opportunities and challenges in funding road projects for final

7/31/2019 Opportunities and Challenges in Funding Road Projects for Final

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1. EXECUTIVE SUMMARY

The first section of the report contains overview of road sector, various

policies frameworks concerned with the road project this helps in

understanding briefly the overall road scenario in India.

The second section of the project emphasizes on the investment

opportunities in the road sector, Public Private Partnership (PPP), types of

PPP projects.

The third section highlights the most important factors for a road project,

traffic study & also funding mechanism for infrastructure project (road),

issues & concerns for the lender or the developer.

The last section highlights the various risks involved in funding road

projects & finally the recommendation & conclusion to the project.


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RESEARCH METHODOLOGY

Given the objectives of the project the following research methodology was adopted:

Interaction with the project guide and key officials in the project appraisaldepartment of IDBI Bank

Articles from infrastructure magazines

Library research


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3. OVERVIEW OF ROAD SECTOR:

An efficient transport system is not only a pre-requisite for sustained economic development

but also plays a significant role in promoting national integration, which is particularly

important in a large country like India. The transport system also plays an important role of

promoting the development of the backward regions and integrating them with the

mainstream economy by opening them to trade and investment.

The most distinct part of Indias physical infrastructure development in recent years is the

development of road network across the countries; per sq. km. of surface area in India is now

endowed with one km of roadways. India has one of the largest road networks in the world

aggregating to 3.34million km.

The countrys road network can be divided in to following broad categories:

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

Road Network:

Total road network 3.34 million km

National highways 57,700 km

State highways 1,40,000 km

Other roads

(MDR, ODR, VR, etc) 29,00,000 km

Urban roads 2,00,000 km

Administratively roads are divided into:

National highways (NH): intended to facilitate medium and long haul intercitypassenger and freight traffic across the country.

These are main highways running through the length and breadth of the country

connecting major ports, state capitals, large industrial and tourist centres, etc. National


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Highways in India are designated as NH followed by the highway number. The

National Highways represent only 2% of the total networklength, and they handle

about 40% of the total road traffic. The National Highways are further classified

based on the width of carriageway of the Highway. Generally, in case of a single lane,

the lane width is of 3.75 meters, while in case of multi-lane National Highways, each

of the lanes has a width of 3.5 meters.

State highways (SH): supposed to carry the traffic along major centres within thestate. The State Highways provide linkages with the National Highways, district

headquarters, important towns, tourist centres and minor ports and carry the traffic

along major centres within the state. These arterial routes provide connectivity to

important towns and cities within the state with National Highways or State Highways

of the neighbouring states. Their total length is about 140,000 km. The Ministry of

State for Surface Transport in India administers the national highway system, and

state highways and other state roads are maintained by state public works

departments. The central and state governments share responsibilities for road

building and maintaining Indian roads

Major district roads (MDR): provide the secondary function of linkages betweenthe main roads and the rural roads. These are important roads within a district

connecting areas of production with markets and connecting these with each other or

with the State Highways & National Highways. It also connects TALUKA

headquarters and rural areas to District headquarters within the state.

Other district roads (ODR) and Village roads (VR): serve to connect villages andconnect accessibility to meet social needs as also the means to transport agriculture

produce from village to nearby market. The rural roads in India form a substantial

portion of the Indian road network.
http://en.wikipedia.org/wiki/Lengthhttp://en.wikipedia.org/wiki/Talukahttp://en.wikipedia.org/wiki/Talukahttp://en.wikipedia.org/wiki/Talukahttp://en.wikipedia.org/wiki/Length


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CURRENT INITIATIVES BY GOI FOR ROAD PROJECTS

In recent times the Government of India has laid great emphasis on the development of

adequate road network in India. A vision of expressways connecting far corners of India has

been projected. There is a need to upgrade the road system in India by widening and

strengthening the existing highways, reconstruction and widening of bridges and provisions

of user-friendly improvements. It is obvious that this vital infrastructure requirement would

have to be developed with the private sector's participation.

The government has announced a series of far-reaching measures to promote investment in

roads. These measures include industry status to road sector, exemption from import duty on

identified high quality construction plant and equipment, automatic approval for foreign

equity up to 74 per cent andforeign commercial borrowing to the extent of 30 per cent of the

project cost has been permitted. There is no restriction on the maximum equity holding by a

foreign company in a joint venture to be set up in India. The pre-qualification criteria,

however, requires experience of the joint venture partners in similar projects.

India has finalized Investment Promotion and Protection Agreements (IPPAs) with over 30

countries. Therefore, setting up of a joint venture or a 100% foreign owned subsidiary

qualifies as an investment under the IPPAs, which offer free transferability, re-patriatibility of

funds and provide for an elaborate dispute settlement mechanism and protection against

expropriation.Moreover, India enjoys Article 8 status of the IMF under which no restrictions

are imposed on current account transactions.All payments under construction contracts are

current account transactions and are accordingly freely permitted.

Construction contracts when conferred by law or under contract, as business concessions

would be defined as investments within the meaning of IPPAs. Such business concessions

would enjoy all protection and benefits extended to investment under IPPAs. The legal

framework for joint ventures is well defined and has the necessary protection against

repatriation and expropriation. For the joint ventures to succeed, it is now necessary that the

international companies entering into JV agreements with Indian companies ensure active

participation in the project implementation rather than providing only project management

services at a fee.


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In the case of an enterprise (the enterprise owned by a company registered in India or by a

consortium of such companies) carrying on the business of developing, maintaining and

operating any infrastructure facility, hundred per cent of the profits and gains derived from

such business for the initial 5 assessment years and thereafter, thirty per cent of such profits

and gains are exempt from corporate Tax. The tax concession may be availed of by the

enterprises in any ten consecutive assessment years beginning with the first assessment year

from which the enterprise begins operation and maintenance facility.

As an Incentive to financial Institution to provide finance for the infrastructure projects,

deduction up to 40 per cent of their income derived from financing of these investments is

allowed provided the amount is kept in a special reserve.

There is an exemption for infrastructure funds from income tax on the incomes from Income

Tax dividend, interest on long-term capital gains of such funds or companies from

investments in the form of shares or long-term finance in any enterprises setup to develop,

maintain and operate an infrastructure facility. Subscription to equity shares or debentures

issued by a public company formed and registered in India and the issue is wholly and

exclusively for the purpose of developing, maintaining and operating an infrastructure

facility, will be eligible for deductions under Section 88 of the income Tax Act, 1961, which

permits deduction equal to 20 per cent of the amount subscribed, from the amount of tax

payable by the subscriber.


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NHDP IMPLEMENTATION:

In 2000, the central government initiated the National Highway Development Program

(NHDP), in an effort to improve highway infrastructure. The national highway network

accounts for 30% of the total highway network and only 2% of the countrys total road

length. However, these national highways account for 45% of total traffic. The government

has therefore made it a priority to invest in this segment. While the NHDP initially targeted

about 13,000 km of arterial highway network, the government has extended the plan to

include all 65,000 kms of national highways. Total cost of this program is likely to be

Rs 1, 720 billion (US$38 billion) and is scheduled for completion in 2012.

Awarding under the NHDP by national highways authority of India (NHAI) accelerated in

the second half of 2009-10 due to the resolution of the policy issues that brought clarity

towards bidding and implementation of national highway projects. Against CRISIL

researchs estimates of 3400 km of projects to be awarded in 2009-10, close to 3213 km were

awarded by NHAI.

From April-May 2010, around 800 km have already been awarded, with a further 6700 km

expected to be awarded in 2010-11 & will get completed by 2014-15, CRISIL research

expects the construction of 25,714 km of roads at an estimated cost of Rs.2, 706 billion, on

the back of the governments continuing focus on implementing NHDP.

In 2008-09, ambiguity in the policy framework and the economic slowdown had led to a lull

in implementation and awarding of road projects under NHDP. Delays in awarding projects

continued in the first of 2009-10 due to frequent changes in the Model Concession

Agreement (MCA) and bidding policy, and the time taken in implementing these policies.


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Expected phase-wise progress of NHDP:

Phase I and II: Majority of work completed.Phase I mainly comprises of golden quadrilateral (GQ), port connectivity and other

stretches. Phases II comprises north-south and east-west corridors (NSEW). Both

phases have mainly been executed on cash contracts. In phase I only 3 percent of the

total remains to be completed. In phase II, out of the total length of 7,300 km, the

balance 500 km is expected to be awarded by 2012-13, over the next 5 years (2010-11

to 2014-15), and an investment of Rs. 194 billion is expected in both phases.

Phase III: Maximum awarding over the next few years.Phase III involves four laning of two laned roads that mainly connect state capitals

and important places to the GQ and other key corridors. Work on around 9,098 km,

out of the total length of 12,109 km, is likely to be completed between 2010-11 and

2014-15 at an estimated cost of around Rs.1041 billion, with bulk of the remaining

portions expected to be completed by 2016-17. The government plans to implement

most of the projects under this phase through the BOT-Toll model, however, projects

which are not attractive for private players, the government will award these under

BOT. Annuity, with the least attractive stretches awarded under cash contracts.

In 2010-11, around 80 per cent of the projects are awarded on BOT annuity since

NHAI will look to award the more attractive stretches in the initial years. Hence,

going forward, the proportion of projects awarded on BOT-Toll will reduce.


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Phase III: proportion of awarding of projects under different models

Source: CRISIL Research.

Phase IV: Awarding gain transaction.Phase IV involves improvement of national highways to two lanes with paved

shoulders. The total length of this phase is 20,000 km. Around 9,400 km of the

stretches have been identified by the NHAI, out of which CRISIL Research expects

5332 km to be completed between 2010-11 and 2014-15 at an estimated cost of

around Rs.194 billion. Several stretches in this phase would be awarded on BOT

Annuity and cash contracts, as the traffic volumes on these stretches will not be

attractive for the BOT-Toll model.

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

length of this phase is 6,500 km, out of which around 4,974 km is expected to be

constructed during 2010-11 and 2014-15 at an estimated cost of around Rs.638

billion, with most of the remaining stretches likely to be completed in 2016-17. The

government aims to implement all projects under this phase on BOT-Toll basis, as

traffic on these stretches is attractive for private players. Moreover, the concessionaire

is allowed to collect toll on the existing four-laned highway from the date of financial

closure of the project, which results in cash inflows even before commencement of

0

10

20

30

40

50

60

70

80

90

2010-11 2011-12 2012-13P 2013-14P 2014-15P

BOT-Toll

BOT-Annuity

Cash


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construction. In 2010-11 they expect most of the projects in this phase to be awarded

under the BOT-Toll model.

Phase V: Proportion of awarding of projects under different models.

Source: CRISIL Research

Phase VI: Progress expected to be lack lustre.This phase includes ring roads, flyovers and bypass on selected stretches of national

highways. Only two stretches have been identified till date. Going forward, CRISIL

Research does not expect much progress in this phase, with around 111 km to be

constructed between 2010-11 and 2014-15 at a cost around Rs.13 billion.

0

20

40

60

80

100

120

2010-11 2011-12 2012-13P 2013-14P 2014-15P

BOT-Toll

BOT-Annuity


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Mega projects: Nine mega projects identified.

Mega projects and the eastern peripheral expressway were announced by the government in

2009-10. Nine mega projects have been identified with the length of each project varyingfrom 390 km to 700 km. Out of the projects; feasibility study for the KISHANGARH-

UDAIPUR-AHMEDABAD stretch is in underway. CRISIL Research estimates an

investment of Rs.423 billion and 2930 km of stretches to be completed over the next 5 years

(2010-11 to 2014-15).

Expressways: New programme outlined:

The government has outlined a new expressway programme, which plans to build 18,637 km

of Greenfield national expressways by 2022. The programme will be implemented in three

phases with four-laned and six-laned expressways. Stretches in these phases have been

identified based on the traffic density on nearby stretches, economic activity in the

surrounding areas and financial viability. However, issues like MCA, bidding process, land

acquisition, setting up of an expressway authority and competing roads are still addressed.

This would delay implementation of the programme. However, some traction is expectedfrom 2012-13, with around 1,000 km expected to be completed over the next 5 years at an

estimated cost of Rs. 203 billion.

Expressway program:

Expressways Length

(Km)

Phase I 3530

Phase II 4310

Phase III 5571

Remaining stretches 5226

Total 18637

Source: CRISIL Research


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NEW PROJECTS ON THE ANVIL:

Road development provides many opportunities at both the central and state level. The

twelfth five year plan targets nearly $150 billion of investment in roads, almost double the

projected expenditure of $75 billion in the eleventh five year plan.

The national highway development program (NHDP) has been the primary driving force for

road construction. As of November 2010, the national highways authority of India (NHAI)

had completed four-laning 13,523 km of highways, while work on 9,000 km of highways is

under implementation. NHAI is yet to award projects to build another 25,963 km of

highways.

Within the NHDP, the maximum potential for construction activity lies in phases IV, V and

VI of the NHDP. Phase III onwards, more than 80 per cent of the projects under the NHDP

have been bid out on a build-operate-transfer (BOT) basis. It is pertinent to note that the road

ministry is also planning to develop nine mega highway projects, which if implemented,

would present significant opportunities. Of these, the 558 km KISHANGARH-UDAIPUR-

AHMEDABAD stretch has been awarded with the feasibility study for the 436 km

ICHHAPURAM-SRIKAKULAM-VISHAKHAPATNAM-ANKAPALLI-RAJAHMUNDRY

section of national highway (NH-5) in Andhra Pradesh has also been completed.

At the state level, much of the engagement is with government agencies like public works

departments, and state road development corporations. State projects are generally funded

through budgetary resources, multilateral aid and Public-Private Partnership (PPP).

Some new projects were approved in 2010 under multilateral aid programs. The World Bank

approved a loan worth of Rs 21 billion for phase II of the Punjab state road sector project,

involving up gradation of 958 km of roads. Later, a $500 million loan was approved for the

development of over 1800 km of state highways in Gujarat.

The Asian development bank approved the Madhya Pradesh state roads sector project phase

II, Chhattisgarh state road development project, Bihar state highways project and the

Karnataka state highway improvement project in 2010. The Madhya-Pradesh state roads


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sector project phase III is proposed for approval in 2011. On the PPP side, accordingly to the

planning commission, a total of 135 state highway projects have either been completed or are

under implementation. In addition, 41 projects are in the bid process while 38 are in the

pipeline for 2011-12.

The rural road development works under the PRADHAN MANTRI GRAMEEN SADAK

YOJNA (PMGSY) are being primarily taken up on an EPC basis. As of May 2010, over

104,000 road works had been sanctioned, at a cost of Rs 1,145.29 billion. The PMGSY is

constructing about 165 km of roads every day.


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PRADHAN MANTRI GRAMEEN SADAK YOJNA:

Rural roads play a vital role in the socio-economic up-liftment of the rural community. Of the

total 3.3 million km road network, rural roads account for around 2.7 million km(80 percent). Despite various efforts at the state and central levels, about 40 per cent of

Indias villages still do not have access to all-whether roads and remain cut-off during the

monsoon.

PMGSY, a sub program under Bharat Nirman, has been launched to construct all-whether

access to unconnected habitations. PMGSY estimates that 172,000 habitations would be

provided new connectivity with a road length of 3, 65,279 km. It is also proposed to upgrade

3, 68,000 km of existing routes for ensuring farm-to-market connectivity.

PMGSY is a 100 per cent centrally sponsored scheme, where in the existing sources of

funding are budgetary sources, Central Road Fund (CRF) on High Speed Diesel (HSD),

market committee fees, and loan assistance from National Bank for Agriculture & Rural

Development (NABARD), World Bank and Asian Development Bank. It is implemented

through cash contracts.

In the union budget 2010-11, around Rs 480 billion have been allocated for up gradation of

rural infrastructure under Bharat Nirman, whereas Rs 40 billion were allocated for rural roads

in the interim budget 2009-10, routed through a separate window created under the Rural

Infrastructure Development Fund (RIDF). This would provide the necessary funds for up

gradation and development of rural roads planned under Bharat Nirman.


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Rural roadsyear wise breakup of the length constructed.

Source: National Rural Roads Development Agency

22,891

30,710

41,231

52,405

36,273

0

10,000

20,000

30,000

40,000

50,000

60,000

2005-06 2006-07 2007-08 2008-09 Till dec

2009

Length Constructed

length constructed


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Rural roadsyear wise breakup of investment

Source: National Rural Roads Development Agency

Over the last 4 years (2005-2006 to 2008-09), there has been a significant growth in

construction of rural roads under the PMGSY, both in volume and value terms. In value

terms, there has been 55 per cent compounded annual growth, while in volume terms the

growth has been 32 per cent compounded annually. As on December 2009, Rs 130 billion has

been incurred on construction of rural roads under PMGSY.

41

73

106

152

130

0

20

40

60

80

100

120

140

160

2005-06 2006-07 2007-08 2008-09 Till dec

2009

Investment

investment


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4. INSTITUTIONAL, LEGAL AND POLICY FRAME WORK:Having given an overview of the road sector, let us understand the contractual structure that

exists between various parties, which is the core of any road project today and probably for

the entire NHDP. Further, in the section, we will briefly understand the institutional, legal

and policy framework before we go ahead with the discussion on important areas and address

various issues one-by-one.

CONTRACTUAL FRAME WORK OF A ROAD PROJECT:

PROJECT DEVELOPMENT: The process begins with, the granting authority i.e. NHAI in

this case, carrying out an extensive project development work including engineering studies,

assessment of the feasibility and preparation of the detailed project report.

1. INVITING REQUEST FOR QUALIFICATION OF BIDS: Thereafter, a notice isfloated inviting request for qualification from interested contractors and project

developers whereby the interested parties are required to furnish details regarding

their technical expertise and financial capabilities .The private parties who satisfy the

required criteria are qualified to submit the financial bids. The bidding can be for a

positive or a negative grant. A positive grant is where the granting authority i.e. NHAI

is expected to pay the successful bidder according to the contractual agreement

(concession agreement).In a negative grant, the private party is expected to pay the

NHAI.

2. AWARDING THE CONTRACT: The contract is awarded to the private partybased on the lowest (for positive grant) or highest (for negative grant) bid. The mode

of contract may vary, viz, Cash Contract, BOT (Toll), BOT (Annuity), etc., which are

explained in the following chapters.

3. CONCESSION AGREEMENT: The successful bidder thus becomes theconcessionaire (Project sponsors), who signs the concession agreement with NHAI

and sets up a project company, which is a special purpose vehicle (SPV), for

implementation and operation of the project. It becomes obligation of the projectcompany to fulfill the contract.


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The term CONCESSION in general, covers situations where the government retains

ultimate ownership of either the physical assets or the right to supply but grants

exploits rights to concessionaire.

Thus, for a road project, through a concession agreement, NHAI or any other granting

authority grants the concessionaire the right to use land, construct the road, operate

and maintain it. The concession agreement thus consists of all terms and conditions

governing the granting authority and concessionaire.

4. SHARE HOLDERS AGREEMENT: The project sponsors are required to infuseequity into the Project Company based on the financial structure designed. To ensure

sponsors commitment to the project there might be certain clauses in the concession

agreement requiring the sponsor to have certain level of equity contribution in the

project company during the duration of the contract. Thus, there is a shareholders

agreement to such effects between the Project sponsors and Project Company, which

serves as an assurance to the lenders and the granting authority.

5. EPC and O&M CONTRACT: The project sponsors through the project companygive the contracts for engineering, procurement and construction, operation and

maintenance to other companies. In most cases, it is observed that EPC contractor is

generally project group Sponsor Company.

6. DEBT AGREEMENT: Finally, to arrange for the debt funds required for the project,the project company enters into a debt agreement with the Lenders. The road projects

are mostly financed through the project finance route. Project finance essentially

means non-recourse or limited recourse financing.

Non-recourse Project financing means there is no recourse to the project sponsors

assets for the debts and liabilities of an individual projects handled by the project

company.

Limited Recourse financing means that there are limited obligations and

responsibilities of the project sponsor as far as the debts and liabilities of the project

company are concerned.


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INSTITUTIONAL FRAMEWORK:

Several line ministries handle transport planning, coordination, and policy setting at the

central government level, with overall coordination by the Planning Commission. NHAI was

constituted and operational zed in February 1995, and given the status of an autonomous

corporate body, under the control of the ministry of surface transport (MOST). The following

diagram gives the institutional framework for the roads sector:


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Institutional framework diagram

Planning commission

(Overall policy framework, overall integration, approval)

MORTH(Release and allocation of funds for

development and maintenance of nationalhighways)

MORD(Release and allocation for development

and maintenance of rural roads)

Roads departmentNHAI

(NH and NHDP implementation,operation and maintenance)

Central

Level

Planning, policy and budgeting

State PWDs for

roads-SH wing(construction

&maintenance ofSH)

State PWDs for roads

(construction &maintenance of

MDRs &rural roads

[for some states])

Secretary

(Panchayat Raj)

Panchayat Raj engineering dept.(for construction & maintenance of

rural roads in some states)

Road DevelopmentCorporation(Construction, maintenance,

operation of roads)

State

Level


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In June 2009, the erstwhile ministry of shipping, road transport and highways (MOSRTH)

has been segregated into two ministries, ministry of road transport and highways (MORTH)

and ministry of shipping and ports (MOSP).

At the central level, the planning commission in consultation with the ministry of road

transport and highways and the ministry of rural development (MORD) prepares the overall

policy, program development and resources planning. MORTHs duties relate to the

development and maintenance of national highways and policies on transport.

National Highways Authority of India (NHAI) is the implementing agency for

implementation, operation and maintenance of national highways. NHAI was constituted and

operational zed in February 1995; it was given the status of an autonomous corporate body

under the control of MORTH. However, the central government, in view of national interests,

has powers to divest NHAI of its responsibilities

At the state level, the overall policy, program development and resource planning is done by

the state planning cell in consultation with the central level planning commission and the

state ministry of roads.

State public works department (PWDs) and Road development corporations are

implementing agencies at the state level implementing, operating and maintaining the state

highways, major district roads and rural roads in few states.

The Ministry of Rural Development (MORD) is responsible for policy development as well

as monitoring and coordination of rural roads.

Apart from the state PWDs, the Panchayat Raj also implements the construction and

maintenance of rural roads.

The ministries allocate and release funds, for the development of roads, to the respective

implementing agencies.


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POLICY FRAMEWORK:

The highways sector in India is witnessing a significant interest from both domestic as well

as foreign investors following the policy initiatives taken by the government of India to

promote Public Private Partnership (PPP) on Build, Operate and Transfer (BOT) basis.

However, the inflow of investment will depend on a comprehensive policy and regulatory

framework necessary for addressing the complexities of PPP. For sustaining the private

investment in up gradation and maintenance of the highways on BOT basis, a precise policy

and regulatory framework has spelt out in a model concession agreement (MCA) which

affects all the parties and is at a core of any road project. Therefore let us understand some of

concerns that were associated with the draft MCA and thereafter discuss some of its key

points.

Model concession agreement

Land acquisition clause: One of the major points of contention was the landacquisition clause. The MCA required the NHAI to acquire 80% of land prior to

awarding the contract for the project. This clause was inserted keeping in mind the

delays in major projects due to land acquisition problems. Though it would speed up

the completion of the projects, NHAI felt that 80% was a large amount of land, it

would require about 9-12 months and this would delay award of projects.

Penalties on NHAI for delay: The new MCA included penalties to be imposed onNHAI (cash amount per 1000sq.kmto be paid to the concessionaire by NHAI) in case

the land was not acquired and handed over in time. This made the land acquisition

clause even more contentious and caused much delay in the approval of the MCA.

Clause on environmental clearances: The MCA also included obtaining theenvironmental clearance prior to award by NHAI. This too became a matter of

concern for NHAI as obtaining environmental clearance is also a long-drawn process

(often taking 12 months). NHAI felt that this clause too would have proved a

hindrance in the award of projects and result in the further delay in NHDP.


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State support agreement (SSA): The SSA is another major reason of delay. TheSSA is not a part of the MCA. At the time of MCA approval, NHAI had cited that

finalizing as SSA for each project with every state was proving to be extremely

difficult and that the Committee of Infrastructure (COI) should provide some relief.

Committee of infrastructure (COI) claims to have taken various initiatives to provide relief

to NHAI regarding the above issues.

As regards land acquisition, a temporary respite (for two years) has been given. NHAInow has to acquire 50% of the prior to the award of the project.

As far as the SSA is concerned, the COI suggested an umbrella agreement forprojects. This would be a bilateral agreement between the union and the state

government and replace the current tripartite agreement between the union

government and concessionaire, the COI has also advised NHAI to work out a

bilateral SSA for whichever states it can, use the tripartite agreement for the

remaining states.

Key points to the MCA:

Land acquisition clause: As mentioned earlier, the MCA provides the NHAI has toacquire 80% of the land prior to awarding the contract for the project. However, a

respite of two years has been given during which only 50% of the land will be

required to be acquired. This provision will lead to speeding up of the process of

completion of the projects and developers can be assured largely that project will not

get stalled due to land acquisition problems. This directly will also make the lenders

feel comfortable in financing the project.

Partial traffic risk mitigation provision: It is generally recognized that economicgrowth will have a direct influence on the growth of traffic and that the concessionaire

cannot in any manner manage or control this growth rate. By way of risk mitigation

the MCA provides for extension of the concession period in the event of a lower than

expected growth in traffic. Conversely, the concession period is proposed to be

reduced if the traffic growth exceeds the expected level.


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The MCA provides for a target traffic growth and stipulates an increase of up to 20%

in the concession period if the growth rate is lower than projected. Thus a shortfall of

1% in the target traffic after 10 years will lead to extension of the concession period

by 1.5% .On the other hand, an increase in 1% in the target traffic will reduce the

concession period by 0.75% (subject to maximum of 10%).

Financial closure: Unlike other agreements for private infrastructure projects, whichneither define a time frame for achieving financial close, nor specify the penal

consequences for failure to do so, the MCA stipulates a time limit of 180 days

(extendable up to another 120 days on payment of a penalty), failing which the bid

security, shall be forfeited. By prevalent standards, this is a tight schedule, which is

achievable only if all the parameters are well defined and the requisite preparatory

work has been undertaken.

The MCA represents the comprehensive framework necessary for enabling financial

close within the stipulated period. Adherence to such time schedules will usher in a

significant reduction in costs besides providing the over-due infrastructure this

approach would also address the present trend where infrastructure projects do not

achieve financial close for long period.

Toll rates indexed only to the extent of 40% of the WPI: The MCA provides forindexation of the user fee only to the extent of 40% of WPI as it has been

contemplated that repayment of debt would be neutral to inflation. However, as the

toll rates in India are one of the lowest in the world, it has been proposed that a flat

rate of 3% shall be added to the toll rates to keep the projects financially viable.

Although the MCA provides for indexation of the user fee only to the extent of 40%

of WPI, the toll rates will be revised upwards by another 2.5% annually to maintain

the viability of the stretches.

Concession fee: Concession fee will be fixed sum of Re.1 per annum for the first nineyears of the concession period. During the tenth year, the concession fee will be equal

to 1% of the project revenues and for each subsequent year, it will increase by an

additional 1%.


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The rationale for the above fee structure is that in the initial years, debt service

obligation would entail substantial outflows. Over the years, however, the

concessionaire will have an increasing surplus in his hand owing to the declining debt

service and rising revenues. Recognizing this cash flow pattern, the concession fee to

be paid by the concessionaire will be on an ascending revenue sharing basis.

Scope of the project: The MCA defines the scope of the project with precision andpredictability in order to enable the concessionaire to determine his costs and

obligations. Additional works may be undertaken within the specified limit, only if

the entire cost thereof is borne by the authority.

Operation and maintenance: The MCA provides for an elaborate and dynamicmechanism to evaluate and upgrade safety requirements on a continuity basis. The

MCA also provides for traffic regulation, police assistance, emergency medical

services and rescue operation. This will help in ensuring a high level of service for the

users.

Viability gap funding (VGF) unchanged at 40% of the project cost: In no case,the government shall provide grant in excess of 40% of the project cost. Where the

minimum grant needed is more than 40% of the project cost, the project will be

awarded either on annuity or cash control basis.

Other key features of the MCA:

A regular traffic census and annual survey has been stipulated for keeping track oftraffic growth. Sample checks by the authority have been also provided for. As a

safeguard against leakage of revenue share, a floor level is present and projected

traffic has been stipulated.

The option of upgrading a highway from four to six lanes during the concessionperiod has been introduced.

The concessionaire has been entitled to levy and collect user fee and liquidatedamages from vehicle owners attempting to make unauthorized use of highways.


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The MCA also address issues relating to dispute resolution, suspension of rights,change in law, insurance, defects liability, indemnity and redreesal of public

grievances and disclosure of project documents.

LEGAL FRAMEWORK:

Central level initiatives:Administrations of roads have to go hand - in - hand with the jurisdiction of the

central government and states government. Some of the legislations governing the

roads sector are:

Indian Tolls Act, 1851:This act enables the government to levy tolls on public roads and bridges within

certain rates. Certain states have modified this act to enable toll collection by private

investors in roads projects.

Land Acquisition Act, 1894:The act empowers the center or state government, and its agencies, to acquired land

required for construction of highways by paying compensation.

Dispute Settlement Act, 1940:Any dispute between government and private enterprise has to be settled through

arbitration as per the act. A dispute between government and foreign enterprise has to

be settled either in accordance with dispute settlement act, or in accordance with the

provision of United Nations Commission on International Trade Laws (UNCITRAL).

National Highways Act, 1956:Legislations about national highways are as per the national highways act (NHA),

1956. The NHA authorizes the central government to notify any highways as national

highways. The NHA also provides for de-notification of a national highway. The

portion of national highway falling within the municipal limits of a time with a

population of more than 20,000 is automatically de-notified. For all other roads, the

planning and coordinating agency is the state PWD which acquires the land required

for construction under Land Acquisition Act, 1894.


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Motor Vehicle Act, 1988:It is a central legislation that consolidates and rationalizes the various laws regulating

road transport in the country. The levy of road usage charges on the vehicles is

governed by either the Motor Vehicle Tax Acts or equivalent Acts.

National Highway Authority Of India Act, 1988:The National Highway Authority of India Act was passed in 1988. They provides for

the constitution of the authority for the development, maintenance and management of

national highways in India. The act specifies that the principal function of the

authority would be to develop, maintain and manage national highways entrusted to it

by central government. The functional profile of NHAI, as envisaged in the act,

includes:

Surveying, developing, maintaining and managing national highways and related

facilities like regulating and controlling the movement of vehicles on these highways

Collecting fees / charges on behalf of the central government

The 1995 amendment to the NHA, 1956 permits:

Assignment of the responsibility to the private developer for theimplementation and operation of projects for a specified period through a

concession agreement

Collection and retention of toll by the developer for the usage of the highwayfor meeting construction, maintenance, management, operational expenses,

interest on the borrowing raised, and a reasonable return on investment

Regulation and control of the traffic on the private sector highways by theprivate parties

Punishment to any person encroaching and misusing the highway developedby private parties


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Central Road Fund Act, 2000:The central road fund was created based on the Central Road Fund Act, promulgated

in November 2000. Revenues from CESS on petrol and diesel production and imports

accrue to CRF. The CESS is routed through the consolidated fund of India to CRF.

The fund is non-lapsable.

State Level Initiatives:To stimulate private sector participation in roads project, several state governments

have taken favorable initiatives such as making appropriate amendment to The Motor

Vehicles Tax Act, The Indian Tolls Act and enacting Infrastructure Development

Acts.

Ownership:The government usually owns the road; it also has the right to develop and maintain

them. However, in case of BOT project, the right to develop, maintain collection and

retention of tolls is given to the concessionaire of the project. However, even in such

cases the ownership of the road is not transferred to the concessionaire. These projects

are transferred back to the government at the end of the pre-determined concession

period.


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5. PUBLIC PRIVATE PARTNERSHIP IN ROAD SECTOR.

Publicprivate partnership (PPP) describes a government service or private business

venture which is funded and operated through a partnership of government and one or

more private sector companies. These schemes are sometimes referred to as PPP, P3 or P 3.

PPP involves a contract between a public sector authority and a private party, in which the

private party provides a public service or project and assumes substantial financial, technical

and operational risk in the project. In some types of PPP, the cost of using the service is borne

exclusively by the users of the service and not by the taxpayer. In other types (notably

the private finance initiative), capital investment is made by the private sector on the strength

of a contract with government to provide agreed services and the cost of providing the service

is borne wholly or in part by the government. Government contributions to a PPP may also be

in kind (notably the transfer of existing assets). In projects that are aimed at creating public

goods like in the infrastructure sector, the government may provide a capital subsidy in the

form of a one-time grant, so as to make it more attractive to the private investors. In some

other cases, the government may support the project by providing revenue subsidies,

including tax breaks or by providing guaranteed annual revenues for a fixed period.

Typically, a private sector consortium forms a special company called a "special purpose

vehicle" (SPV) to develop, build, maintain and operate the asset for the contracted period. In

cases where the government has invested in the project, it is typically (but not always)

allotted an equity share in the SPV. The consortium is usually made up of a building

contractor, a maintenance company and bank lender(s). It is the SPV that signs the contract

with the government and with subcontractors to build the facility and then maintain it. In

the infrastructure sector, complex arrangements and contracts that guarantee and secure

the cash flows and make PPP projects prime candidates for project financing. A typical PPP

example would be a hospital building financed and constructed by a private developer and

then leased to the hospital authority. The private developer then acts as landlord, providing

housekeeping and other non-medical services while the hospital itself provides medical

services.
http://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Private_finance_initiativehttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Public_goodhttp://en.wikipedia.org/wiki/Public_goodhttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Subsidyhttp://en.wikipedia.org/wiki/Grant_(money)http://en.wikipedia.org/wiki/Tax_breakhttp://en.wikipedia.org/wiki/Annuity_(finance_theory)http://en.wikipedia.org/wiki/Special_purpose_vehiclehttp://en.wikipedia.org/wiki/Special_purpose_vehiclehttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Cash_flowhttp://en.wikipedia.org/wiki/Project_Financehttp://en.wikipedia.org/wiki/Project_Financehttp://en.wikipedia.org/wiki/Cash_flowhttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Ownership_equityhttp://en.wikipedia.org/wiki/Special_purpose_vehiclehttp://en.wikipedia.org/wiki/Special_purpose_vehiclehttp://en.wikipedia.org/wiki/Annuity_(finance_theory)http://en.wikipedia.org/wiki/Tax_breakhttp://en.wikipedia.org/wiki/Grant_(money)http://en.wikipedia.org/wiki/Subsidyhttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Public_goodhttp://en.wikipedia.org/wiki/Public_goodhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Private_finance_initiativehttp://en.wikipedia.org/wiki/Public_sector


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NEED FOR THE PPP MODEL:

Financing road projects has always been a tricky proposition, given the complexities of road

projects, which are actually common across all infrastructure projects. Road projects are

characterized by high upfront costs and long payback periods and the private investor is often

unable to provide the large initial capital required and is not capable of obtaining matching

long-term finance thereby making it difficult for them to get involved in road development.

In addition, it is difficult to cover all costs completely through pricing the road services.

Finally, cross subsidization, which forms an important part of infrastructure provision, is

easier done by the public sector than the private sector. Thus, financing of road was until

recently a government activity. However in recent times, from the second phase of NHDP,

there has been a paradigm shift in funding road projects from the government to the private

sector. The main reasons for it are as follows:

Though India has second largest road network in the world, it is characterised by lowstandard roads, which are mostly two-lane with high traffic, low service and slow

speeds. There is barely some network of high quality, high capacity highways, and

expressways. Thus, there is a significant deficit in the availability of good road

transport, which the primary transport system in India and it is increasingly a major

constraint to faster economic growth and social development.

The total number of PPP projects listed officially was 170 which are operational innature. The private sector has ability to take up large shelf of infrastructure

investments, which the government has to take advantage of, so that it can attract the

required capital.

The government is facing budgetary constraints in making funds available to meetthe huge requirements of the infrastructure sector.

The government is putting greater emphasis on allocation of budgetary resources tosocial services sector such as health and education.

In general, there has been dissatisfaction with the performance of state providedroads and highways.


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BENEFITS OF THE PPP MODEL:

In addition to the factors, following are some benefits of the private sector participation in

road sector, which explain the increased focus on the PPP model.

The private sector is more capable of making efficient utilization of resources. Through private sector participation the government can have access to specialized

expertise, proprietor technology and managerial efficiencies, which is very critical in

successful project implementation. Significant efficiency improvements, For example,

can be achieved by involving the private sector in the design and construction of

infrastructure facilities, even when they are owned and managed by the public sector.

The private sector has more flexible procurement procedures than the public sectorand therefore it can speed up implementation efforts helping the government develop

large scale implementation capacity in a short span of time.

Finally, the high investment and long gestation period of 15-20 years being thecharacteristic features of infrastructure projects, involving private sector will help in

sharing the projects risk.

The benefits of private sector involvement are largely attributable to a few key features that

are unique to the private sector viz.

a) Great flexibility in adjusting its resources and procedures.b) A comprehensive approach so that when entrusted with a long-term contract, private

firms can balance expenditure over the project lifecycle and make optimal trade-offs

between investment, maintenance and operation costs and.

c) The ability to access cutting-edges technology and equipments.

However, given the difficulties in recovering all costs through direct user charges alone,

continued support of the government in raising additional resources- either directly through

budgetary support or indirectly through collection of proxy user charges such as levy on fuel-

assumes critically in encouraging private participation in the road sector. For example, the

NHDP too envisages substantive government support in the form of raising a sizeable

quantum of resources through cess revenues. Given the vast sums of public money involved,

it is only prudent that the government play an important role in supervising and monitoring

the quality of road services and ensuring that funds are optimally utilised.


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Thus, very clearly there is an increasing recognition that successful provision of road services

entails a sustained collaborative effort between the public (government and its agencies) and

private (investors and entrepreneurs) sectors. In such a Public-Private Partnership (PPP)

arrangement, the role of public sector will and should be focused more on the core functions

of supervision and regulation, whereas the private sector should assume greater

responsibilities and risks in execution, operation and the mobilisation of resources.

TYPES OF PPP MODELS IN THE ROADS SECTOR:

There are several models of public private partnerships that can be considered for road

development. In this section we will briefly describe some of these models and examine the

different risk involved.

PPP models in roads

PPP models in roads:

a) Civil works/ cash contract: A traditional way of involving private sector is tocontract and bid out the construction process based on defined designs and

specifications. In this process, the government/road agency appoints an EPC

contractor who is awarded a construction contract. The responsibility of the

construction is placed on him subject to appropriate supervision. In such as

arrangement, on completion of construction, the road would be ready for use and

would have to be maintained by government.

Civilworks/cash

BOT direct

tolling

BOT shadow

tollingAnnuity


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The critical success factor in this model is to ensure that the risks are properly

defined. The government should carryout closely scrutiny of the bidders reputation

and the responsiveness of his bid, and incorporate these factors when awarding a

contract to ensure that it is protected against irresponsibly low that may later result in

excess claims and controversy.

b) Build Operate Transfer (BOT) direct tolling: In this model a concession is awardedto a private entity (the concessionaire) to build, operate and collect toll on a road for a

specified period of time (usually 15-20 years), at the end of which the road is

transferred back to the government free of charge. The investment in the road is to be

recovered directly through user fees by the way of tolls. However as mentioned

earlier, the government does provide some viability gap funding/grant on case-to-case

basis to make the project financially viable.

ADVANTAGES OF BOT PROJECTS:

BOT projects have several advantages such as-

1.

The government gets the benefit of the private sector to mobilize finances and to usethe best management skills in the construction, operation and maintenance of the

project.

2. The private participation also ensures efficiency and quality by using the bestequipment.

3. The projects are conducted in a fully competitive bidding situation and are thuscompleted at the lowest possible cost.

DISADVANTAGES OF BOT PROJECTS:

1. It involves multiple entities and requires a relatively complicated legal andinstitutional framework. As a result, it may take a long time and considerable up

front expenses to prepare and close a BOT financing deal.

2. The BOT modality may not be suitable for small projects.3. Success of the project depends on the accuracy of traffic projections.


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c) Build Operate Transfer (BOT) shadow tolling: This is similar model to the onedescribed above, except that in this case the money is recovered directly from the

government through shadow tolls. The authority granting the concessions repays the

concessionaires investment through public funding based on the number of vehicles

observed to be using the road within a certain specified period or a similar indicator.

This model is to some extent a direct subsidy of road services by the government as

users do not pay directly for the road services that they use. This method of financing

is often used by the government to provide security to the concessionaire when there

is high traffic risk, more specifically when there is a risk that are likely to divert to

alternative roads to avoid paying tolls.

d) Annuity: The annuity model comprises of a composite contract, combining theconstruction of civil works and their maintenance for a subsequent period of around

15 years. In this approach, the contractor receives a fixed semi-annual payment over

the life of the contract instead of receiving a payment for the civil works, as they are

completed over a period of construction. This semi-annual payment implicitly consist

of a deferred payment for the civil works portion of construction and a levelised

payment for maintenance works undertaken over a contract period . In this case, the

annuity payment made to the contractor is based on unit rates quoted by the contractor

and the actual usage of materials and labour used during the construction as verified

by the supervising engineers.

THE ADVANTAGES OF ANNUITY/SHADOW TOLLS ARE:-

1. Suitable for projects where direct toll mechanism is not feasible or is inadequate tomake the project viable

2. Reduces resistance associated with privatization3. Revenue liability for the government is spread over the concession period4. The government can draw upon various revenue sources to contribute to the shadow

toll fund


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THE DISADVANTAGES OF ANNUITY/SHADOW TOLLING ARE:-

1. Requires higher budgetary support from the government2. Government funds used for servicing private debt, which is likely to be more

expensive than debt raised by the government

3. It would be difficult for the government to justify direct toll on certain highways andshadow toll on others (i.e. subsidization of cost of road usage in selective cases)


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RATIONALE FOR SHADOW TOLLS /ANNUITY SCHEMES

Highways in some developed countries such as UK, Germany and Netherlands are toll-free;

however other countries such as France, Italy, Japan, and Korea have a network of toll roads.

USA has a mix of both. Over a period of several decades they have allocated adequate funds

therefore their incremental requirements are marginal. Moreover, being comparatively

affluent economies, they can in any case afford a higher level of public spending. On the

other hand, developing economies such as China, Indonesia, Brazil, Mexico and Argentina

have been increasingly relying on user charges for funding their program of accelerated road

development.

In all infrastructure projects such as power, electricity, telecom, airports, ports, irrigation and

water supply, it is normal to levy a user charge, even though there may be subsidies for a

selected targeted group. A user-paid highway development would also ensure a superior level

of maintenance through the BOT Concessionaire. Improved service for a small fee can hardly

be questioned if such fee reduces the travel time and running cost of the vehicles.

Risk allocation:

The above PPP models being different in nature from each other, the risk allocation between

the contractors also differs in each case. The following table gives how certain important

risks are allocated in each of the model, from as investors perspective.

Allocation of key risks from an investors perspective:

Public-private

partnership

Agency/government

credit risk

Project

completion

Traffic risk

Civil works Yes Yes No

BOT(direct

tolling) No Yes Yes

BOT(shadow

tolling) Yes Yes Yes


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6. IMPORTANT FACTORS CONSIDERED WHILE APPRAISING

ROAD PROJECT:

One of the most important factor is the past track record and profile of the sponsors. Here the

Group company structure and financial performance is looked into. The sponsor and its group

companies, share capital, reserves, investments, income and profits are taken into

consideration. The sponsor's track record in terms of successfully executing projects is also

important.

When looking at the above-mentioned details, a lender tries to envisage the commitment of

the sponsors. Here a very important commitment issue remains open to question. Generally

the debt-equity ratio of road projects averages around 4:1. The EPC contractor belongs to the

sponsor's group company. The KPC contract consists of 80% of the project cost and it has a

profit margin of around 25% which is recovered at the end of the construction period. Thus,

the promoter effectively recovers his equity in the initial period of the project whereas the

payment to lenders is back ended. This shifts the project risk wholly to the lenders and leaves

the sponsors commitment to complete the project and service debt open to consideration.

Financial Indicators are used to decide on the viability of the road project and hence

financially structure the project to aid in the lending process. Some of the most important

financial indicators are -

1. Debt-Equity ratio (DER):- It is the ratio of debt and equity employed in a roadproject. It forms a part of the capital structure of the project. The lenders generally

prefer a lower DER since it results in equal sharing of risk by the sponsors and the

lenders and results in increased sponsor commitment. The ratio can be as low as 2:1

or even less for high-risk projects to 19:1 for low risk projects like BOT-annuity.

2. Debt Servicing Coverage Ratio (DSCR) - It is the amount of cash flow available tomeet annual interest and principal payments on debt including sinking fund payments.

It is the ratio of net operating income and annual debt servicing. A DSCR below 1

indicates a negative cash flow, which is undesirable by lenders.


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In road project financing a minimum average DSCR of 1.25 is necessary for the entire

repayment period. If the DSCR is below that, the project may not be viable. Also in

any of the years if the DSCR dips below the average, then a default is invoked and the

project company has to immediately correct the ratio through increased cash flows.

3. Internal Rate of Return (IRR) and Cost of Capital: - It is a capital budgetingmethod used by firms to decide whether they should make long-term investments. It is

defined as any discount rate that results in the NPV of zero of a series of cash flows.

A project is a good investment if its IRR is greater than the rate of return that could be

earned in alternative investments. Thus if IRR is greater than the projects cost of

capital or hurdle rate, the project will add value for the company.

Thus since road projects have a long gestation period and the payments are back

ended, ballooning towards the end, the lenders have to keep a track of the DSCR and

lend at an appropriate DER. The developers on the other hand have to ensure the

viability of the project through a high IRR. All the financial indicators are dependent

on the present value of the cash flows of the project. The financial indicators can be

worked out from case to case and depends on the way the loan is structured.

4. Traffic Projection is one of the most critical factors in a toll road project. The objective ofa traffic study is to establish -

The existing and future toll able traffic on the project corridor for the period of theconcession. The volumes of vehicles plying which are eligible for toll exemption

(Army, govt, vehicles, ambulances, fire tenders etc.).

Identify and assess toll category. Assess the potential traffic diversion: Presence of alternate routes for Project routes

may result in leakage of traffic.

Thus in the traffic study gray areas exists regarding the quality of traffic study conducted and

estimation of traffic growth rates based on economic growth rate of the state, growth in

registered vehicles and transport demand elasticity. One more factor of concern is the

potentiality of leakage. Alternate routes available or bypassing the toll booths can rob the


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road of its projected revenues. These gray areas might result in actual traffic being lower than

traffic projections and as a result hitting the cash flows of the project.

5. Right of way is also a concern. For e.g. if a continuous stretch of land is not allottedinitially, working on fragmented strips is inefficient and adds to the costs. Non-

arrangement of permits and clearances especially from the forest and environmental

departments may result in significant delays. Geographical location is an important

factor while considering a project. For e.g. in certain states like Bihar and Uttar

Pradesh there can be law and order problems and people might not have willingness

to pay.

6. Transparency of contractual agreement entered into with counter-parties in mostof the cases, the EPC contractor is a group company of the sponsor. Thus, there exists

a risk of lack of transparency. However most projects are taken up with reputed

sponsors, which ensure transparency. Contractual agreement between the sponsor and

EPC contractor is generally a fixed time and fixed cost contract, which ensures no

cost overruns and payment of penalties in case of a delay in completion. The

contractual agreement entered into with the O&M contractor must be transparent andchecked for ambiguities.


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8. TRAFFIC STUDY:The most important part of all transport projects is whether the projected traffic is similar to

the actual traffic. The success of any toll project lies in the thorough study of the vehicular

traffic. Reasonably accurate traffic forecasts depend on the quality of input data, technical

expertise and realistic growth assumptions. In many cases, it has been observed that

independent audits of traffic forecasts and the use of sensitivity analysis techniques on key

variables have increased the comfort level of all the concerned parties, viz. project developers

and financial institutions.

Majority of the road projects in India are BOT toll projects, where the projects are debt

backed by toll revenues and limited or no government guarantees, the traffic forecasts are

very important to the lenders

The type of the project will also influence the accuracy of the traffic forecast. For e.g.

BANDRAWORLI sea link toll bridge is designed to be a congestion-reliever. However the

MUMBAI PUNE expressway highway is designed for convenience and short route

travelling.

Method of Data Collection:

Five methods of data collection are generally used they are as follows :

1. Roadside Interviews (RSI): Vehicles are stopped by Police Officers and the drivers

are asked to answer questions about the origin, destination and purpose of their journey.

2. Automatic Traffic Count (ATC): Machines automatically count the number ofpassing vehicles.

3. Number Plate Recognition Survey (NPRS): The number plates of passing vehiclesare recorded by observers at two different sites. The records are compared to

determine how many vehicles passed through both sites within a 15 minute period.


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4. Manual Classified Count (MCC): Observers count the number of vehicles passing agiven point on a road and classify them according to vehicle type (e.g. Heavy Goods

vehicles, cars, motorbikes etc.).

5. Manual Classified Turning Count (MCTC): Observers count the number ofvehicles passing through a junction according to the manoeuvre they make at the

junction, and classify the vehicles according to type (e.g. cars, motorbikes etc).

ASSESSING THE FUTURE TRAFFIC

The most basic element of financial projections is the traffic forecast. For most projects, even

with those with a guaranteed revenue stream, the source of cash projection needs to be

carefully considered. Important details that need to kept in mind while assessing the cash

flows.

Price - Volume sensitivity - It describes the demand function as toll price increaseswill the consumers still use the same route or will he opt for a alternative route. In a

country like India people are price-sensitive.

Traffic volatility - Traffic volumes may vary with seasons, business cycles or eventhe time of day. Volume fluctuations with respect to business cycle is perhaps the

most dangerous type of volatility, because the high debt financial structure of most

project financing requires steady cash flows to service the high fixed cost which

represents interest and principal payments.

Creating Traffic - When a new infrastructure project provides an improved serviceof a new type of service, much of the demand is created rather then met. For example,

a new bridge may relieve some of the congestion on existing river crossing, but the

reduced congestion might encourage additional traffic. This can be the third source of

revenue, as the people who might not otherwise decide to use the bridge will do so

due to reduced traffic delays.


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SUGGESTIONS FOR A MORE REALISTIC PROJECTION OF TRAFFIC

Following are the suggestions made for a more realistic projection of traffic for assessing the

viability of toll-based road projects under appraisal stage:

1. As the entire traffic projections are dependent on the base traffic, accuracy of the basetraffic data is very crucial. Here, the number of days of actual count of traffic and the

locations on the project road where the traffic count has been carried out play an

important role and should be carefully selected and moderated for seasonal variations,

etc.

2. Use of Global Positioning System (GPS) technology may be considered to assess thedirection / flow and volume of traffic.

3. The following factors need to be considered while arriving at growth rate for futuretraffic projections:

Shifts in inter-modal transport and competition from railways.Possibilityof diversion of traffic due to continued existence / availability of alternate

road facility.

Surveys on ability and willingness of users to pay toll.4. Finally, conservative estimation of traffic volumes and revenue generation should

be made at the appraisal stage itself, by using appropriate sensitivity analysis tools.

RATIONALE FOR INTRODUCING TOLL CHARGES

One or more of the following objectives are typically the reason for introducing tolls on the

road network:

1. Source of Finance - The toll revenue is a "new" source of revenue for the contractorswho were previously paid out of Government revenues.

"Stable" Source of Finance: Tolls provide an ongoing revenue source, which isnot tied to the annual Government budgetary process. This can be particularly

important for raising debt finance outside the national accounts and requires a

Government Corporation or private sector operator.

Dedicated Source of Finance: The funds from toll revenues can be dedicated tothe support of construction and maintenance for a particular road thereby ensuring


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that maintenance funds in particular do not compete with the requirements of

other roads in the network.

2. User pays - Government has introduced tolls in pursuit of a general policy to increasethe extent of "use related payment".

3. Private Sector Development - Government has sought private sector participation inroads where there was a need to develop the road network, and also to develop the

private sector within the economy at the same time. In addition the involvement of the

private sector can allow the government to finance at least part of the road

development off balance sheet. Government can also use the private sector

concessions as a mechanism for promoting/explaining the introduction and increase of

tolls to a reluctant public.

4. Creating a stream of revenues - which can be used to develop the road network andwhich are not under control of the annual Government funding process. This requires

tolling to continue until the required network is complete and requires the earlier

roads to generate surplus revenues for investment in new ones. Few Governments

admit to having completed a road network however, and Ensuring that road users bear

the full cost of their travel directly, by pricing the externalities, which also requires

continued tolling.

The objective for each road will affect both the level of toll and the period of tolling. Where

tolls are simply required to cover construction costs, and the traffic levels are high, then tolls

will only be required for a relatively short period. However where Governments seek to cover

maintenance and operations costs, tolls required are low and need to be levied continuously.

Where tolls are levied to allow extensions to the road network, the tolls would be required

only as long as further developments of the network are required.


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VARIATIONS IN TOLL COLLECTION

Typically tolls vary with distance travelled along the road and according to the number of

axles on the vehicle. This approach was first adopted because it can act as a proxy for the

road space used by the vehicle and the damage that the vehicle inflicts on the road pavement.

However other options (which can be combined) include:

1. Time of Day or Day of Week. Variation by time of day is typically used wherecongestion causes considerable delays to travelers. It depends on the value of time and the

decision-making criteria of travelers.

2. Seasonality -Any adverse development in the agricultural and industrial base of theprincipal origin and destination connected by the toll road can cause reduced traffic or

traffic diversions. Further, inter-State variations in the entry tax / octroi also cause traffic

diversions.

3. Cost of road construction. Tolls vary across the country, because of the different costsof road construction through different areas, for example roads cut through mountains are

likely to cost more to construct than those across flat open landscapes. Political incentives

for unified toll structures across the country may however prevent differentials in toll

across the country.

4. Social considerations. Charging different toll rates for different vehicles. Public transporttolled less compared to private vehicles.

5. Passes and other discounts. With the introduction of electronic tolling systems this sortof commercial action has been more feasible. Where the private sectors are involved

however the concession arrangements must allow for toll variations.


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INCREASING TOLLS OVER TIME.

NHAI has brought out the "National Highways - Collection of fees by any person for the use

of sections of National Highways / permanent bridge / temporary bridge on National

HighwaysRules" in 1997. Toll rates are prescribed by the Government / NHAI on the basis

of these Rules, toll rates are indexed to the Wholesale Price Index (WPI) and are revised

accordingly with effect from July 1 every year. Some State Governments also follow the

same Rules for prescription of toll rates. As the toll rates are prescribed by the Government /

NHAI / State Government in the concession agreement, estimation of traffic on a realistic

basis is of crucial importance in assessing the viability of road projects.

New tolling policy:

Parameters New tolling policy (2008)

With effect from April 1, 2008

Categorization of vehicles

Increase in base rate Rs per km

- Car/jeep/vans- LCV- Truck/bus- MAV- Oversized vehicles

5 types

0.65

1.052.20

3.45

4.20

Methodology for revision

in toll rates

Fixed 3 per cent + 40 per cent

of changes in WPI

Tolling rates for 2-lanednational highways

Tolling of permanent bridges,

bypasses or tunnels

60% of toll rates of 4-lanednational highways

If cost >Rs 0.5 bn. then

+Tolled separately.

Source: CRISIL Research, MORTH


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9. RISKS IN ROAD PROJECTS: (Lenders View)

Risks at different stages of development of a road project are either borne by the Government

or the concessionaire. These risks, if not mitigated, would pass on to the lender. The

following are the various risks in road projects.

A.Construction Risks:1. Land acquisition: With the necessary statutory powers provided by the Land

Acquisition Act, 1894, the Government has taken responsibility to provide land (free

from encumberances), at no cost, required for development of roads / bridges. Public

resistance to a project may pose some problems, as issues like shifting of villages

could become a politically sensitive one. This could also be a time consuming

process, as it may involve obtaining clearances from various authorities viz. Ministry

of Environment and Forests, etc.

2. Financing arrangement: Timely financing arrangement is critical for successfulcompletion of road projects. The concessionaire needs to have the capability to raisenecessary finance for the project and also the additional flexibility to fund cost

overruns and withstand any financial difficulties. In some large road projects,

availability of finance in the domestic markets may not be adequate, in which case

funds have to be raised from international markets. Here, the concessionaire has to

consider country risks, foreign exchange risks and the lack of linkage between toll

rates and foreign exchange rate movements. Availability of project finance will

become easier with Government guarantees for debt repayment and foreign exchange

risks, assured toll revenues by way of shadow tolls and standby loans or diversion of

toll revenues from other profitable facilities (cross subsidisation).

3. Quality of construction: The quality of construction is defined by the Government /NHAI, and the concessionaire has to abide by the pre-defined norms. An independent

consultant usually certifies the quality of construction and a provisional certificate is

issued in the case of outstanding issues, which have to be ratified within a specific

time-frame. In the case of poor quality construction, the concessionaire is not only


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penalised for the concerned project, but could also be disqualified during selection for

future contracts.

4. Timely completion of construction: Delay in land acquisition or financialarrangement, non-availability of necessary clearances, infrastructure and right-of-way

could lead to time and cost overruns, which will have to be borne by the

concessionaire. In addition, the concessionaire has to pay damages to the Government

/ NHAI for such delays, except in the case of Force Majeure events.

B.Operations and Maintenance Risks;1. Feeder / Link Roads: Timely construction and regular maintenance of feeder / link

roads, upon which, traffic flow depends, needs to be ensured. This risk is normally

borne by the concessionaire, which has to be taken into account while arriving at

realistic traffic projections.

2. Demand: The traffic flow on a road facility is estimated based on the growth inexisting traffic volumes (based on past trends and future potential), diverted traffic

and generated traffic. Traffic flow is affected by the development of a competing road

facility and improvement in the status of an existing free-access facility.

3. O&M cost escalation: The risk of increase in operations and maintenance costs, whichcan occur due to increase in input costs and taxes, is borne by the concessionaire. As

toll is regulated by the Government / NHAI, toll revision should adequately

compensate the concessionaire for cost escalation, or the concession period should be

extended to allow the concessionaire to earn the pre-specified level of return oninvestment.

4. Maintenance: Maintenance of the project highway has to be as per the MaintenanceManual and the standards agreed. The Government / NHAI imposes penalties for lack

of proper maintenance. The concessionaire can ensure availability of funds for

maintenance, by creating a Maintenance Reserve Fund.


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5. Insolvency and debt: Insolvency of the concessionaire would result in substantialfinancial loss to lenders of the project and economic loss, due to the incomplete /

inadequately maintained facility. In such an event, the Government / NHAI, which

takes over construction and maintenance work, would need to have sufficient

financial strength. The lenders need to be provided with a step-in right to induct new

operator.

C.Legal, Regulatory and Political Risks:1. Legislation changes: In the case of BOT projects, the Government / NHAI

assumes the risk of any adverse impact due to legislation changes. In the case of a

toll-based project, if a change in law results in a financial loss of over Rs.1 crore

to either the Government / NHAI or the concessionaire, the affected party would

be compensated by the other. In the case of an annuity-based project, any loss to

the concessionaire, due to an increase in capital expenditure by over Rs.6 crore,

shall be compensated by the Government / NHAI.

2. Political: The political risk of a country is a key factor in the context of raisinginternational funds for a project. Any political turmoil, and the resultant changes

in the policy and economic environment, could lead to higher cost of financing

for the concessionaire.

3. Country Risk:There may be a situation where the host country is unable or unwilling to make

foreign exchange available to service external debt. This was a common feature

of international lending during the 1980's and had led to a situation where manygovernments and central banks have sought a re-scheduling of their external debt

due to insufficient foreign exchange to meet their obligations. This can be

controlled by actually generating revenue in hard currency.

D.Force Majeure Risks:Force Majeure events are beyond the control of any of the participants in the project.

These have to be either insured against or shared as per an agreed allocation in the


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concession agreement. Proper attention to Force Majeure risks in the concession

agreement is as important as a Force Majeure event itself. Given the Government /

NHAIs commitment to meet the debt service obligations in the event of termination due

to Force Majeure events, lenders face lower risk.

Table : Allocation of Risks in a Road Concession Project:

Type Of Risk Government Private

Sector

Political Risks

Expropriation of the company Y

General modifications of the law and tax system Y

Specific modifications of the laws and tax system Y

Political events Y

Termination of the contract by the government Y

Limitation of currency convertibility Y

Materially adverse foreign action Y

Construction Risks

Land acquisition Y

Cost overrun (excluding change of project) Y

Cost overrun (change of project) Y

Increase of financial costs Y

Risk on administrative procedures delay time Y Y

Risk on schedule and quality of works Y Y

Damages incurred by the works Y

Bankruptcy of the p

opportunities and challenges in funding road projects for final

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