy and institutional framework, which has been the backbone of the more than INR 3,00,000 Crore (USD 60 billion1) NHDP, also conveys the intent and commitment of successive governments to encourage increased private sector participation in developing the arterial road network of the country to world class standards. More than 60 percent of the estimated investment requirement is expected to be privately financed. The early success of Public-Private-Partnerships (PPP) in the NHDP, arguably, set the tone for similar initiatives in other infrastructure sectors and has provided the single largest opportunity for private financing and management of infrastructure services. Build Operate Transfer (BOT) concession contracts with an estimated Total Project Cost of approximately USD 32 billion (including BOT/DBFOT2-Toll and BOTAnnuity contracts) have been awarded under various packages till December 31, 2011 and these projects are expected to be fully operational by 201516. With several key projects on the anvil (including 6- laning of 4-laned roads, expressways and port connectivity projects) and the increasing interest evinced by domestic and foreign players in the sector, NHAI is happy to present to you, the Guidelines for Investment in the Road Sector, with specific focus on NHDP. NHAI believes that this document would serve as a useful guide for potential investors, developers and stakeholders interested in participating in India's ambitious highway development programme.

1. INR 50 = 1 USD : figures approximated 2. Design Build Finance Operate & Transfer (DBFOT)

Guidelines for Investment in Road Sector

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Current Scenario
India has an extensive road network of 4.24 million km– the second largest in the world. The National Highways have a total length of 70,934 km and serve as the arterial road network of the country. It is estimated that more than 70 per cent of freight and 85 per cent of passenger traffic in the country is being handled by roads. While Highways/ Expressways constitute only about 2 per cent of the length of all roads, they carry about 40 per cent of the road traffic leading to a strain on their capacity. The number of vehicles on roads has been growing at compounded annual growth rate (CAGR) of approximately 8%in the last five years The development of National Highways is the responsibility of the Government of India. The Government of India has launched major initiatives to upgrade and strengthen National Highways through various phases of the National Highways Development Project (NHDP). NHDP is one of the largest road development programmes to be undertaken by a single authority in the world and involves widening, upgrading and rehabilitation of about 54,000 km, entailing an estimated investment of more than INR 3,00,000 Crore (USD 60 billion). The National Highways Authority of India (NHAI) is mandated to implement the NHDP. Most of the projects have been developed or are under development on Public Private Partnership (PPP) basis through Build Operate and Transfer (BOT)-Annuity and Build Operate and Transfer (BOT)-Toll mode (these have been explained in detail in later section of the brochure). Typically, in an annuity project, the project IRR is expected to be 12-14% and equity IRR would be 14 -16%. For toll projects, where the concessionaire assumes the traffic risk, the project IRR is expected to be around 14-16% and equity IRR around 18-20%3. The NHDP is being implemented under several phases: 4-laning of the Golden Quadrilateral (GQ) and North- South and East- West (NS-EW) Corridors(NHDP I & II) Phase I mainly involves widening (to 4 lanes) and upgrading of 7,498 km of the national highway network and has four component packages: 1. Highway network linking the four metropolitan cities in India i.e. Delhi-Mumbai-ChennaiKolkata, covering a length of 5,846 km, popularly known as the Golden Quadrilateral (GQ) project. Highways along the North-South (NS) and EastWest (EW) corridors, covering a length of 981 km Port connectivity projects covering a length of 356 km; and Other highway projects, covering a length of 315 km

2. 3. 4.

Phase-II involves widening and improvement of the NS-EW corridors (not covered under Phase-I) covering a distance of 6,647 km, besides providing connectivity to major ports on the east and west coasts of India and some other projects. This includes 6,161 km of NS-EW corridors and 486 km of other highways. 4-laning of the GQ has almost been completed.

3. Deloitte Research

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Guidelines for Investment in Road Sector

Phase III - Upgradation of 12,109 km NHDP-III involves upgradation of 12,109 km (mainly 4laning) of high density national highways, through the Build, Operate & Transfer (BOT) mode at a cost of INR 80,626 Crore (USD 16.1 billion). The project consists of stretches of National Highways carrying high volume of traffic, connecting state capitals with the NHDP network under Phases I and II and providing connectivity to places of economic, commercial and tourist importance. Phase IV - 2-laning of 20,000 km with paved shoulders With a view to providing balanced and equitable distribution of the improved/widened highways network throughout the country, NHDP-IV envisages upgrading of 20,000 km of such highways into 2-lane highways, at an indicative cost of INR 27,800 Crore (USD 5.6 billion). This will ensure that their capacity, speed and safety match minimum benchmarks for national highways. The government has already approved strengthening of 5,000 km to 2-lane paved shoulders on BOT (Toll/ Annuity) under NHDP-IV A at a cost of INR 6,950 Crore (USD 1.4 billion). Phase V - 6-laning of 6,500 km Under NHDP-V, 6-laning of the 4-lane highways comprising the GQ and certain other high density stretches, will be implemented on BOT basis at an estimated cost of INR 41,210 Crore (USD 8.2 billion). These corridors have been 4-laned as part of the GQ in

Phase-I of NHDP. Of the 6,500 km proposed under NHDP-V, about 5,700 km would be taken up in the GQ and the balance 800 km would be selected on the basis of predefined eligibility criteria. Development of 1,000 km of expressways (NHDP-VI) With the growing importance of urban centres of India, particularly those located within a few hundred kilometers of each other, expressways would be both viable and beneficial. The Government has approved 1,000 km of expressways to be developed on a BOT basis, at an indicative cost of INR 16,680 Crore (USD 3.3 billion). These expressways would be constructed on new alignments. Other Highway Projects of 700 km (NHDP-VII) The development of ring roads, bypasses, grade separators and service roads are considered necessary for full utilisation 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 INR 16,680 Crore (USD 3.3 billion) has been approved by the Government. Apart from the high density corridors, a substantial part of the National Highways network would also require development during the 12th Plan period. These sections are characterised by low density of traffic. Some of these stretches fall in backward and inaccessible areas and others are of strategic importance. The development of these categories of National Highways would be carried out primarily through budgetary resources.

Current Status of Projects4
60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0
Completed Work in Progress To be Awarded Total 16776 13264 24414 54454

4. Length in Km. as on December 31, 2011.

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Financing National Highway Projects
Traditionally, financing for development of National Highways in India was from the budgetary resources of the Government of India. In order to augment the available resources, loans have also been raised from multilateral agencies like World Bank, Asian Development Bank (ADB) and Japan Bank of International Cooperation (JBIC). NHAI has earlier received loans directly from multilateral agencies (highway project). These loans Summary of Externally Aided Projects
Category World Bank Funded Projects NHDP Phase I GQ Others NHDP Phase II EW Corridors Sub-Total A ADB Funded Projects NHDP Phase I GQ Others NHDP Phase II NS & EW Corridors Sub-Total B JBIC Funded Projects NHDP Phase I GQ Others Sub-Total C Grand Total (A+B+C) 7 5 2 7 78 150 111 39 150 3,873 634 333 301 634 18,811 7 5 2 7 65 150 111 39 150 3,251 10 9 1 31 41 615 567 48 1,638 2,253 1,866 1,807 59 7,565 9,431 10 9 1 23 33 615 567 48 1,226 1,841 18 18 12 30 983 983 487 1,470 5,538 5,538 3,208 8,746 17 17 8 25 932 932 328

are expected to be repaid through the toll income from the project. The interest rate for the project is determined according to ADB's pool based variable lending rate system for US dollar loans. Around 80 per cent of the external assistance is provided to NHAI as a grant by the Central government. The balance is made available as long-term loans to NHAI, with the Centre bearing the foreign exchange risk. Such loans are usually provided for 15-25 years with a moratorium of 5 years.

Awarded No. of Contracts Length in km

Awarded Cost (INR Crore)

Completed No. of Contracts Length in km

1,260

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Guidelines for Investment in Road Sector

Presently, the development and maintenance of National Highways is financed by following modes: 1. Government's Gross Budgetary Support (GBS) and Additional Budgetary Support (ABS) Dedicated accruals under the Central Road Fund (share in the levy of cess on fuel) Lending by international institutions (World Bank, ADB, JBIC) Private financing under PPP frameworks • Build Operate and Transfer/Design Build Finance Operate and Transfer5 (DBFOT) Investment by private firm and return through levy and retention of user fee • Build Operate and Transfer (Annuity) - BOT (Annuity) - Investment by private firm and return through semi-annual pre-determined

payments from NHAI as per bid. Special Purpose Vehicle – SPV (with equity participation by NHAI)

5.

2.

Market Borrowings (including funds raised through Capital Gain Tax Exemption Bonds under section 54 EC of Income Tax Act)

3.

4.

NHAI also has a provision for providing grant upto 40% of the project cost to make projects commercially viable. However, the quantum of grant is decided on a case to case basis and typically constitutes the bid parameter in BOT projects. The disbursement of such grant is subject to provisions of the project concession agreements (A compact Disc (CD) containing an overview of the Model Concession Agreement for BOT - Toll projects is enclosed with the brochure).

Approved Project Cost of NHDP (Excluding Interest During Construction and Escalations)
Phase Particulars Cess and Market Borrowings NHDP-I External Assistance BOT/SPV Total (At 1999 Prices) Cess and Market Borrowings NHDP-II External Assistance BOT/SPV Total (At 2002 Prices) Budgetary Support NHDP-III Cess and Market Borrowings BOT/SPV Total (At 2004 Prices) NHDP-IV A Private Sector Government Spending Total (At 2006 Prices) NHDP-V Cess and Market Borrowings BOT/SPV Total (At 2006 Prices) NHDP-VI Cess and Market Borrowings BOT/SPV Total (At 2006 Prices) Cess and Market Borrowings BOT/SPV Total (At 2007 Prices) 700 1000 6500 5000 12109 6647 7498 Projected For (Kms) INR Crore 18,846 7862 3592 30300 23420 7609 3310 34339 12809 17688 50129 80626 4608 2342 6950 5519 35691 41210 7680 9000 16680 6302 10378 16680

NHDP-VII

5. The developer has flexibility in project design so long as the build and service quality is in line with prescribed standards set out in the Standards and Specification Manuals.

Guidelines for Investment in Road Sector

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NHAI projects, with higher traffic volumes, have also received Negative Grant (upfront payment payable by successful bidder to NHAI) instead of grant / VGF as an outcome of the competitive bidding process. Further, under the revised MCA, projects under BOT/ DBFOT framework have also been awarded on a revenue share / premium basis, where the bidder offering the highest revenue share / premium is awarded the project. These revenues are also ploughed back for the development and maintenance of National Highways.

Projects awarded on Negative Grant
Estimated Cost (INR Crore) Estimated Cost (USD Million) Negative Grant (INR Crore) Negative Grant (USD Million)

Road Section Delhi-Gurgaon Rajkot Bypass-Jetpur Panipat Elevated Highways Salem- Karur Krishnagiri - Thopurghat Tindivanam-Ulundurpet Thirssur-Angamali Jalandhar- Amritsar Ambala-Zirakpur Dhule-Pimpalgaon Vadodara Bharuch Bharuch-Surat

Length (Km.)

28 36 10 42 62 71 40 49 36 118 83 65

710 388 270 253 372 480 312 263 298 556 660 492

142 78 54 51 74 96 62 53 60 111 132 98

61 59 96 46 140 152 84 7 106 59 471 504

12 12 19 9 28 30 17 1 21 12 94 101

Projects awarded on Revenue Share Basis
Road Section
Surat-Dahisar Gurgaon-Jaipur Panipat-Jalandhar Chennai-Tada Vijayawada-Chilkaluripet Krishnagiri-Walajhapet

Length (Km.)
239 225 291 42 85 148

Estimated Cost (INR Crore) 2,600 1,900 2,200 317 1,173 1,250

Estimated Cost (USD Million) 520 380 440 63 235 250

Revenue Share (%) 38% 48% 20% 17% 2% 7%

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Guidelines for Investment in Road Sector

Projects awarded on Premium
Estimated Cost (INR Crore) 853 1,175 388 786 807 954 650 593 909 359 828 1,725 805 325 480 839 535 943 479 1,396 530 2,125 1,665 484 2,388 1,232 2,815 1,055 5,387 354 910 1,044 283 1,216 1,034 1,124 1,267 790 1,207 1,573 923 Estimated Cost (USD Million) 171 235 78 157 161 191 130 119 182 72 166 345 161 65 96 168 107 189 96 279 106 425 333 97 478 246 563 211 1,077 71 182 209 57 243 207 225 253 158 241 315 185

Road Section Chengapalli to Coimbatore Bypass and End of Coimbatore Bypass Indore-Jhabua-Gujarat/MP Hyderabad-Yadgiri 4 Laning of Godhara to Gujarat /MP Border Panipat - Rohtak Kandla - Mundra Port Rohtak - Bawal Deoli - Kota Sambalpur-BaragarhChattisgarh/Orrisa Border Belagaum-Khanpur (4-lane) Jetpur-Somnath (4-lane) Pune – Satara Samaikhiali-Gandhidham Indore-Dewas Belgaum-Dharwad Chitradurga -Tumkur Bypass Six Laning of Hosur-Krishnagiri Panvel - Indapur Luchiyana - Talwandi Six Laning of Dhankuni-Kharagpur Kota-Jhalwar Ahmedabad-Vadodara Barwa Adda-Panagarh Nagpur-Wainganga Bridge Beawar-Pali-Pindwara Orissa/Chhattisgarh Border-Aurang Shivpuri-Dewas Gwalior-Shivpuri Kishangarh-Udaipur-Ahmedabad Muzaffarpur-Barauni Hospet-Bellary- KNT/AP Border Lucknow-Sultanpur Rohtak-Jind Raipur-Bilaspur Hospet-Chitradurga Cuttack-Angul Mah/KNT Border-Sangareddy Rampur-Katgodam Agra-Etawah Etawah-Chakeri Solapur-Maharashtra/Karnataka Border

Length (Km.) 55 155 36 87 81 71 83 83 88 82 123 140 56 45 80 114 60 84 78 111 88 102 123 45 244 150 330 125 556 108 95 126 49 127 120 112 145 93 125 160 100

Premium (INR Premium Crore) (USD Million) 36 23 12 8 45 42 12 49 1 2 23 91 58 24 31 140 67 34 1 126 4 310 106 27 251 30 181 67 636 5 18 10 0 45 63 61 80 34 128 92 28 7 5 2 2 9 8 2 10 0 0 5 18 12 5 6 28 13 7 0 25 1 62 21 5 50 6 36 13 127 1 4 2 0 9 13 12 16 7 26 18 6

Guidelines for Investment in Road Sector

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Public Private Partnership in Highway Development
Initially, projects under NHDP were awarded as item rate cash contracts. However, going forward, Public Private Partnerships (PPP) are going to be the main mode of delivery for future phases of NHDP. While there are a number of forms of PPP, the common forms that are popular in India and have been used for development of National Highways are: • • • Build, Operate and Transfer (Toll) Model on DBFOT basis Build, Operate and Transfer (Annuity) Mode on DBFOT basis Special Purpose Vehicle (SPV) for Port Connectivity Projects operations and maintenance) and an expected return on the investment. The bidder quoting the lowest annuity is awarded the project. The annuities are paid semi-annually by NHAI to the concessionaire and linked to performance covenants. The concessionaire does not bear the traffic/ tolling risk in these contracts. Operate, Maintain and Transfer (OMT) Concession NHAI has recently taken up award of select highway projects to private sector players under an OMT Concession. Till recently, the tasks of toll collection and highway maintenance were entrusted with tolling agents/ operators and subcontractors, respectively. These tasks have been integrated under the OMT concession. Under the concession private operators would be eligible to collect tolls on these stretches for maintaining highways and providing essential services (such as emergency/ safety services). Special Purpose Vehicle for Port Connectivity Projects NHAI has also taken up development of port connectivity projects by setting up Special Purpose Vehicles (SPVs) wherein NHAI contributes upto 30% of the project cost as equity.The SPVs also have equity participation by port trusts, State Governments or their representative entities. The SPVs also raise loans for financing the projects. SPVs are authorised to collect user fee on the developed stretches to cover repayment of debts and for meeting the costs of operations and maintenance. International Competitive Bidding Process General procedure for selection of concessionaires adopted by NHAI is a two-stage bidding process. Projects are awarded as per the model documentsRequest for Qualification (RFQ), Request for Proposal (RFP) and Concession Agreement - provided by the Ministry of Finance. NHAI amends the model documents based on project specific requirements. (Please refer CD for these model documents). The processes involved in both stages are set out as

NHAI is also proposing to award projects under a long term Operations, Maintenance and Transfer (OMT) concession. BOT (Toll) Private developers/ operators, who invest in tollable highway projects, are entitled to collect and retain toll revenues for the tenure of the project concession period. The tolls are prescribed by NHAI on a per vehicle per km basis for different types of vehicles.The Government in the year 1995 passed the necessary legislation on collection of toll. (Refer the National Highways Fee [Determination of Rates and Collection] Rules 2008 and its amendments dated December 3, 2010, January 12, 2011 and October 12, 2011). A Model Concession Agreement (MCA) has been developed to facilitate speedy award of contracts.This framework has been successfully used for award of BOT concessions.The MCA has been revised recently and current projects are being awarded under the revised MCA (refer enclosed CD for overview of MCA framework). BOT (Annuity) The concessionaire bids for annuity payments from NHAI that would cover his cost (construction,

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Guidelines for Investment in Road Sector

follows: Stage 1: Pre-qualification on the basis of Technical and Financial expertise of the firm and its track record in similar projects which meets the threshold technical and financial criteria set out in the RFQ Document. Some of the recent significant amendments in the pre qualification document are set out below: 1. Determination of technical and financial capacity of consortium applicants in proportion to the committed equity holding of each consortium member in the project SPV. For illustrationIf Company A has been assessed to have an experience score (measured in terms of payments made/received and/or revenues received for eligible projects) of 5,000 and Company B has been assessed to have an experience score of 2,500, in a Consortium with shareholding of A as 60% and B as 40%, then the weighted experience score of the Consortium shall be: 5,000*60%+2,500* 40%=4,000 If Company A with a net worth of INR 1000 Crore (USD 200 million) & Company B with a net worth of INR 500 Crore (USD 100 million) are bidding together as a Consortium with shareholding of A as 60% and B as 40% then the weighted financial score of the Consortium shall be: 1,000*60%+500*40%= INR 800 Crore (USD 160 million)

Contractors who have completed atleast a single highway project of more than 20% of the estimated project cost of the project or INR 500 Crore (USD 100 million) which ever is less in the preceding 5 financial years from the application due date. Notice inviting tenders is posted on the web site and published in leading newspapers Stage 2: Commercial bids from pre-qualified bidders are invited through issue of RFP. For BOT-(Toll) projects the bid parameter is the premium offered to the NHAI or the grant sought from NHAI. In BOT(Annuity) projects the bid parameter is the semi annual annuity sought from NHAI. Generally, the duration between Stage 1 and 2 is about 30-45 days. Wide publicity is given to NHAI tenders so as to attract attention of leading contractors/ developers/ consultants. The Government has put in place appropriate policy, institutional and regulatory mechanisms including a set of fiscal and financial incentives to encourage increased private sector participation in road sector. Summary of recent policy changes in the project development and award process are set out below: Based on NHAI’s experience and the discussions with various stakeholders, the RFQ, RFP and the MCA are being updated continuously. Some of the important changes made in these documents are as under: 1. All applicants meeting the threshold technical and financial experience criteria set out in the RFQ shall be eligible to participate in the RFP stage. Earlier only the top 5-6 applicants shortlisted based on qualification criteria were eligible to submit financial bids for projects. 2. NHAI is empowered to accept single bids based on assessment of reasonableness of the bids. 3. Overall cap on Viability Gap Funding (VGF)

-

2. In case of foreign companies, a certificate from a qualified external auditor who audits the books of accounts of the Applicant or the Consortium Member in the formats provided in the country where the project has been executed shall be accepted, provided it contains all the information as required in the prescribed format of the RFQ. 3. Applicants/Bidders would need to provide an undertaking to NHAI that the EPC works of the project would be executed only by such EPC

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increased from 5% to 10% for the entire six-laning programme. 4. For individual projects with low traffic in the Golden Quadrilateral (GQ) corridors, VGF cap has been increased upto 20% of the project cost with an overall cap of 500 km of roads in the project network. 5. Equity Support under VGF has been increased to 40% of project cost. Earlier, 20% of project cost was provided as equity support in construction phase and 20% as Operations & Maintenance Support 6. Modifications in Standard RFQ, RFP and Concession Agreement structures for National Highway Projects a. Termination provisions under capacity augmentation situations modified to give more comfort to investors and lenders. The concession period can be extended upto 5 years to yield a post tax equity IRR of 16%, in the event of capacity augmentation option exercised by the concessionaire. b. Exit option allowed for principal promoters of road SPVs after two years from commercial operations date (COD). Promoters were earlier required to hold a minimum of 26% of the SPV’s shareholding at all times during the tenure of the Concession. c. Threshold limit for common control (shareholding) of entities in competing Applicants and/ or their Associates for the purposes of determining Conflict of interest, raised from 5% to 25%. Any such conflict of interest arising at the pre-qualification stage shall be deemed to subsist at the bidding stage only if such applicants attracting the conflict of interest provisions submit their bids. d. Threshold technical capability for claiming eligible project experience has been reduced to a range between 5-10% of estimated project
6. As per recommendations of B K Chaturvedi Committee

cost of the subject project in lieu of 10-20% of estimated project cost of the subject project earlier. e. The threshold technical experience score for the purpose of pre-qualification will be equal to the estimated project cost of the subject project. This was, earlier equal to twice the estimated project cost of the subject project. f. Where the projects are bid out on a revenue share basis, the base premium (fixed amount) (revenue share proposed by the successful bidder) will be increased at the rate of 5 per cent year on year with respect to the immediately preceding year for the entire tenure of the concession.

The aforesaid changes6 are expected to further incentivise private investment in road/highway projects. Opportunities for Private Investors/ Developers More than 60% of the projected investment requirement for the NHDP (more than USD 60 billion) is expected to be privately financed, primarily through the BOT/DBFOT (Toll) route, offering enormous opportunities. With a large number of new projects on offer under PPP in the road sector, there exists several investment opportunities for investors and companies with diverse business lines such as engineering companies, civil work contractors, O&M contractors, toll operators, construction equipment manufacturers etc. and other stakeholders such as advisors, financiers and sector professionals. Only about 23 per cent of the total highways in India are 4-laned / 6laned and the sheer potential for investments in this sector is likely to create opportunities in the core construction industry which may also be attractive for foreign players. The opportunity for private players in the road sector can be broadly categorised in two segments: a) Infrastructure Development b) Logistics and Services.

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Guidelines for Investment in Road Sector

Roads

Development Projects

Construction

Tolling

Urban Transportation

Trucking

Tourism

stakeholders based on internationally accepted principles and best practices. Throughout, it seeks to achieve reasonable balance of risks and rewards for all the participants. As an underlying principle, risks have been allocated to the parties that are best suited to manage them. Project risks have, therefore, been assigned to the private sector to the extent it is capable of managing them. The transfer of such risks and responsibilities to the private sector would increase the scope of innovation leading to efficiencies in cost and services. The commercial and technical risks relating to construction, operation and maintenance are allocated to the concessionaire, as it is best suited to manage them. Other commercial risks, such as the rate of growth of traffic, are also allocated to the concessionaire. Key Concessionaire Risk/Obligations • Construction Risk - The concessionaire is required to commence construction works when the financial close is achieved or earlier date that the parties may determine by mutual consent. The concessionaire shall not be entitled to seek compensation for any prior commencement and shall do it solely at his own risk. O & M Risk - Concessionaire to operate and maintain the project facility (includes road and road infrastructure as specified in the concession agreement). Failure to repair and rectify any defect or deficiency within specified period shall be considered as breach of responsibility. Financial Risk - The concessionaire shall at its cost, expenses and risk make such financing arrangement as would be necessary to finance the cost of the project and to meet project requirements and other obligations under the agreement, in a timely manner. Traffic Risk - The MCA provides for increase or decrease of the concession period in the event the

BOT/ DBFOT - Toll

Equipment

Services

Pvt Bus Service

Perishables

Luxury Buses

BOT Annuity

Material

Equipment

Containers

OMT

Technology

Bulk

SPV Maintenance

Logistics & Services

Infrastructure Development

Model Concession Agreement (MCA) for PPP Projects The highways sector in India has witnessed significant investment in recent years. For sustaining the interest of private participants, a clear risk-sharing and regulatory framework has been spelt out in the Model Concession Agreement (MCA). The MCA has been developed to facilitate speedy award of contracts. This framework has been successfully used for award of BOT concessions. The MCA has been revised and current projects are being awarded under the revised MCA. This framework addresses the issues, which are typically important for PPP, such as unbundling of risks and rewards, symmetry of obligations between the principal parties, equitable sharing of costs and obligations, and risk mitigation options under various scenarios including force majeure and termination, under transparent and fair procedures. With the introduction of the MCA, the risks involved in project and contractual issues, hitherto, have been assuaged, and the entire process from invitation to bid to implementation of the project is transparent. MCA's risk framework is briefly discussed below: Risk Framework of Model Concession Agreement The MCA has been developed in consultation with all

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actual traffic falls short or exceeds the target traffic. NHAI stipulates the target traffic during the year specified in project specific concession agreement, which is usually around the 10th year from the date of signing of the agreement. The target traffic is determined based on 5% Compounded Annual Growth Rate (CAGR) over the base year traffic for the project. MCA also provides for termination of the agreement if the average daily traffic in any accounting year exceeds the design capacity and continues to exceed for three subsequent accounting years. Termination payments under this scenario will be commensurate to those applicable under an Indirect Political Event (See table in next section on page 27). An overview of revenue risks and mitigation (including Termination Payment) under the MCA is provided in the next section. Key NHAI Risk/Obligations • Land Acquisition Risk: NHAI is responsible for acquiring the requisite land for the project highway Approvals: NHAI will provide all reasonable support and assistance to the concessionaire in procuring applicable permits required from any Government Instrumentality.

Key Common Risk • Force Majeure Risk - Force Majeure shall mean occurrence in India of any or all of Non-Political Event(s), Indirect Political Event(s) and Political Event(s), which include the following: Non-Political Event: • act of God, epidemic, extremely adverse weather conditions or radioactive contamination or ionising radiation, fire or explosion; • strikes or boycotts • the discovery of geological conditions, toxic contamination or archaeological remains on the Site; or • any event or circumstances of a nature analogous to any of the foregoing. Indirect Political Event • an act of war, invasion, armed conflict or act of foreign enemy, blockade, embargo, riot, insurrection, terrorist or military action, • civil commotion or politically motivated sabotage which prevents collection of toll/ fees, • industry-wide or state-wide or India-wide strikes or industrial action which prevent collection of toll/ fees, • any public agitation which prevents collection of toll/ fees

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Guidelines for Investment in Road Sector

Political Event • Change in Law, • compulsory acquisition by any governmental agency of any project assets or rights of concessionaire or of the Contractors; or • unlawful or unauthorised or without jurisdiction revocation of or refusal to renew or grant without valid cause any consent or approval required by developer Other Salient features of the MCA • Substantial part of the project site free from encumbrances would be handed over to the concessionaire till the Appointed Date. Additional land in case of change of scope will need to be acquired by concessionaire on behalf of the Authority. • Additional tollway will not be commissioned within a specified year, depending upon the concession period. Minimum user fee for additional tollway will be at least 25% higher than the toll fee on project. Any alternate road, exceeding 20% of the length of the project highway, shall not be considered as an additional tollway. • The concessionaire will be entitled to nullify any change of scope order if it causes the cumulative cost relating to all change of scope orders to exceed 5% of the Total Project Cost (TPC) in any continuous period of 3 years immediately preceding the date of such Change of Scope order, or if such cumulative cost exceeds 20% of the TPC at any time during the concession period. • Financial close is to be achieved within 180 days from date of agreement. NHAI may allow additional period for financial close on a project specific basis. • Grant (upto 40% of TPC) to the concessionaire by way of equity support and operations & maintenance support in quarterly installments. (B.K.Chaturvedi Committee has recommended that the entire grant [upto 40% of TPC] can be provided as equity support).

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17

Concessionaire to pay nominal fee of INR 1 (USD 0.02) per annum throughout the concession period. There is an optional provision for capacity augmentation of existing 4-laning to 6-laning. If capacity augmentation is not done within the specified period, the concession period gets reduced to the number of years specified in the project specific agreement. The option to excuse from 6-laning of the Project Highway is available with both the concessionaire and the Authority before the pre-specified 6-laning date in the concession agreement.

Dispute Resolution Procedure for PPP projects • Mediation by the Independent Engineer: If any dispute arises between the parties, it is in the first place resolved by the mediation of the Independent Engineer. Any dispute, which is not resolved by mediation of the Independent Engineer, is resolved by amicable resolution. Amicable Resolution: Any dispute, difference or controversy of whatever nature between the parties, arising under, out of or in relation to the Project Concession Agreement (PCA) is attempted to be resolved amicably in accordance with the procedure set forth in the dispute resolution mechanism. Either party may require such dispute to be referred to the Chairman, NHAI and the Chief Executive Officer of the concessionaire in the interim, for amicable settlement. Upon such reference, the two shall meet at the earliest mutual convenience and in any event not later than 15 days of such reference to discuss and attempt to amicably resolve the dispute. If the dispute is not amicably settled within 15 (fifteen) days of such meeting between the two, either party may refer the dispute to arbitration in accordance with the provisions of the PCA. Arbitration: Any dispute, which is not resolved amicably, shall be finally settled by binding arbitration under The Arbitration Act. The arbitration shall be carried out by a panel of three arbitrators, one to be appointed by each party and the third to be appointed by the two arbitrators appointed by the parties. The party requiring arbitration shall appoint an arbitrator in writing, inform the other party about such appointment and call upon the other party to appoint its arbitrator. If within 15 days of receipt of such intimation the other party fails to appoint its arbitrator, the party seeking appointment of arbitrator may take further steps in accordance with the Arbitration Act.

Dispute Resolution Any dispute arising out of or in relation to the concession agreement, between the parties is required to be resolved as per the Dispute Resolution Procedure (see below) prescribed in the Agreement. It specifies that the parties should attempt to resolve the dispute amicably and for this purpose, the mandate has been given to an Independent Engineer to mediate and assist the parties to arrive at a settlement. The procedure has been laid out in sufficient detail therein. However, upon the failure of such conciliatory measure, the parties shall resort to Arbitration, which shall be held in accordance with Arbitration and Conciliation Act, 1996 (based on United Nations Commission on International Trade Laws - UNCITRAL model). The seat of arbitration for all concession agreements pertaining to National Highways shall ordinarily be at Delhi, however, the place may be changed by mutual consent of the parties. Each party is free to nominate its arbitrator who in turn, will appoint a presiding arbitrator. The Arbitration Tribunal so constituted can adjudicate any dispute referred to it, and any other question of law arising out of such dispute, including its own jurisdiction. The award passed by such Tribunal, has the sanctity of a 'Decree' under Indian Law and can be challenged on very limited counts.

18

Guidelines for Investment in Road Sector

The Dispute Resolution Procedure for EPC Projects does not involve amicable settlement. The disputes are referred to the Dispute Review Board. • Dispute Review Board: The Board shall comprise of three members, experienced with the type of construction involved in road works, and with the interpretation of contractual documents. If, during the contract period, either of the parties is of the opinion that the Dispute Review Board is not performing its functions properly, they may together disband the Board and reconstitute it. Dispute involving Foreign Contractor(s): In the case of a dispute with a foreign contractor, the dispute shall be settled in accordance with the provisions of the UNCITRAL Arbitration Rules. The arbitral tribunal shall consist of three arbitrators, one each to be appointed by the employer and the contractor and the third arbitrator chosen by the two arbitrators so appointed by the parties, who shall further act as the Presiding Arbitrator. A “Foreign Contractor” means a contractor who is not registered in India and is not a juridical person under Indian Law. General Trends in Dispute Resolution The Courts in India have been very neutral in construing the documents, in the cases arising out of tender processes and rely upon terms and conditions agreed between the parties under the tender documents. The provisions of the Contract Act and other legal provisions, covering the intricate commercial aspects of the dispute are looked into very minutely before passing any order. The Courts have, however, been very cautious in passing any injunctive relief in disputes arising out of tender process and pays due regard to the fairness in the process of issuing tender and selection of bidders, stage of infrastructure development and stakes (public money) involved.

Where complex financial issues are involved, the Courts also seek advice of an expert committee and consider various factors like price index, quality of work, past performance of parties, market reputation, etc. The decision in each case may however differ, depending upon facts of each case. BOT - (Annuity) projects are similar to BOT - (Toll) projects with the exception that the traffic risk is borne by NHAI and the concessionaire is paid fixed semi annual annuities by NHAI. OMT Concessions • The OMT concession would be for a maximum period of 9 years • The private sector will be selected on the basis of a competitive bidding process. The successful bidder would be the one offering the highest concession fee to NHAI7 • Either party is allowed a period of 45 days from the date of signing of the concession agreement to fulfill the Conditions Precedent for commencement of commercial operations. • The OMT concessionaire will pay a fixed concession fee to NHAI every month (equivalent to one-twelfth of the annual quoted amount) and undertake tasks of toll collection and operation and maintenance of highways along with construction of additional project facilities as per the scope of work. NHAI has signed Concession Agreements for six OMT projects and further identified twenty six projects to be awarded during the year 2011-12. This way NHAI intends to cover the entire NSEW public funded corridor under OMT in the next two years. More sections, where project completion is anticipated in the next six to twelve months, are being planned for OMT concessions.

7. The bidder offering the maximum amount of first year concession fee or minimum amount of first year quarter O&M support (in case no bidder offers the concession fee).

Guidelines for Investment in Road Sector

19

The upcoming opportunities for investment in various Phases of NHDP are provided in the tables below:

Opportunities for Investment Under NHDP Phase II *
Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

1 2 3 4 5

Ramban - Banihal Udhampur-Ramban Walayar-Vadekancherry** Agra Bypass Ghoshpukur-Salsalabari

36 Jammu & Kashmir 43 Jammu & Kashmir 54 Kerala 33 UP 163 West Bengal

1,444 1,725 682 457 1,549

289 345 136 91 310

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

Opportunities for Investment Under NHDP Phase III *

Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

1 2

Khagaria-Bakhtiyarpur** Ambala-Kaithal UP / Haryana Border

120 Bihar 86 Haryana

420 300

84 60

3 4 5 6

Yamunanagar-Panchkula** Rohtak-Hissar** Parwanoo-Solan Shimla-Solan Mulbagal-Karnataka/AP

104 Haryana 100 Haryana 41 Himachal Pradesh 60 Himachal Pradesh

938 950 387 570

188 190 77 114

7

Border** Thiruvananthapuram-TN/Kerala

22 Karnataka

231

46

8 9 10

Border Kuttipuram-Edapally Cherthalai-Ochira

43 Kerala 116 Kerala 84 Kerala

409 1,102 798

82 220 160

*As on December 31, 2011 **Targeted to be awarded in FY 2011-12

20

Guidelines for Investment in Road Sector

Opportunities for Investment Under NHDP Phase III *

Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

Bhopal-Bareily,Bareily-Rajmarg Crossing,Rajmarg Crossing11 Jabalpur Jowai-Meghalaya/Assam 12 13 Border** Chandikhole-Dubari-Talchar** Madurai-Parmakoti14 15 16 17 18 19 Ramanathapuram** Nagapattnam-Thanajavur Kerala/TN Border-Kanyakumari Coimbatore-Mettupalayam** Karaikkudi-Ramanathapuram Barasat-Petrapole 116 Tamil Nadu 77 Tamil Nadu 65 Tamil Nadu 54 Tamil Nadu 80 Tamil Nadu 60 West Bengal 1,102 268 618 567 280 570 220 54 124 113 56 114 102 Meghalaya 133 Orissa 391 1,287 78 257 290 Madhya Pradesh 2,755 551

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

Guidelines for Investment in Road Sector

21

Opportunities for Investment Under NHDP Phase IV *

Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

1

Yadagiri-Warangal Chhapra - Rewaghat -

96 Andhra Pradesh

912

182

2 3 4 5 6 7 8 9 10 11 12 13

Muzzaffarpur Biharsharif - Barbigha -Mokama Ekangarsarai- Jehanabad - Arwal Maheshkhut - Saharsa - Purnea Raipur-Dhamtari Chilpi-Simga Ghamtari-Jagdalpur Ambikapur-Pathlgaon Bilaspur-Ambikapur Pathalgaon-Gumala Punjab/ Haryana Border - Jind** Hissar-Dabwali Kaithal-Haryana/Rajasthan

75 Bihar 52 Bihar 54 Bihar 171 Bihar 72 Chhattisgarh 128 Chhattisgarh 222 Chhattisgarh 85 Chhattisgarh 190 Chhattisgarh 130 Chhattisgarh 70 Haryana 160 Haryana

225 156 162 513 684 384 666 255 570 390 439 1,520

45 31 32 103 137 77 133 51 114 78 88 304

14 15 16 17 18

Border Bilaspur-Ner Chowk** Ner Chowk-Manali Kiratpur- Bilaspur Chas- Ramgarh Junction with NH-2 at Govindpur-Chas-Upto JHR/WB

160 Haryana 54 Himachal Pradesh 119 Himachal Pradesh 63 Himachal Pradesh 85 Jharkhand

1,520 902 1,131 599 255

304 180 226 120 51

19 20 21

Border Ranchi - Birmitrapur Ranchi- Nagar Untari

71 Jharkhand 210 Jharkhand 260 Jharkhand

213 630 780

43 126 156

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

22

Guidelines for Investment in Road Sector

Opportunities for Investment Under NHDP Phase IV *

Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

22 23 24 25 26 27 28 29

Jamshedpur-Kharagpur Kundapur-KNT/Goa Border** Shimoga-Mangalore Hasan-BC Road Gulbarga-Bijapur-Homnabad Hospet-Hubli-Ankola Gundlupet-TN/KNT Border Hoskote-Dobespet** Tamil Nadu/KNT Border-

150 Jharkhand 192 Karnataka 188 Karnataka 130 Karnataka 200 Karnataka 271 Karnataka 27 Karnataka 89 Karnataka

1,425 1,965 1,786 1,235 1,900 2,575 81 844

285 393 357 247 380 515 16 169

30

Bangalore Shahganj Junction -Budhni-

204 Karnataka

612

122

31 32 33 34 35 36

Betul Obdullaganj-Shahganj Biaora- MP/Rajasthan Border Jabalpur-Mandla-Chilpi Khed-Sinner Vedishi-Osmanabad-Solapur Kalyan-Andhra Pradesh Border

107 Madhya Pradesh 26 Madhya Pradesh 66 Madhya Pradesh 189 Madhya Pradesh 150 Maharashtra 85 Maharashtra

1,017 247 198 567 1,425 808

203 49 40 113 285 162

37

(km442 to km591) Kalyan-Andhra Pradesh Border

149 Maharashtra

447

89

38 39

(km232 to km284) Dhule-Aurangabad Amravati-Dhule-Gujarat

51 Maharashtra 140 Maharashtra

153 1,330

31 266

40

Border** Kalyan-Andhra Pradesh Border

480 Maharashtra

1,079

216

41

(km 0.0 to km232)

232 Maharashtra

696

139

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

Guidelines for Investment in Road Sector

23

Opportunities for Investment Under NHDP Phase IV *
Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

Kalyan-Andhra Pradesh Border (Km284 to km 337 Jn.with NH42 211) Kalyan-Andhra Pradesh Border (Km 342 Jn. With NH-211 to km 43 44 45 46 47 442) Aurandabad-Vedishi Solapur-Mah/KNT Border** Bahargora-Sambalpur Birmitrapur-Barkote** Baleashwar-BaripadaJharpokhria (Jn. of NH-5 with 48 NH-6) Sriganganagar49 50 Rajasthan/Punjab Border Karauli-Dholpur Jhalawar-Rajasthan/Madhya 51 52 53 Pradesh Border Rajasthan Border-Fatehpur Padhi-Dahod Vikravandi-Kumbakonam54 Thanjavur** Thanjavur - Pudukkotai 55 Sivaganga - Manamadurai Tiruchirapalli-LalgudiChidambaram & Meenusuriti56 Jayamkondam-Kootu Road Viluppuram-Pondicherry57 58 59 60 Nagapattinam Coimbatore-TN/KNT Border Dindigul-KNT/TN Border Ghaghra Bridge-Varanasi Indo Nepal Border-Ghaghra 61 Bridge 122 Uttar Pradesh 1,159 232 194 Tamil Nadu 103 Tamil Nadu 266 Tamil Nadu 177 Uttar Pradesh 1,843 309 798 1,682 369 62 160 336 135 Tamil Nadu 405 81 122 Tamil Nadu 366 73 165 Tamil Nadu 1,172 234 71 Rajasthan 135 Rajasthan 85 Rajasthan 213 405 255 43 81 51 124 Rajasthan 72 Rajasthan 1,178 216 236 43 90 Orissa 855 171 100 Maharashtra 175 Maharashtra 126 Maharashtra 370 Orissa 128 Orissa 300 1,663 1,236 3,515 778 60 333 247 703 156 53 Maharashtra 159 32

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

24

Guidelines for Investment in Road Sector

Opportunities for Investment Under NHDP Phase IV *

Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

62 63 64 65 66 67

Unnao - Lalganj Varanasi-Sultanpur** Meerut - Nazibabad Raibareilly - Jounpur Ambedkar Nagar - Banda Varanasi-Hanumanha Barabanki-Bahraich-Nanapara-

68 Uttar Pradesh 142 Uttar Pradesh 139 Uttar Pradesh 169 Uttar Pradesh 287 Uttar Pradesh 125 Uttar Pradesh

204 1,349 417 507 861 375

41 270 83 101 172 75

68

Rupaidiha Gorakhpur-Ferenda-Nautanwa-

152 Uttar Pradesh

456

91

69 70 71 72 73 74 75 76 77 78

Sonauli MP/UP Border-Allahabad Varanasi-Gorakhpur Bharatpur-Mathura-Hathras Moradabad-Aligarh** Bareilly-Sitarganj Sitarganj-Kashipur Kashipur-Haridwar Dehradun-Chutmalpur-Roorkee Sitarganj - Tanakpur Chutmalpur-SaharanpurYamunanadar-Haryana/UP

99 Uttar Pradesh 41 Uttar Pradesh 206 Uttar Pradesh 90 Uttar Pradesh 145 Uttar Pradesh 87 Uttar Pradesh 97 Uttarakhand 167 Uttarakhand 70 Uttarakhand 52 Uttarakhand

297 123 619 270 679 261 291 1,587 210 156

59 25 124 54 136 52 58 317 42 31

79 80

Border Pundlbari - Baxirhat JHR/WB Border-PurliyaBalarampur-JHR/WB border-

50 Uttarakhand 46 West Bengal

475 138

95 28

81

upto junction with NH-33

83 West Bengal

248

50

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

Guidelines for Investment in Road Sector

25

Opportunities for Investment Under NHDP Phase V *
Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Vijaywada-Elluru-Rajamundry** Rajamundary-Gundugulanu Ichhapuram-Srikakulam-Anandpuram Anandpuram-Vishakhapatnam-Ankapalli** Ankapalli-Tuni Tuni-Dharmavaram Dharmavaram-Rajahmundary Nellore Bypass Tada - Nellore Aurangabad-Barwa Adda** Khagal – Belgaum Neelamangala-Tumkur Dharwad-Haveri Haveri-Chitradurga Tumkur & Chitrdurga Bypass Satara-Kagal Chandikhole-Paradeep** Bhubaneshwar-Icchapuram Balasore-Chandikhole Kharagpur-Baleshwar** Ludhiana-Chandigarh** Walahajapet -Poonamallee** Tambaram - Tindivanam Allahabad Bypass-Varanasi** Chakeri-Allahabad** Hapur-Moradabad Agra-Gwalior Delhi-Hapur Panagarh – Palsit Palsit-Dhankuni

103 Andhra Pradesh 121 Andhra Pradesh 213 Andhra Pradesh 59 Andhra Pradesh 59 Andhra Pradesh 47 Andhra Pradesh 53 Andhra Pradesh 17 Andhra Pradesh 111 Andhra Pradesh 220 Bihar/Jharkhand 77 Karnataka 35 Karnataka 95 Karnataka 135 Karnataka 31 Karnataka 133 Maharashtra 77 Orissa 135 Orissa 140 Orissa 119 Orissa 60 Punjab 92 Tamil Nadu 93 Tamil Nadu 160 Uttar Pradesh 150 Uttar Pradesh 110 Uttar Pradesh 85 Uttar Pradesh 52 Uttar Pradesh 64 West Bengal 65 West Bengal

1,743 1,210 2,130 590 590 470 530 170 1,110 2,200 770 350 950 1,350 310 1,330 809 1,350 1,400 487 600 930 930 1,520 1,425 1,100 850 520 640 650

349 242 426 118 118 94 106 34 222 440 154 70 190 270 62 266 162 270 280 97 120 186 186 304 285 220 170 104 128 130

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

Opportunities for Investment Under Other Projects *
Estimated Project Cost S.No. Road Section Length (Km) State (INR Crore) (USD Million)

1

Eastern Peripheral Expressway**

135 UP/Haryana

2,699

540

*As on December 31, 2011

**Targeted to be awarded in FY 2011-12

26

Guidelines for Investment in Road Sector

Revenue Risks and Mitigation
Revenue realisation in BOT-Toll projects is subject to some key risks including, but not limited to variation in traffic, variation in toll rates, additional tollway, occurrence of premature termination on account of certain events. The concession agreement provides for various risk mitigation mechanisms to the concessionaire including change in concession period, differential toll rates that are linked to cost of different road structures under the new toll rules (linear alignment, bridges, tunnels, bypasses etc.) to providing for termination payments under force majeure events. Variation in Traffic
Type of Variation Actual Traffic < Target Traffic Actual Traffic > Target Traffic Change in Concession Period For every 1% shortfall,concession period increase by 1.5% For every 1% excess, concession period reduction by 0.75%8 Cap on Concession Period Variation 20%

The concession agreement provides for extension or reduction of the concession period in the event the actual traffic falls short or exceeds the target traffic9, as estimated on the target date10. MCA also provides for termination of the agreement if the average daily traffic in any accounting year exceeds the design capacity and continues to exceed for three subsequent accounting years. Termination in such scenario will be deemed to happen on account of an Indirect Political Event. Variation in Toll rates (Linked to WPI) The notification of the New National Highways Fee Rules (2008) and its amendments dated December 3, 2010, January 12, 2011 and October 12, 2011 has provided for a revision of toll rates and hence realisable toll revenues for all vehicle categories. The new toll rules are applicable for all new road projects.

10%

8. Waiver from concession period reduction can be obtained on payment of premium 9. The method for calculating Actual Traffic and Target Traffic is detailed in the MCA 10. Target Date is around 10 years from the date of the agreement in a 20 year concession period

Guidelines for Investment in Road Sector

27

The salient features of the new toll rules and its amendments are: • Increase in base toll rates by 3% every year • Increase in toll charges to the extent of 40% of the increase in WPI. • Toll charges for new structures (bridges, tunnels) determined based on construction cost. • Rounding off fee to the nearest five rupees (earlier rounded off to nearest one Rupee). While the earlier tolling rules prescribed a standard base toll rate on a per passenger car unit (pcu)/km basis for a highway project, the new rules prescribe base toll rates also for high-cost structures (such as bridges and tunnels) separately. For bypasses constructed at a cost of INR ten crore or more, the base toll rates are one and a half times the standard base toll rate on a per passenger car unit (pcu)/km basis. The base toll rates for other high-cost structures (such as bridges and tunnels) are indexed to the estimated project cost (on INR/vehicle/trip basis). Provided below is an illustration of toll revenues earned from a Light Motor vehicle and Multi Axle Vehicle (MAV of more than three and up to six axles) as per the applicable toll rates under the old and new toll
Old Toll Rate Rs./ trip (USD) New Toll Rates11 Rs./ trip (USD)

rules respectively. The toll charge at the end of fifth year has been calculated under two project development scenarios. In Scenario 1, a linearly aligned highway stretch (without bypasses and bridges) of 100 km has been considered. In Scenario 2, the highway stretch includes a linear alignment of 80 km and bypass length of 20 km. The base toll rate on a pcu/km basis has been assumed to be 0.69 for a Light Motor vehicle and 3.85 for a Multi Axle Vehicle (MAV of more than three and up to six axles). The increase in WPI is assumed to be 5% p.a. The table above shows that for a given base toll rate, the toll charges determined by the new toll rules are significantly higher in Scenario 2, where the bypass is reflected in the toll charges. Complete details of the new National Highway Fee (Determination of Rates and Collection) Rules, 2008 and its amendments dated December 3, 2010, January 12, 2011 and October 12, 2011 are provided in the enclosed CD. Early Termination of Concession The concession may be terminated before project completion in the event of the following:
Event of Default During construction (after financial closure) No payment During operations

Scenario 1 88 (~1.76) 491 (~9.82) Scenario 2 88 (~1.76) 491 (~9.82) 95 (~1.90) 540 (~10.80) 90 (~1.80) 490 (~9.80)

Concessionaire event of default NHAI event of default Force Majeure Non-Political Event Indirect Political Event13 Political Event

Payment equal to 90% of debt due less insurance claims if any.

Light Motor Vehicle

a. the total Debt Due b. 150% of the Adjusted Equity.12

Multi Axle Vehicle

Payment equal 90% of the Debt Due less Insurance Cover a. Debt Due Less Insurance Cover b. 110% of the Adjusted Equity a. the total Debt Due b. 150% of the Adjusted Equity

Light Motor Vehicle

Multi Axle Vehicle

11. As per new tolling rules, toll rate revision is determined by the formula - TR1 = TR0(1+3%) + TR0((1+3%)*%Variation in WPI*40%) 12. Adjusted equity is equity funded in Indian Rupees adjusted suitably to reflect change in value of equity on account of depreciation and variations in WPI at different periods during the Concession Period 13. Including termination due to breach of capacity as set out under traffic risk

28

Guidelines for Investment in Road Sector

NHAI Event of Default: In the event of any of the defaults specified in the concession agreement which the Authority has failed to cure within 90 days or such longer period as has been specified in the agreement, the Authority shall be deemed to be in default and concessionaire shall have the right to terminate the agreement Concessionaire Event of Default: In the event of any of the defaults specified in the concession agreement which the concessionaire has failed to cure within the specified cure period, and where no such cure period has been specified, then within the cure period of 60 days, the concessionaire shall

be deemed to be in default and NHAI shall have the right to terminate the agreement • Force Majeure Event: A force majeure event which lasts for less than 180 days will lead to a proportionate change in the concession period to compensate the concessionaire for losses during such period The concession is eligible to be terminated (by either party) if the force majeure event subsists for at least 180 days within a continuous period of 365 days.

Guidelines for Investment in Road Sector

29

Overview of Successful Projects
PPP is gradually proving to be a successful mechanism for developing and maintaining the National Highways, as is evident from the increased private sector participation in projects till date.
Cost in Number of Contracts INR Crore USD Billion
BOT Toll Awarded Completed Awarded Completed
Source: NHAI

161 44

15,242 2,412

130,372 16,625 29,717 6,186

26.1 3.3
5.9

BOT Annuity 50 3,381 1,011 17

The project was completed 5 months ahead of its scheduled completion date (2005). The concessionaire also earned a bonus of INR 42.25 Crore (USD 8.5 million) in the form of early tolling during the period before scheduled completion date. Even today, the concessionaire is earning more revenues than those projected at the time of bidding. However, the excess revenue is being shared between the concessionaire and NHAI as per the revenue sharing clause in the agreement. Belgaum – Maharashtra Border Section of NH-4 (Annuity Project) The project involved widening of existing two lanes to 4-lane divided carriageway facility including the rehabilitation of existing 2-lanes on annuity basis. The estimated cost of this 78 km long road project is INR 332 Crore (USD 66.4 million; NHAI Estimate). The section has two toll plazas. The project was awarded to the consortium of M/s ILFS, M/s Punj Lloyd Ltd. and M/s Consolidated Toll Network India Ltd. The concession period is 17 years and 6 months. The concessionaire completed the project in October 2004, two months earlier than the stipulated project completion date, and was paid a (performance) bonus of INR 42.16 Crore (USD 8.4 million) on account of early completion. Second Vivekananda Bridge (now Sister Nivedita Bridge)- BOT Project in Kolkota: This bridge is one of the first BOT projects, undertaken by NHAI in 1995. The concession agreement was signed in September, 2002.The consortium members are from USA, U.K, Mauritius and India. Though the

1.2

Toll collection depends on two factors - traffic volume and tolling rate. The toll rates are pre-specified by NHAI. Estimates of traffic growth for projects are also provided by NHAI based on detailed feasibility studies. However, bidders are advised to carry out independent due-diligence of the traffic and growth estimates. The profitability of tolled National Highways has made the sector extremely competitive and attractive. In light of the forecasts for traffic growth on important road corridors, the Government has given first preference to Build-Operate Transfer (BOT/ DBFOT) toll projects. Jaipur- Kishangarh BOT Project –NH 8 Jaipur-Kishangarh is one of the earliest projects implemented on BOT framework. The project involved 4-laning a length of approximately 91 km from Jaipur to Kishangarh (NH-8), in the state of Rajasthan at an estimated cost of INR 644 Crore (USD 129 millionNHAI estimate). NHAI provided a grant of INR 211 Crore (USD 42 million) to the project. The concession period of the project is 20 years.

30

Guidelines for Investment in Road Sector

financial close was delayed by one year, the construction thereafter was almost on time and the bridge was commissioned on 4th July, 2007. This bridge also won the award of excellence for the year 2007 under the Foreign Bridge Project Category from the American Segmental Bridge Institute. NHAI had provided a grant of INR 120 Crore (USD 24 million) out of the total project cost of INR 640 Crore (USD 128 million). The concession period of the project is 30 years. Jawaharlal Nehru Port Connectivity Project in Maharashtra This project has been undertaken as part of a programme for adequate road connectivity to major ports through an SPV of NHAI (Jawaharlal Nehru Port Road Company Limited). Phase-1 of the project, with a length of 30 km for 4-laning of NH-4/4B, built at an estimated cost of INR 177 Crore (USD 35.4 million) was commenced in February 2002 and was completed in July 2005. This project is a symbolic representation of a successful venture of NHAI, Jawaharlal Nehru Port and State Government represented by City and Industrial Development Corporation of Maharashtra Ltd. (CIDCO). Phase-II of the project for 4-laning of 14 km and the 6-laning of Panvel Creek Bridge (length: 397m) at a cost of INR 143 Crore (USD 29 million) has also been completed. Encouraged by the results, Phase –III at a cost of INR 279 Crore (USD 56 million), is being taken up. The concession given to the SPV of NHAI is for 20 years from December 2000. The SPV is making profits (after tax). Participation of Foreign Contractors Foreign contractors started participating in NHDP contracts (and to a limited extent in state highway projects) from 2000-01. In 2000-01, there were about 20 contracts in the NHDP, where foreign contractors participated either on their own or in joint ventures; the number grew to about 32 in 2003. The foreign contractors taking part were from Malaysia, Korea, China, Russia, Turkey, Indonesia, Iran and some niche contractors from Europe for specialised jobs. It is presently estimated that contractors from about 16

countries are operating in India. Foreign companies are executing 24 contracts exclusively and 83 contracts as joint venture partners with Indian companies. Foreign investors are allowed 100 per cent foreign direct investment in road sector (Please refer section on page 33). The total value of contracts with foreign participation is estimated to be more than INR 12,000 Crore (USD 2.4 billion)

Construction Firms

No. of Foreign Firms

No. of Projects

Length (in km)

BOT (Toll) BOT (Annuity) EPC Contracts

30 10 66

30 10 66

3,243 889 3,298

Country wise breakup of Foreign and JV Companies involved in development work of National Highway Projects

S. No.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Country
China Dubai Malaysia Iran Saudi Arabia UK Indonesia Korea Spain Taiwan Thailand Turkey Philippines USA Russia Italy Total

Contractors JV
14 3 26 1 1 4 2 9 5 3 2 1 1 10 1 83

Independent
2 10 2 5 2 1 2 24

Guidelines for Investment in Road Sector

31

Policy Framework
National Highways Policy Initiatives The government has adopted a road development policy setting out the guidelines for investment in highways. In order to meet the huge investment requirements in the sector, the government has taken a number of measures to attract private sector participation. • The government has permitted 100 per cent foreign equity in construction and maintenance of roads, highways, tunnels etc. Grant upto 40% of project cost to make project viable. 100% tax exemption in any 10 consecutive years within a period of 20 years after completion of construction provided the project involves addition of new lanes. Agreements to avoid double taxation with a large number of countries Concession period upto 30 years Right to charge tolls on certain (toll) projects. These tolls are indexed to a formula linked with the wholesale price index. The government permits duty free import of high capacity equipment required for highway construction. Government support for land acquisition, resettlement and rehabilitation. Simplified procedure for Land Acquisition MCA for BOT (Annuity) is being finalised. New rules for collection of fee for use of sections of national highway, permanent bridges, bypasses and tunnels have been put into place. The illustration of revenue collection for new projects under the new policy is provided in the earlier section. Viability Gap Funding Scheme ( VGF) The VGF scheme provides financial support in the form of capital grant for PPP projects in various infrastructure sectors. VGF Scheme is intended to support projects which are commercially unviable but have high economic benefit. The Empowered Institution sanctions projects for VGF upto INR100 crore (USD 20 million) for each eligible project subject to the budgetary ceiling indicated by the Finance Ministry. The Empowered Institution also considers other proposals and places them before the Empowered Committee. Funding upto 20% of the project cost is provided. If required, an additional 20% can be made available by the sponsoring Ministry/agency. Proposals up to INR 200 Crore (USD 40 million) will be sanctioned by the Empowered Committee and amounts exceeding INR 200 Crore will be sanctioned by the Empowered Committee with the approval of Finance Minister. Capital grant for all infrastructure projects under the VGF scheme is restricted to a maximum of 40% of the project cost (for projects upwards of INR 200 Crore). Grant provided by NHAI for highway projects under the BOT route may be financed through the VGF route. VGF funding will not be available over and above NHAI's grant for projects. The Government will carry out all preparatory works for the projects identified for private investment and meet the cost of following items:

• •

• • •

• • • •

32

Guidelines for Investment in Road Sector

• • •

Detailed Feasibility Study Land for right-of-way and enroute facilities Clearance of the right-of-way land: Relocation of utility services, cutting of trees, resettlement and rehabilitation of the affected establishments Environment Clearances

Clearance from Indian Railways to allow construction of Rail-Over-Bridges under their supervision Where design is left to the enterprise, giving details of standards and bore holes logs at bridge sites etc.

Government Support for Major Clearances required for Road Projects
CLEARANCES Cost Estimate CLEARING AUTHORITY Ministry of Road Transport & Highways /Public Works Department /National Highways Authority of India (NHAI) Ministry of Road Transport & Highways/ Public Works Department/ National Highways Authority of India Central Pollution Control Board

Techno economic Clearances

Pollution Clearance (water & air)

Forest Clearance Environmental Clearance

Ministry of Environment & Forests

Ministry of Environment & Forests

Company Registration Rehabilitation & Resettlement of Displaced families

Registrar of Companies

Ministry of Road Transport & Highways, State Governments and NHAI

Foreign Direct Investment (FDI) Policy
Introduction The FDI regime has been progressively liberalised during the course of the 1990s (particularly after 1996) with most restrictions on foreign investment being removed and procedures simplified. With limited exceptions, foreigners can invest directly in India, either wholly by themselves or as a joint venture. India welcomes FDI in virtually all sectors, except those of strategic concern such as defence (opened to a limited extent), atomic energy and activities/sectors not opened to private sector investment. The major source of FDI in India is through the equity route, which accounted for approximately 67% of the total FDI inflows in India during the period April 2000 to April 2011. Routes For Foreign Direct Investment
Investment Climate – FDI Current Situation

Net Foreign Investment (in billion $)

Net Direct Foreign Investment 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0
2006-07 2007-08

Net Portfolio Foreign Investment 32.4 27.4 19.8 15.9 7.7 7.1 18.8 30.1

7.6

-14.0
2008-09 2009-10 2010-11*

* Apr 2010 - Dec 2010; Source: RBI

FDI
Automatic Route No prior government approval required
Prior Permission (Foreign Investment Promotion Board) Decision generally within 4–6 weeks FDI Requiring prior approval (illustrative list) • Defence production -26% • • • • • • FM broadcasting – Foreign investment 20% Print media / news and current affairs - 26% Broadcasting – cable, DTH, setting up of hardware facilitiesForeign equity 49% (Ceiling of 20% for FDI in DTH) E-commerce activities - items sourced from small scale sector & test marketing – 100% Single brand retailing 51% Banking - Public Sector FDI and Portfolio Investment upto 20%

FDI equity limit-Automatic Route (illustrative list) • Roads -100% • Insurance – 26% • Domestic airlines – 49% (100% for NRI investment) • Telecom services – Foreign Investment 74% (FDI upto 49% under the automatic route) • Private sector banks – 74% (upto 49% is under the automatic route) • Exploration and mining of coal, lignite, diamonds and precious stones – 100% • Development of new airports – 100% • Development of existing airports – 100% (upto 74% is under the automatic route)

Other areas (100% - Auto Route): Pharma, Non Banking Financial Services, SEZs, Food Processing

34

Guidelines for Investment in Road Sector

Automatic Route - No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (“RBI”) within 30 days of receipt of remittance and within 30 days of issuance of shares FIPB Route - Investment proposals falling outside the automatic route would require prior Government approval. Foreign Investment requiring Government approvals are considered and approved by the Foreign Investment Promotion Board (“FIPB”). Decision of the FIPB is usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the

RBI • CCEA Route - Investment proposals falling outside the Automatic Route and having total foreign equity inflow of more than INR 12,000 million (USD 240 million) would require prior approval of Cabinet Committee on Economic Affairs (“CCEA”) after obtaining the FIPB approval. Decision of CCEA is usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI. Investment proposals falling within the automatic route and having total foreign equity inflow of more than INR 12,000 million do not require to be approved by CCEA.

Guidelines for Investment in Road Sector

35

Tax Environment
Taxation System In India India has a well-developed tax structure with the authority to levy taxes divided between the central and the state governments. Since 1991 tax system in India has undergone a radical change in line with liberal economic policy. Brief description of taxes prevalent in India is given below:
Taxation in India Central Direct Taxes Indirect Taxes Customs Duty Excise Duty State

Rates of Taxation
Domestic Companies
• • • Taxed at worldwide income Taxed at 30% If taxable income > INR 10,000,000; Surcharge applicable @ 5% of tax. Education cess of 3% of tax (and surcharge if applicable) Dividend Distribution Tax (DDT) is levied @ 16.22% on the amount of dividend declared.

Foreign Companies
• Taxed at income which is
earned from a business connection in India or from a source/asset located in India. • • Taxed at 40% If taxable income > INR 10,000,000; Surcharge applicable @ 2% of tax. Education cess of 3% of tax (and surcharge if applicable)


Other Taxes Professional Tax Indirect Tax

Personal Income Tax Wealth Tax Corporate Tax

Value Added Tax Entry Tax Octroi

• No Dividend Distribution Tax
(DDT)

Central Sales Tax Service Tax

Direct Taxation Tax incentive for Roads 100% tax holiday is available for those who are engaged in (i) development or (ii) operation and maintenance or (iii) development, operation and maintenance of a new infrastructure facility. Such tax holiday can be availed for any consecutive period of 10 years within a block of 20 years starting from the year when the undertaking develops and begins to operate the infrastructure facility. Following conditions need to be fulfilled by such an undertaking: • It should be a company registered in India; • Such company is awarded a contract by the government or its agency to develop the roads/highways; • A certificate from an accountant certifying the deduction.

Both the companies may be liable to Minimum Alternate Tax (MAT) of 18.5% of the book profits if the tax liability under normal provisions is less than MAT. The above rates may be subject to more beneficial provisions contained in a tax treaty entered into between India and the country in which the taxpayer is resident.

Minimum Alternate Tax (MAT) The tax law requires companies to pay a minimum tax known as MAT on the basis of profits disclosed in the financial statements. MAT becomes payable when tax liability under normal provision is less than MAT. In such a case, companies are liable to pay 18.5% of book profits as MAT plus applicable surcharge of 5% for domestic companies and 2% for foreign companies. Education cess of 3% thereon is levied in case of both domestic and foreign companies. Book profits for this purpose are computed by making prescribed adjustments to the net profit disclosed by the corporations in their financial statements.

36

Guidelines for Investment in Road Sector

MAT paid by companies can be carried forward for 10 years and offset against income tax payable under the normal provisions of tax. The maximum amount that can be set off against regular income tax is equal to the difference between the tax payable on the total income as computed under the Income Tax Act and the tax that would have been payable under the MAT provisions for that year. Dividend Distribution Tax (DDT) Dividend distributed by an Indian company is exempt from income-tax in the hands of all shareholders. However, the Indian company is liable to pay a tax called Dividend Distribution Tax (DDT) of 16.22% (i.e. inclusive of surcharge and education cess) on such dividends. This tax is in addition to the normal corporate tax liability (income tax levied on the

company). The amount of dividend declared by the parent company (i.e. holding more than 50 percent of capital) will be reduced by the amount of dividend received from its subsidiary company for the purposes of computing DDT payable by the parent company if: • • • Such dividend is received from its subsidiary; The subsidiary has paid DDT on such dividend; and The parent company is not a subsidiary of any other company.

Such tax paid is a non-deductible expense.

Guidelines for Investment in Road Sector

37

Withholding tax
Withholding tax compliance Tax withholding and deposit • Tax on payment is required to be deducted at the time of credit; or at the time of payment, whichever is earlier. • Amount of tax withheld is required to be deposited with the government within 7 days from the end of the month in which tax was withheld. • In case the tax is paid or credited in the month of March, the same can be deposited by April 30. Quarterly statement • Payment to residents and non residents: Quarterly statements for withholding tax are to be filed on or before July 15, October 15, Jan 15 and May 15. Withholding tax certificate • Certificate in Form no. 16A to be issued to the payee within 15 days from the due date for furnishing the statement of tax deducted at source. • Certificate in Form 16 for tax withheld on salary to be issued annually by May 31 of the financial year immediately following the financial year in which income was paid and tax deducted. Requisite Challan • Tax withheld has to be deposited in Form ITNS-281. With effect from April 1, 2008 all corporates will have to pay tax electronically.

Determination of Taxable Income

Profit / Loss as per Accounts

Deduct taxes already paid to arrive at net taxes payable / refundable

Is amount positive? Y

Net taxes payable

Add: Expenses Disallowed as per Income Tax Act and considered in accounts

Tax payable is equal to tax under normal provisions Y

N Net taxes refundable

Less: Expenses Allowed as per Income Tax Act but not considered in accounts

Is Tax payable under normal provisions higher than tax payable under MAT?

N

Tax payable is equal to tax under MAT provisions

Apply applicable tax rates (including Surcharge & Education Cess) to the taxable income to arrive at gross tax payable under normal provisions.

Calculated tax payable under ‘Minimum alternate Tax’ (MAT) provisions

38

Guidelines for Investment in Road Sector

Double Tax Relief and Tax Treaties India has a comprehensive tax treaty network. Taxpayers have the option to choose between the provisions of the tax treaty or the Income Tax Act, whichever is beneficial to them. List of countries with which India has Double Taxation Avoidance Agreements (DTAA) is provided below.

List of countries with which India has a DTAA
Armenia Australia Austria Bangladesh Belarus Belgium Botswana Brazil Bulgaria Canada China Cyprus
Denmark Finland France Germany Greece Hungary Iceland Indonesia Ireland Israel Italy Japan

Kazakhstan Kenya Korea Kuwait

Namibia Nepal Netherlands New Zealand

Serbia Singapore Slovenia South Africa Spain Sri Lanka Sudan Sweden

Trinidad and Tobago Turkey Turkmenistan UAE United Arab Republic (Egypt) Uganda UK Ukraine USA Uzbekistan Vietnam Zambia

Kyrgyz Republic Norway Libya Luxembourg Malaysia Malta Mauritius Mongolia Morocco Myanmar
Oman Phillippines Poland

Portuguese Republic Swiss Confederation Qatar Romania Russia Saudi Arabia

Syria Tanzania Tazakhistan Thailand

Czech Republic Jordan

Guidelines for Investment in Road Sector

39

Indirect Taxation Customs Duty Customs duty is payable on import of goods into India. The rate of Customs duty is based on the Tariff classification of the goods being imported as per the Customs Tariff Act, 1975 ('Customs Tariff') [which is aligned with the Harmonised System of Nomenclature (HSN) followed internationally]. Various concessions/ exemptions are available on the basis of nature of goods, usage, status of importer, country of import etc.
Name of Duty / Cess
Basic Customs Duty ('BCD') Additional Customs Duty in lieu of Execise duty ('CVD') Education Cess (including the Secondary Higher Education Cess of One percent) Additional duty of Customs in lieu of local taxes ('ADC')

An importer of specified goods is eligible to claim exemption from payment of Customs duty on fulfillment of prescribed conditions. • Projects funded by international organisations: In terms of customs laws, goods imported from outside India for execution of projects funded by international organisations (like World Bank, Asian Development Bank etc.) and approved by the Government of India are exempt from levy of Customs duty subject to prescribed conditions. Foreign Trade Policy ('FTP'): The FTP provides certain exemptions/benefits to specified supplies of such goods manufactured in India, where such supplies qualify as 'Deemed Exports'. As per the FTP, Deemed Exports refer to certain transactions wherein the goods supplied do not leave the country and payment for supplies is received in Indian rupees or in free foreign exchange. Supplies made to various specified projects/ purposes qualify as deemed exports under the FTP including supplies under the following categories: I. Supply of goods to projects financed by multilateral or bilateral agencies/funds notified by Department of Economic Affairs under International Competitive Bidding ('ICB'). Supply of goods to any project or purpose in respect of which import of goods is permissible at zero-rate of Customs duty.

Rate
10%14 10.3% 3% 4%

Incentives/Exemptions • Exemption for specified projects: An importer of specified goods is eligible to claim exemption from payment of Customs duty15 on fulfillment of prescribed conditions, which inter alia include: i The goods are imported by Ministry of Road Transport or a person who has been awarded contract for construction of roads in India by NHAI, PWD, road construction corporation under the control of State/ Union Territory Government A person who has been named as a subcontractor in the contract between NHAI and the principal contractor for construction of roads

ii.

ii

Project Import: As per the project import regulations, the benefit under project import would be available only to those goods which are imported against the specific contracts registered with the appropriate authority. Under Project Import scheme, goods can be imported for specified projects (including road development project for NHAI) at a concessional BCD rate of 5%.

However, in order to be eligible for Deemed Export benefits, supplies under the aforementioned categories should be made under ICB. Further, a subcontractor making supplies directly to the main contractor or directly to the designated projects/ agencies would also be eligible for Deemed Export benefits subject to prescribed conditions in this regard. Excise duty Excise duty is levied by the Central Government on the manufacture of movable goods in India at the time of

14. Capital goods can be imported at the general rate of 7.5 % . 15. Notification No. 21/2002-Cus, dated March 1, 2002.

40

Guidelines for Investment in Road Sector

removal of goods from the factory premise of the manufacturer. The Central Excise Act, 1944 ('the Excise Act') prescribes the rate of levy in the Excise Tariff Act, 1985 ('Excise Tariff'). The general rate of Excise duty in India is 10.3% (Basic Excise Duty 10%, Education Cess 3%). Credit of Excise duty paid is available against the output Excise duty liability/output service tax liability. Incentives/Exemptions A supplier or a manufacturer of goods (that are supplied to a contractor/ sub-contractor engaged in construction activities) would be eligible for exemption from payment of Excise duty on fulfillment of prescribed conditions, which inter alia include: • Goods are supplied against ICB • Goods being supplied/ manufactured are exempt from BCD, CVD and ADC when imported into India Also, all goods supplied to projects financed by international organisations (like World Bank, Asian Development Bank etc.) and approved by the Government of India are exempt from levy of Excise duty. Service Tax Service tax is a federal levy on provision of specified services in India. Service tax is currently leviable at the rate of 10.3%. Relevant taxable services category for construction activities inter alia include: • Commercial or industrial construction services • Site formation, clearance, excavation, earth moving and demolition services • Works contract services • Management, maintenance or repair services Incentives/Exemptions Construction / maintenance of roads has been specifically exempted from levy of Service tax under the following taxable categories: • Commercial or industrial construction services • Site formation and clearance, excavation, earthmoving and demolition services16 • Works contract services • Management, maintenance or repair services.

Value Added tax ('VAT') VAT is a state specific levy on sale of goods within the State. The rate of VAT generally varies from 4%/13.5%17 (depending upon the goods involved). However, a higher or a lower rate of VAT may be notified by the respective State Government for specified goods. Multiple schemes for payment of VAT are available under the State VAT laws. Central Sales Tax ('CST') A transaction qualifies as an inter-state sale, where the sale entails movement of goods from one State to another. Inter-state movement of goods is liable to CST under the Central Sales Tax Act, 1956 ('the CST Act') at the rate of 2 percent against statutory declaration form ('Form C'), which can be issued by the buyer for specified purposes, or at the VAT rate applicable on local sale of goods in the dispatching State (i.e. the State from which the movement of goods commences pursuant to the sale). The EPC contractor can issue Form 'C' for purchase of goods at the concessional rate. Further, it is pertinent to note that the CST borne on account of inter-state procurements and paid in other State will not be available as credit against any output liability. Goods and Service tax - Proposed In the Union Budget 2008-09, the Government of India had signaled its intention to introduce a nation wide Goods and Service tax ('GST') with effect from April 1, 2010. Though GST has still not been introduced, the Government introduced the Constitution Amendment Bill in Parliament in March 2011 as a step towards the roll-out of GST. GST would be in lieu of Excise duty, VAT, Entry tax, CST and Service tax. GST in India would be a dual GST with Center (CGST) and State (SGST) levying GST at each transaction. Inter-state transaction would attract Integrated GST (IGST) which would be sum of CGST and SGST. Credit of CGST, SGST and IGST would be available. No credit of Central GST is likely to be available against State GST and vice-versa.

16 Notification No. 17/2005-ST, dated 7 June 2005 17 Some states have increased the rate

Guidelines for Investment in Road Sector

41

Repatriation of Investments and Profits Earned in India
Type of Income streams

Dividend

Interest

Royalty

Technical Fees
Domestic law 10%* Best treaty rate Nil

Rates of taxation

Domestic law (a) NIL

Best treaty rate 5%

Domestic law 20%*

Best treaty rate 10%

Domestic law 10%*

Best treaty rate 10%

Notes: a. Tax free for all shareholders but Indian company declaring the dividend is subject to Dividend Distribution Tax (DDT) at 16.22% of the dividend declared.
* the above rates are exclusive of surcharge and education cess.

Ministry of Commerce and Industry vide Press Note dated December 16, 2009 has permitted payments for royalty, lumpsum fee for transfer of technology, payments for use of trademark/brand name under automatic route. • Royalties and Technical Know-how Fees: Indian companies that enter into Technology Transfer Agreements with foreign companies are permitted to remit payments towards know-how and royalty under the terms of the foreign co l l a bo ra ti o n ag re e m e n t wi th o u t an y restrictions. Dividends: Dividends are freely repatriable after the payment of Dividend Distribution Tax by the Indian company declaring the dividend. No permission of RBI is necessary for effecting remittance, subject to specified compliances. • Interest: Payment of interest borrowed from overseas would be governed by the regulation regarding external commercial borrowings. Buyback of shares: A maximum of 25% of equity share capital permitted to be repurchased in a financial year. Buyback is possible only from free

Dividends are not allowed as deduction. Royalty/ fee for technical services/ interest are allowed as deduction subject to transfer pricing norms

42

Guidelines for Investment in Road Sector

Repatriation of capital

Buy back of shares

Redemption of preference share

Capital Reduction

Liquidation of company

reserves, share premium and proceeds from fresh issue of shares. Post repurchase, debt owed by company should not to exceed 2 times of (capital + free reserves). There will be no tax implication in the hands of Indian company. However, since buy back is considered as transfer of shares (capital asset), therefore, shareholder will be liable to capital gain tax. No DDT to be paid by Indian company/ shareholders. • Redemption of preference shares: Foreign capital invested in India is generally repatriable, along with capital appreciation, if any, after the payment of taxes due on them, provided the investment was on repatriation basis. Preference shares are similar to equity shares carrying preferential right towards payment of dividend. However, foreign investment in redeemable preference shares is considered to be foreign borrowings. Profits on redemption of preference shares taxed are to be taxed as capital gains. This may not be applicable for non-resident investors as preference shares can be redeemed only at par. DDT @ 16.22% would be payable on coupon

on preference shares. • Capital reduction: The company law provision provides for a detailed procedure wherein the capital of company can be reduced and money can be repatriated back. A special permission/resolution is to be passed at general meeting of shareholders authorising capital reduction process. Thereafter, a capital reduction process has to go through a court process which would could involve obtaining creditors approval, no objection certificate from all creditors etc. Cash paid to the extent of accumulated profits (including capitalised profits) would be liable to DDT @16.22% in the hands of Indian company. Liquidation of company: Cash can be repatriated by way of liquidation of Indian company. Both the shareholders can exit out of the project simultaneously and get entire funds back. Liquidation is complicated and time consuming.

Guidelines for Investment in Road Sector

43

Administrative Framework
The road sector in India is a concurrent subject. The jurisdiction of Central Government is limited to National Highways, while the jurisdiction of State Governments is across State Highways, Major District Roads, Village Roads and Other Roads. At the Central Level, the overall policy, programme development and planning is done by the Planning Commission in consultation with the Ministry of Road Transport and Administrative Framework by Category of Roads Highways (MoRTH) and Ministry of Rural Development (MoRD). At the State Level, the overall policy and programme development and resource planning is done by the State Planning Cell in consultation with Central Planning Commission and State Ministry in charge of Roads.

Road Network

Coordinating Agency
Ministry of Road Transport and Highways (MoRTH), National Highway Authority of India (NHAI) and State Road Development Corporations MoRTH, NHAI, BRO (Border Roads Organisation) State Public Works Departments ( PWDs)

Connectivity To

Expressways

State capitals and tier 1 cities

National Highways

Union capital, state capitals, major ports, strategic locations State capitals, district centres, important towns, national highways, other states State Capitals, district centres, important towns, national highways Production centres, markets, highways, railway stations etc Projects like irrigation, power, mines, etc

State Highways

Major District Roads

State PWDs

Rural and Other Roads

Ministry of Rural Development (MoRD)

Project Roads

State PWDs/Project Organisations

Urban Roads

Municipal Corporations

Intra city networking Villages, district roads, highways, railway stations, riversides etc

Village Roads

Zilla Parishads/State Governments

44

Guidelines for Investment in Road Sector

Administrative Framework for Roads

Institutional Advisory Framework Facilitated by Committee on Infrastructure Planning Commission Finance Ministry/PPP Cell

Central Level

MoRTH
(allocation of funds for the development and maintenance of highways)
(allocation

MoRD
of funds for the development and maintenance of rural roads)

Department of Road Transport & Highways

NHAI
(NHDP implementation, operations and maintenance) Planning, Policy and Budgeting State Level Secretary Panchayat Raj

State PWD (NH-Wing)

State PWD State Highways MDRs,ODRs, Village Roads

Rural Redevelopment & Panchayat Raj (Rural Roads)

Road Development Corporations (Construction, Maintenance and Operation of Roads)

Guidelines for Investment in Road Sector

45

About NHAI
The National Highways Authority of India (NHAI) was constituted by an act of Parliament, the National Highways Authority of India Act, 1988. The Authority was operationalised in February 1995. NHAI is the nodal agency responsible for the development, maintenance and management of National Highways entrusted to it and for matters connected or incidental thereto. The more than USD 60 billion National Highways Development Project (NHDP) has been managed by the NHAI under the mandate of the Ministry of Road Transport & Highways (MoRTH), Government of India. The charter of NHAI is set out in the National Highways Act, 1956 and National Highways Authority of India Act, 1988: • Delegation of power and functions of the highway administration to NHAI • Enhanced powers for land acquisition • Right to collect tolls for road projects on its own or through third parties in accordance with specified government guidelines • Authorisation to borrow from capital market through bonds, debentures and other instruments • Situation where Central Government will have powers to override NHAI and its officials

Besides implementation of the NHDP, NHAI is also concerned with implementation of road safety measures and environmental management and IT initiatives in construction, maintenance and operation of National Highways. For projects related information kindly contact : Chief General Manager (FA) Phone : + 91(11)-25074100 & 25074200, Extn : 1330

46

Guidelines for Investment in Road Sector

Organisation Structure of NHAI is set out below:

NHAI CORPORATE

NHAI OFFICE

Technical

Finance

Administration

Project Management NHAI FIELD OFFICES

Corridor Management

Project Implementation Unit (PIU)

Corridor Management Unit (CMU)

The administrative framework at the Head Office is set out below

Chairman

Central Vigilance Officer

Member Finance

Member Administration CGM (HR & Admn) CGM (LA) CGM (IT) CGM (CM) CGM (Legal)

Member Technical

Member Projects CGMs (Technical)

Member PPP

CGM (Finance)

CGM (S R&D) CGM (Safety)

CGM (PQ)

Guidelines for Investment in Road Sector

47

Annexure
List of CD Contents 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Overview of the Model Concession Agreement (BOT-Toll) Model document of Request for Qualification Model document of Request for Proposal Arbitration Act, 1996 Central Road Fund Act Land Acquisition Act The Indian Tolls Act National Highways Fee (Determination of Rates and Collection) Rules, 2008 National Highways Fee (Determination of Rates and Collection) Amendment Rules, 2010 National Highways Fee (Determination of Rates and Collection) Amendment Rules, 2011 National Highways Fee (Determination of Rates and Collection) Second Amendment Rules, 2011 Motor Vehicles Act NHAI Act, 1988 Environment Protection Act Manual and Specification for 6-laning Manual and Specification for 4-laning Manual and Specification for 2-laning Road Transport Policy Reserve Bank of India Policy

Useful Addresses
National Highways Authority of India G 5&6, Sector-10, Dwarka, New Delhi - 110 075 Phone: 91-011-25074100 & 25074200 Fax : 91-011-25093507, 25093514 www.nhai.org Ministry of Finance, Government of India / Department of Economic Affairs North Block, New Delhi www.finmin.in Ministry of Road Transport and Highways Transport Bhavan 1, Parliament Street New Delhi 110 001 www.morth.nic.in Department of Industrial Policy and Promotion Joint Secretary Secretariat for Industrial Assistance (SIA) Ministry of Commerce & Industry Udyog Bhavan, New Delhi-110 011, India www.dipp.nic.in Reserve Bank of India (RBI) Foreign Investment Division, Shaheed Bhagat Singh Road, Mumbai-400 001, India www.rbi.org.in Foreign Investment Promotion Board Ministry of Finance Government of India North Block, Lok Nayak Bhavan, New Delhi Registrar of Companies Department of Company Affairs Ministry of Finance 'B' Block, IInd Floor, Paryavaran Bhawan C.G.O. Complex, New Delhi-110 003, India www.dca.nic.in Border Roads Organisation Seema Sadak Bhawan Ring Road Naraina Delhi Cantt 110010 www.bro.nic.in Central Institute of Road Transport Bhosari, Pune - 411026, India www.cirtindia.com National Portal of India www.india.gov.in/ Directory of Indian Government Websites www.goidirectory.nic.in/ Press Information Bureau (PIB) www.pib.nic.in/

Not just roads... building a NATION
http://www.nhai.org