Financial Viability Analysis of The Road Sector Projects in

Financial Viability Analysis of the Road Sector
Projects in India.
SUBMITTED TO:
UNDER THE GUIDANC
PREPARED AND SUBMITTED BY
ABSTRACT:
As India continues to grow at more than 8%, a balanced increase in the gross capital
formation (GCF) in infrastructure as a proportion of the GDP emerges as the most
important key in sustaining high economic growth. Though recently there have been
investments in the infrastructure sector, the GCF as a proportion of GDP continues to be
lower at around 5%. As far as the physical infrastructure is concerned, there exists a huge
deficiency, in our view. Inadequate infrastructure is identified as one of the biggest
constraints of doing business in India. Therefore, to give proper direction to highway
development The Planning Commission of India has estimated an investment of INR
3118 billion under the Eleventh Plan versus the INR 1448 billion spent under the Tenth
Plan.
Further Private participation is crucial to meet the investment goal in infrastructure

because there are limitations to budgetary support from the Indian government. For this
purpose a proper framework is being put in place to enhance participation of the private
sector in various segments of infrastructure. So we can expect a strong private
participation in roads through BOT projects. BOT stands for "Built, Operate and
Transfer". BOT model uses private investment to undertake the infrastructure
development that has historically been the preserve for the public sector. In a BOT
project a private company is given a concession to built and operate a facility that would
normally be built and operated by the government. The facility might be a power plant,
airport, toll road, etc. But we are here concerned with the financial attractiveness of toll
road projects to the Private Infrastructure developers. For this purpose I have provided an
insight to the various opportunities available like the tax benefits and various aids and
grants announced by the Government. I have also tried to bring to notice all the major
risks involved and steps to mitigate such risks.
Further I have done a comprehensive financial analysis in which I have made certain
assumptions and calculated the BOT toll road projects IRR and DSCR, which proves
the fact that such projects are, indeed, not only financially lucrative but also has a
dazzling future.
CERTIFICATE OF ORIGINALITY
The thesis Financial Viability Analysis of the Road Sector Projects in India submitted
by for his MBA program has been pursued and completed under my guidance. The same
has been upto my expectation and so I, hereby, approve the same.
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Thesis Topic Approval (Fin) SS/ 2006-08
Thesis to me show details Apr 29 Reply
Dear Vijay,
This is to inform that the thesis topic Financial Viability Analysis of the Road Sector Projects in
India, as proposed by you, has been approved .This email is an official confirmation that
you would be doing your thesis work under the guidance of. Make it a comprehensive
thesis; the objective of a thesis should be value addition to the existing knowledge base.
Please ensure that the objectives as stated by you in your synopsis are met using the
appropriate research design.
You must always use the thesis title as approved and registered with us.
You are required to correspond with us by sending atleast six response sheets to (format
attached along with this mail) at regular intervals, before 31st May 2008 (the last date for
thesis submission).
Regards,
ACKNOWLEDGEMENT
Guidance, assistance and cooperation of a lot of people is always involved in successfully
completing a project, and so with great pleasure and privilege I wish to thank those
people who have been actively supporting me in the project.
First of all, I would like to thank, for providing me an opportunity to work on this project.
He constantly encouraged and guided me to streamline this project from
conceptualization to finish.
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I am especially thankful to for guiding me through the project with valuable inputs and
suggestions. He has been a source of constant support and encouragement.
The whole of has been immensely supportive and very helpful during course of the
thesis.
Last but not the least, I would also like to thank from National Highways Authority of
India for providing me documents pertaining to the subject under study.
Table of Contents
Chapter I: Introduction. 1
1.1 Study Background. 1
1.2 Scope. 2
Chapter II: An Overview of Indian Road Sector. 3

2.1 Classification of Roads. 3
2.2 National Highway Network. 5
2.3 Trend in Road Traffic. 5
2.4 Deficiencies in the Road Sector - mismatch between demand for road 7
transport and road space.
2.5 Revenue from road transport and expenditure on roads. 7
2.6 Economic losses due to poor conditions of roads. 8
2.7 The dwindling Public Sector Outlay on Transport. 8
2.8 Agencies involved in Road Sector Development in India. 10
2.9 Road Development Plans. 13
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2.10 Current status. 14
Research Methodology 15
Chapter III: Trends in Road Sector Financing. 16

3.1 Traditional Financing Mechanism. 16
3.1.1 Budgetary Allocations. 16
3.1.2 Central Road Fund. 16
3.1.3 Octroi. 16
3.1.4 Foreign Aid to Road Sector. 17
3.1.4.1 Historical Background. 17
3.1.4.2 World Bank Aided Projects. 17
3.1.4.3 Asian Development Bank Aided Projects. 20
3.1.4.4 OECF/JBIC Aided Projects 23
3.2 Alternative Financing Mechanism. 24
3.2.1 Market Borrowings. 24
3.2.2 Private Sector Participation. 26
3.2.2.1 Government of India initiatives. 26
3.2.2.2 Implementation Models. 27
BOT (Toll Based). 27
BOT (Annuity). 31
Govt. owned SPV. 32
MOU (Negotiated Deal). 33
Govt. to Govt. Cooperation. 34
3.2.2.3 The Route Map already followed A Data Base on 35
Indias Road Sector Privatization Efforts.
Chapter IV: Critical Issues Private Sector Road Financing. 37

4.1 Stages in development of Road Sector Projects. 37
4.2 Financial Structuring of BOT Road Projects. 39
4.2.1 Project Financing. 39
4.2.2 Means of Financing. 40
4.2.3 Components of Project Costs. 43
4.3 Procurement Issues and Selection of Concessionaire. 44
4.3.1 Bidding Criteria. 44
4.4 Governments Role in facilitating BOT Projects. 45
4.4.1 Supportive Legal Framework. 45
4.4.2 Administrative Framework. 46
4.4.3 Govt. incentives and other form of support. 47
4.5 Contract Package and Project Agreements. 48
4.6 Identification of Risks Matrices and Instruments for Mitigation. 51
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4.6.1 Risks involved in Road Sector Projects. 51
4.6.2 Instruments for mitigating risks. 53
Chapter V: Lessons from International Experience. 65

5.1 International Practices. 65
5.2 Advantages & Disadvantages of common Govt. support measures for 66
Toll Road development.
5.3 Examples of Toll Adjustment Procedures. 70
Chapter VI: The Way Forward Opportunities for PSP in 73

Road Sector Development & Conclusion.
6.1 Opportunities. 73
6.2 Findings. 73
6.3 Recommendations/Suggestions. 74
6.4 Conclusion The Middle Path. 74
Chapter VII: Model: Financial Viability Analysis. 76
7.1 Description. 76
7.2 Sensitivity Analysis. 77
7.3 IRR & DSCR 78
Bibliography. 79
Appendix A: Model Excel Sheets. 80
Appendix B: Model of Concession Agreements 84
Response Sheets 94
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1. Introduction
1.1 Study Background
The road sector has been, and will be for a long time, the dominant form of transport for
freight and passenger movement throughout the world. In India the decade of 90s
witnessed a series of economic reforms. The government since then is committed to
second generation reforms aimed at achieving an annual growth rate of 7 to 8 percent.
Such acceleration in growth is bound to create a massive demand for infrastructure
services such as power, telecom, roads, ports, railways and civil aviation.
Over the last few years, the road development scenario has changed rapidly. Until 1991,
government was exclusively responsible for the development and maintenance of the
road sector. In the absence of user charges, the road sector in India has relied entirely on
the budgetary allocation and funding by multilateral agencies, which stagnated at about 3
percent of the total plan expenditure during the seventh and eighth five-year plans.
The major initiative taken in the road sector was the constitution of the Central Road
Fund with the introduction of a cess on fuel. Over the years this has become the major
source of financing highways development programme. The revenue from the cess has
increased from Rs. 2000 crores at time of its inception to Rs. 5000-6000 crores per
annum.
The era of 90s also witnessed major changes in the policies. To facilitate & induct the
capital from private sector into road development, policies were amended and several
incentives were introduced. Further to give proper direction to highway development, the
National Highways Authority of India was made operational. A clear mandate was set for
NHAI. A concrete plan of development was announced for National Highways and Rural
Roads in the form of NHDP and Pradhan Mantri Gramin Sadak Yojana. It has thrown
excellent Business opportunities for contractors, equipment manufacturers and suppliers,
consultants, road developers, investors and managers. It is also expected to give a boost
to the economy through increased demands for raw materials and job opportunities.
However, it has also thrown challenges. Challenges, not to garner resources, but to ensure
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optimum utilization of available resources, challenges to domestic contracting industry to

modernize and upgrade to meet international competition, challenges to domestic
equipment manufacturers to compete with multinational companies in the liberal import
regime and finally challenges for the government to keep the momentum high as also to
mobilize private sector participation.
Scope
Study of the past trends in financing of the road sector projects in India with a special
emphasis on terms of financing, institutions involved in financing of the road sector
projects, role of World Bank, ADB, etc.
o Risks perceived by lenders in financing of the road sector projects and ways to
mitigate these risks.
o Public Private Partnership: Role of the private sector in the development of the
road projects in India.
o Also prepare a Model to show the Financial Viability of the Road Sector Project.
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2. An Overview of Indian Road Sector

2.1 Classification of Roads
India has the second largest road networks in the world totaling more than 3.3 million km
at present. For the purpose of management and administration, roads in India are divided
into the following five categories:
1. National Highways (NH).
2. State Highways (SH).
3. Major District Roads (MDR).
4. Other District Roads (ODR).
5. Village Roads (VR).
The National Highways are intended to facilitate medium and long distance inter-city
passenger and freight traffic across the country. The State Highways are supposed to
carry the traffic along major centers within the State. Other District Roads and Village
Roads provide villagers accessibility to meet their social needs as also the means to
transport agriculture produce from village to nearby markets. Major District Roads
provide the secondary function of linkage between main roads and rural roads.
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Indian Road Network

CATEGORIES LENGTH (KMS)
National Highways 58,112*
State Highways 1,37,119
Major District Roads 4,70,000
Village & Other Roads 26,50,000
Total Length 33,15,231
(As we can see from the above bar chart that NHs are less than 2% but carry more than
40% of traffic)
2.2 National Highway Network

The National Highways are the primary arteries of the countrys traffic, connecting to
nations capital to the various State capitals, major ports and centres of industries. The
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national Highway system is owned by Central Government. The legal status is given by
National Highways Act, 1956. When the era of planning started in India (in 1956), the
length of National Highway system was 19,811 kms. This has now increased to 58,112
kms. The additions to National Highway System have been made after careful evaluation
of various demands or needs arising from time to time. National Highways constitute less
than 2% of the total road network, but carry nearly 40% of the total road traffic.
2.3 Trend in Road Traffic

The roads and highways in India account for about 87 per cent of the total passenger
traffic and about 65 per cent of the total freight traffic in the country.
Traffic Movement (%)
Freight Passengers
Year Road Rail Road Rail
1951 11 89 28 72
1961 28 72 42 58
1971 35 65 59 41
1991 53 47 79 21
2000 65 35 87 13
2015 80 20 92 8
(estimated)
Traffic Movement in Bar Chart

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(The Blue And Red bars are for Freight Traffic and Green and Purple for Passenger Traffic)
Its evident from above that the Freight transport by road has risen from 6 billion tonne
km (BTK) in 1951 to 400 BTK in 1995 and 800 BTK in 2001. Passenger traffic has risen
from 23 billion-passenger km (BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The
annual growth of road traffic is expected to be 9% to 10%. Current boom in the
automobile sector may even increase the future growth rate of road traffic. While the
traffic has been growing at a fast pace, it has not been possible to provide matching
investment in the road sector, due to the competing demands from other sectors,
especially the social sectors, and this has led to a large number of deficiencies in the
network. Many sections of the highways are in need of capacity augmentation, pavement
strengthening, rehabilitation of bridges, improvement of riding quality, provision of
traffic safety measures, etc. There are congested road sections passing through towns
where bypasses are required. Many old bridges are in need of rehabilitation/replacement
along with capacity augmentation.
2.4 Deficiencies in Road Sector

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Road development has been ignored in most of the development plans of India. There has
been no matching growth of the main road network comprising of National and State
Highways as seen from the table given below:
Category 1951 2007 % Change

National Highways 22,255 58,112 161%
State Highways 60,000 1,37,119 128%
Major District Roads & Other Roads 3,18,000 31,20,000 881%
Total 4,00,255 33,15,231 728%
The main roads have not kept pace with traffic in terms of quality also. Out of the total
1,95,231 km. Length of National and State Highways only 2% of their length is four-
lane, 34% two-lane, and 64% single lane. As far as NHs are concerned, only 5% of
their length is four-lane, 80% two-lane and the balance 15% continues to be single
lane.
Thus the road sector, in spite of its high priority is adversely affected by the poor quality
and service levels. The poor quality of Indian roads is highlighted by congestion, old
fatigued bridges and culverts, railway crossings, low safety, no bypasses and slow traffic
movement.
2.5 Revenue from road transport and expenditure on roads

The entire revenue received by the Government by road transport taxation is not
ploughed back on the roads. Presently the total allocations, central and state, available for
road development are to the tune of Rs.11,000 crore, which is just 42% of total
transportation revenues received by the government. This implies the inefficiency of our
system, which consumes 58% of the total revenues received by the transportation sector.
2.6 Economic losses due to poor conditions of roads

The poor condition of roads has a telling effect on the economy. Movement of traffic on
poor and congested roads increases the cost of operation of vehicles as well as loss of
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valuable time and also contributing to high rate of road accidents. Our commercial
vehicles are able to make only 250-300 kms in single day against 500-600 kms in
developed countries. It has been roughly estimated that a saving of Rs. 25,000 crores per
year could be brought about by road improvements. These savings would be in the form
of reduced fuel consumption, lower wear and tear of vehicles and less damage to tyres.
These can be avoided by modernizing the roads.
2.7 The dwindling Public Sector Outlay on Transport

In the successive Five Year Plans, the public sector outlay on transport has been
declining.
Plan (Year) Total Outlay or Expenditure on % age of Total
Expenditure Road Sector Plan
Expenditure
1st Plan (1951-56) 1968 135 6.7%
2nd Plan (1956-61) 4672 224 4.8%
3rd Plan (1961-66) 8577 440 5.1%
4th Plan (1966-69) 6625 309 4.6%
5th Plan (1969-74) 15778 862 5.5%
6th Plan (1974-79) 39426 1701 4.1%
7th Plan (1980-85) 109292 3807 3.5%
8th Plan (1985-90) 179277 6335 3.5%
Annual Plan (1990-92) 137034 3779 2.8%
9th Plan (1992-97) 341000 13210 3.0%
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Ninth & Tenth Five Year Plan:

The following goals and objectives are defined for the Road Sector in the 9th & 10th Plan.
1. Phased removal of deficiencies in the existing NH network in the tune with traffic
needs for 10-15 years with emphasis on high-density corridors for four laning.
2. Bring in highway-user oriented project planning in identifying package of projects
section wise rather than isolated stretches.
3. Greater attention to rehabilitation and reconstruction of weak/dilapidated bridges
for the safety of the traffic.
4. Modernization of road construction technology for speedy execution and quality
assurance.
5. Engineering measures to improve road safety and conservation of energy.
6. Continued emphasis on Research f& development.
7. Integrating the development plans with Railways and other modes of transport.
8. Integrating the development plans with Railways and other modes of transport.
9. Providing employment opportunities to the labour force in rural areas.
10. Special attention for development of roads in the North-Eastern Region.
11. Encouraging private sector participation in development of roads.
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2.8 Agencies involved in Road Sector Development in India

Ministry of Road Transport & Highways (MORT&H)
Ministry of Road Transport & Highways is responsible for the formulation and
implementation of policies and programmes for the development and maintenance of
Roads & Highways. All roads other than National Highways in the various states fall
within the jurisdiction of respective State Governments. Ministry being an Apex
Organization in the Highway Sector makes specifications placed down on codes of
practice for all items and activities related to construction of roads and bridges. The
Ministry has basically been divided in two wings i.e. Roads & Highways and Transport.
The various associated agencies under the ministry are:
o NHAI
o CRRI
o IRCC
o NITHE
o IRC
o IABSE
NHAI (National Highways Authority of India)

The execution of National Highway projects were either handled by State or Central
Governments so there was a problem in fixing the responsibility between the between the
two. Moreover, dual control of the Central and State Government often led to delays in
decision-making. The Central Government realized a need of central agency that could
directly facilitate the matter so, The National Highways Authority of India that was
constituted under National Highways Authority of India Act, 1998 and made operational
in February 1995.
The Authority is an Autonomous Body with executive responsibility for the development,
maintenance and operation of those National Highways and associated facilities vested in
it by the Ministry of Surface Transport. The Authority has been entrusted with the
projects under National Highways Projects (ADB loan, OECF, World Bank). In addition,
NHAI is also responsible for the maintenance and development of Golden Quadrilateral,
North South & East West corridors, providing port connectivity and some selected
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projects like Naini Bridge, Hapur Bypass, Durg Bypass etc. NHAI is also responsible for
implementation of the policy of privatization in highway sector.
CRRI (Central Road Research Institute)

Road research has played an important role in Indias road development. The problems of
planning, design construction and maintenance of roads in India is unique and
challenging and the ready made solutions from other countries are not found feasible and
economical. Indigenous solutions have to be devised to suit the countrys local needs and
resources. This task has been carried out by Central Road Research Institute (CRRI),
Delhi, established in 1950, as one of the chain of the major laboratories under the council
of Scientific and Industrial Research. The CRRI has many divisions, dealing with the
diverse areas such as flexible pavements, rigid pavements, geotechnical engineering,
roads, bridges, pavements performance, traffic and transportation, environment and road
safety.
IRCC (Indian Road Construction Corporation Limited)

IRCC is a public sector enterprise under the Ministry of Road Transport and Highways. It
was incorporated during 1976 as a specialized commercial enterprise in the field of
construction of roads, bridges, airfield pavement and allied civil works both in Indian and
abroad.
NITHE (National Institute of Training For Highways Engineers)

NITHE was established in 1983 for training of Highway engineers in Central & State
Government Departments as well as private sector. It is a society under the administrative
control of the Ministry of Road Transport & Highways. NITHE organizes foundational
training programmes refresher courses and specialized courses for the in service Highway
Engineers of Central & State Governments.
IRC (Indian Roads Congress)
The Indian Roads Congress (IRC) was set up by the Government of India in consultation
with the State Governments in December, 1934. It is the premier body of Highways
Engineers in India. The Principal objectives of the India Roads Congress are to provide a
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national forum for regular pooling of experience and ideas on all matters concerned with
the construction and maintenance of highways, to recommend standard specifications and
to provide a platform for the expression of professional opinion on matters relating to
roads and road transport including those of organizations and administration. It is also
publishing Journals, monthly magazines and research bulletins. IRC is a registered
society under the Registration of Society Act and is financed by contribution from
Central Government, various State Governments and also contributions from its
Members and sale of Publication.
IABSE (Indian National Group of the International Association for

Bridge and Structural Engineering)
The International Association for Bridge and Structural Engineering (IABSE) was
founded in 1929 in Zurich by Engineers from 14 countries, who recognized both the
necessity for a closer human collaboration and exchange of information, knowledge and
discoveries across all national borders. The Government of India, Ministry of Road
Transport and Highways in consultation with various State Governments set up the
Indian National Group (ING) of IABSE in May 1957.
The goals of the Association are, promotion of international collaboration between
engineering and researchers and particularly representatives of science, industry and
public authorities. It also encourages the members for promotion and exchange of
technical and scientific knowledge. The Indian National Group deals with all aspects of
planning, design, analysis, detailing, construction, management, operation, maintenance,
repair and rehabilitation of structures of all kind including Bridges.
Public Works Department (PWD):

In India PWD was first established in the Punjab Presidency in mid of the 19th Century
out of Military Board. It is an institution now 150 years old and is firmly in saddle in all
the States of the country. This institute i.e. State Public Works Department is the premier
body responsible for delivery of developmental works, be it building, roads or bridges. In
the Road Sector the road connectivity of villages, construction and maintenance of State
Highways, Major District Roads, Other District Roads along with maintenance and
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construction of National Highways as an agent of Government of India is the

responsibility of the State PWDs.
2.9 Road Development Plans

The country prepares a long term Road Development Plan once in every 20 years. The
first was the Nagpur Plan (1943), which set the blue print for the period upto 1961. The
second was the Bombay Plan, which was for the period 1961-1981. Next plan was the
Lucknow Plan covering the period 1981-2001. The recent plans that are going on is the
National Highway Development Plan & Pradhan Mantri Gramin Sadak Yojana.
National Highway Development Plan: For augmenting the capacity of National

Highways, sequel to Prime Ministers announcement, Central Government with National
Highway Authority of India (NHAI) as its nodal agency is undertaking National Highway
Development Project (NHDP). The plan envisages four and six laning of the following
roads:
o Golden Quadrilateral: Delhi-Mumbai-Chennai-Kolkata-Delhi.
o North-South Corridor: Srinagar to Kanyakumari with spur from Salem to Cochin.
o East-West Corridor: Silchar to Porbunder.
o Port Connectivity to Major Ports.
Pradhan Mantri Gramin Sadak Yojana: Under the Pradhan Mantri Gramin
Sadak Yojana, two lakh villages with over 1,000 population will be connected to the
nearest highway by 2008. All villages with a population above 500 will be connected by
2009. The cost is estimated at Rs. 60,000 crores. Indian villages need roads which serve
for decades without maintenance, are hard enough to withstand iron-tyred bullock carts
and can be used even monsoons.
National Highways Development Project (NHDP)

In order to improve the road network on a country wide level, the National Highway
Development Project was set up by the PMO. The project aims to develop the Golden
Quadrilateral, the North-South and East-West Corridor and other work including Port
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Connectivity, as these are the high volume sectors carrying the substantial portion of the
road traffic in India.
The total length of Golden Quadrilateral is 5952 kms, North-South-East-West Corridor is
7300 kms and that of Port Connectivity 400 kms. The project envisages a total
investment of Rs 58,000 crores spread over a nine-year period. Golden Quadrilateral is
scheduled for completion by the end of 2003 and North-South-East-West Corridor by the
year 2009.
2.10 Current Status

1. Of the 58,112 kms of National Highways in India about 33 per cent are single lane
and only about 2 per cent of the total road network is four lane. The poor quality of
Indian roads is highlighted by congestion, old fatigued bridges and culverts, railway
crossings, low safety, no bypasses and slow traffic movement.
2. Considering the importance of the road sector in the country, the government has
embarked on the ambitious National Highway Development Project covering 14,000
km with a cost of Rs. 58,000 crore and the projects have already started rolling.
3. The Indian construction industry that had been experiencing a slowdown witnessed a
growth of 9 per cent and 8.5 per cent for the periods Financial Year 2000 and
Financial Year 2001 (1st half) respectively. This was possible due to the increased
spending in infrastructure and the actual taking off of some of the Road Sector
projects.
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Research Methodology:
The research design which I have planned for my thesis will be of the following nature.
Research : Analytical & Exploratory.
Data Source : Secondary data.
Research approach : Survey method.
Research instrument : Personal interviews & Financial Model.
Type of questionnaire : Structured non-disguised.
Type of questions : Open ended.
I would be working on secondary data because of the fact that the various financial
aspects of the projects like the Projects Initial Investment, the Payment Pattern, duration
of the project, Project IRR, etc. have to be analysed to show the viability of such projects.
For this purpose I will have to indepth and exhaustive study of all the available secondary
data like journals, websites and other related documents.
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3. Trends in Road Sector Financing

3.1 Traditional Financing Mechanism
3.1.1 Budgetary Allocations: Roads are primarily funded through budgetary
allocations. Central government provides funds for National Highways and State
Government for other roads. Further to give proper direction to highway development
The Planning Commission of India has estimated an investment of INR3,118 billion
under the Eleventh Plan versus the INR1,448 billion spent under the Tenth Plan.
3.1.2 Central Road Fund: The Central Road Fund derives its revenues out of the
duty on customs and excise levied on petrol and diesel. It is expected to provide Rs.
6,000 crore annually for National Highway Development Program. The states are also
getting Rs. 1962 crore for development of state roads. A dedicated road fund has been
created by the central government. It is expected that the total collections in the fund will
be to the tune of around Rs. 10,000 crore.
The allocations from the fund would be as shown:
o 50% of the proceeds from additional excise duty on diesel would be allocated for
development of rural roads.
o Of the remaining balance, 57.5% would be provided for national highways, 27%
for state roads, 3% for development of roads of interstate and economic
importance and 12.5% for railway safety works such as rail roads over bridges,
manning of level crossings etc.
3.1.3 Octroi: Octroi is the fees collected by the local authorities of towns and cities
from the trucks, which carry goods. It is one of the major avenues of resource generation
of municipalities. The fund collected by octroi is generally used to develop the other
district roads and village roads. Since the collection of octroi results in long detention of
trucks on the roadside and entails waste of time and fuel, so central Government is
pressurizing to abolish this mode of taxation.
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3.1.4 Foreign Aid to Road Sectors:

3.1.4.1 Historical Background: The first major external aid for roads was for the
development of certain National Highway Section in Maharashtra, Bihar, Bengal started
in 1960s. This was funded by International Development Association (IDA), an affiliate
of World Bank. Though efforts were made in the seventies to continue external aid for
the roads by the World Bank, but were unsuccessful because of the differences on two
issues:
a. Inviting Global tenders
b. The engagement of consultants.
Negotiations were again revived in the mid-eighties, when the Government of India
agreed to the World Banks condition that tenders should be called on the basis of
International Competitive bidding. Since then there have been a number of externally
aided highway projects, both in Central Sector for National Highways and in the State
Sector for State Highways and Rural Roads.
3.1.4.2 World Bank Aided Projects: Various projects that have been funded by world
bank are:
1. India: State Highways Project
Date: June 20, 1997
LOAN AMOUNT: IBRD-US $ 70 million
PROJECT DESCRIPTION: The project will help relieve traffic congestion and
reduce travel times by widening and upgrading priority roads, enhancing road
maintenance, and strengthening the state road agency's ability to manage its road
programs and assets. The main components of the project are: (i) civil works for
widening and strengthening of about 1,400 kms of high-traffic volume State
Highways and Major District Roads; (ii) reduction in the backlog of periodic
maintenance work on 2,000 kms of state highways and major district roads and
twenty kilometers of national highway damaged by a recent cyclone will receive
emergency maintenance; and (iii) the Institutional Development Plan of the Roads
and Buildings Department (RBD) will be supported through corporate strategy
development, studies and/or pilot projects, training and staff development.
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India: Third National Highways Project

Date: June 6, 2000
TERMS: Grace period=5 years, maturity=20 years
PROJECT DESCRIPTION: This project will help bring down transport costs by
increasing highway capacity, reducing traffic jams and road accidents, separating
local and through traffic in towns, and improving pavements. The project will support
the National Highway Authority of India (NHAI) in the development and
maintenance of the 6,000 km "golden quadrilateral" between Delhi, Calcutta,
Chennai, and Mumbai, and the development of the strategically important North-
South and East-West corridors and access to key ports. Specifically, the project will
finance civil works for widening and strengthening about 475 kms of national
highway from two lanes to four, six lane divided carriageways. It will also cover
environmental management, including tree plantation, and a program of road work to
introduce alternative maintenance contracting methods and improve traffic
management and safety.
2. India: Gujarat State Highway Project

Date: September 6, 2000
TERMS: Grace period=5 years; maturity=20 years
PROJECT DESCRIPTION: The project will strengthen and widen about 800-900
kms of state highways while implementing periodic maintenance of an additional
1,000 kms of state highways. It will also finance technical assistance, training, and
equipment needed to meet increasing demands on road services and infrastructure.
The resulting reduction in transport bottlenecks is expected to help support the long-
term economic growth needed to reduce poverty.
3. India: Karnataka State Highways Improvement Project

Date: May 24, 2001
LOANS AMOUNT: IBRD-US $ 360 million equivalent
Terms: Grace period=5 years; maturity=20 years
19
PROJECT DESCRIPTION: This project will finance road widening and

strengthening, and technical assistance for improved management of road resources
and road safety. The project will enhance and expand the core road network through
institutional strengthening of Karnataka's main road agency and support for a pilot
road safety program. Specifically, the project will upgrade and widen about 1,000
kms and repair an additional 1,300 kms of state roads. The project will also invest in
Karnataka's road agency -- the Public Works Department -- to provide training for
staff and modernize equipment and systems of strategic importance in improving
state roads.
4. India: Grand Trunk Road Improvement Project

Date: June 22, 2001
CREDIT AMOUNT: IDAUS $ 589 million equivalent
TERMS: Grace period = 5 years; Maturity = 14 years
PROJECT DESCRIPTION: The project will fund the upgrading of this New Delhi-
Calcutta highway, a 1,300 kms stretch which suffers from major traffic congestion.
The project will cut travel time and boost safety on. It will also help highway
agencies improve management and delivery of highway services, including the
management of a growing number of private sector contracts for road maintenance.
The project will specifically upgrade 420 kms of national highway sections through
Bihar, Jharkhand and Uttar Pradesh; implement road safety works; and pilot
initiatives to foster private sector involvement in road financing.
India: Kerala State Transport Project Loan

Date: March 14, 2002
AMOUNT: IBRD US $ 255 million
PROJECT DESCRIPTION: Kerala State, on Indias southwest coast, has the highest
rate of road accidents of any state in India. The Kerala State Transport Project will
address the rapid increase in demand for road services that has contributed to this low
level of road safety. The project will enhance road capacity and provide targeted
safety programs designed to boost both safety and efficiency of Keralas roads.
20
India: Mizoram State Roads Project

Date: March 14,2002
CREDIT AMOUNT: IDA- US $ 60 million

PROJECT DESCRIPTION: The credit will improve road capacity, quality, and safety
through rehabilitation and maintenance. Specifically, the Mizoram project will
expand or rehabilitate over 700 kms of the states core road network - nearly three-
fourths of the states total network over the next five years. These physical
improvements will benefit an estimated 70 percent of the States largely poor
population that relies on the road network on a daily basis.
3.1.4.3 Asian Development Bank Aided Projects:

The Bank's policy focuses on alleviating constraints to economic development and
attracting private sector participation to develop and maintain an efficient and dynamic
multimodal transport system. Assistance is given to develop roads, railways, and
ports. Bank support for roads is focused on policy reforms, and attracting private sector
participation for the development of national highways and expressways, as well as state
highways. Having helped support the establishment of the National Highway Authority,
the Bank has strengthened its efforts in promoting reforms of the institutional and
regulatory framework. It encourages improved efficiency in public sector operations and
removal of bottlenecks in highdensity corridors. The promotion of environmental and
safety standards are carefully examined during project preparation. There have been three
loans from the Asian Development Bank to the Highway Sector and four other State
Level loans.
1. Loan No. 918-IND: Road Improvement Project

This project consists of improvement of Roads Equipment: Procurement of quality
control, pavement evaluation and maintenance equipment for the PWDs of the five
states concerned.
o Consulting Services: Provision of consulting services to (a) assist the
Executing agencies in construction supervision of the Project; (b) undertake a
21
study for the development of a long-term plan for expressways; and (c) carry out a
study for the updating of road user cost data.
o Incremental Operation and Administration: Incremental operation and
administration costs for the implementation of the Project.
2. Loan No. 1041-IND: Second Road Improvement

This project comprises:
o Improvement of Roads: Procurement of equipment for traffic counting,
weighing and pavement evaluation.
o Consulting Services: Provision of consulting services to assist the
Executing Agencies in the implementation of the Project.
3. Loan No. 1274-IND: National Highways Project

The Project comprises:
o Highway Improvement: This component of the Project will cover
improvement of the five national highway sections, totaling about 330 km in the
five states. The improvements will include widening to four lanes (234 km) and
strengthening of the existing pavements with asphaltic concrete surfacing. The
five sections of the Project are:
o Consulting Services: Consulting services for construction supervision of
civil works under the Project are envisaged to be carried out by an appropriate
combination of international and domestic consultants.
4. Loan No. 1279-IND: Bombay-Vadodara Expressway Technical Assistance

Project
The Project was formulated to assist the Government, through the provision of
consulting services, with the preparation of detailed designs and contract
documentation required for the implementation of the construction projects to
develop an expressway between Bombay and Vadodara.
22
5. Loan No. 1747-IND: Surat-Manor Tollway Project

The Project will improve the 180 km stretch between Surat and Manor of National
Highway 8 linking the states of Gujarat and Maharashtra, including strengthening of
the highway's pavements. Thus ease congestion in freight and passenger traffic
between the industrial and agricultural areas of Gujarat and the west coast ports,
including Mumbai.
The objectives of the project are to remove capacity constraints and improve road
safety on critical sections of the western transport corridor from Delhi to Mumbai.
The completed project highway will be operated and maintained by the private sector
through a toll concession. The commercialization of the operation and maintenance of
the project represents a significant step in increasing private participation in national
highway development in India and is expected to have a demonstration effect on the
management of other national highway sections.
6. Loan No. 1839-IND: Western Transport Corridor Project

The project will upgrade the 259-km Tumkur-Haveri section of the Western
Transport Corridor (WTC) from a two-lane, single-carriage highway to a four-lane,
divided highway. The safety features will include a dual carriageway to prevent head-
on collisions and service roads to separate slow-moving and fast-moving traffic. They
will also include overbridges for pedestrians, bypasses to separate through traffic
from local traffic, and fences to prevent unlawful crossing and reduce noise pollution
in populated areas.
7. Loan no. 1870-IND: West Bengal Corridor Development Project

The project will upgrade India's national and state highways that link West Bengal's
southern ports of Kolkata and Haldia with eastern India, Bangladesh, Bhutan and
Nepal. Specifically, the project will improve:
o 370 km of National Highway 34, which was identified for priority assistance
because of its strategic importance and its impact on poverty reduction.
o 150 km of connecting state highways that link the corridor to Bangladesh.
o 100 km of rural roads, giving poor communities easier access to markets, schools,
and hospitals and thus improving their job and income opportunities.
23
3.1.4.4 OECF/JIBC Aided Projects:
Five National Highway Projects have been so far funded by Overseas Economic
Cooperation Fund of Japan/Japan Bank for Inrenational Cooperation so far. The total
loan is of the order 37.557 billion Japanese Yen. Four of these projects are for four-laning
and one is for major bridge across River Yamuna at Allahabad.
Date of Amount of Interest Repayment Grace

Project Name
Approval approval Rate Period Period
National Highway-2 4855 2.6% 30 years 10 years
9 Jan, 1992
Improvement Project million Yen
National Highway-5 11,360 2.6% 30 years 10 years

24 Jan, 1994
National Highway-24 28 Feb 1995 4,827 2.6% 30 years 10 years

National Highway-5 28 Feb 1995 5,836 2.6% 30 years 10 years

Calcutta Transport 25 Feb 1997 10,679 2.3% 30 years 10 years

Infrastructure million Yen
Development Project
24
3.2 Alternative Financing Mechanism

3.2.1 Market Borrowing:
1. Issuing of Infrastructure Bonds by NHAI guaranteed by Government: In
financial year 2006, the authority issue raised Rs.7,500 crore and in financial year
2007, Rs.8,100 crore from the issue of Infrastructure Bonds. The authority is going to
raise Rs.10,200 crore in the financial year 2008-2009.
Specifications:
The Authority / Issuer / National Highways Authority of India, Authority

NHAI incorporated under the National Highways Authority of
India Act, 1988.
Issue / Offer / Private Private Placement of Non-Convertible Redeemable

Placement Taxable Bonds (with benefits under section 54EC of
Income Tax Act 1961for Long Term Capital Gains).
Bond(s) Non-convertible redeemable taxable bond(s) in the nature

of debentures with benefits under section 54EC of
Income Tax Act 1961for Long Term Capital Gains, also
referred to as NHAI Bonds(s).
Category Non-Financial Public sector unit.

Amount Offered On tap
Put/Call Option 3 Years
Credit Rating AAA
Rating Agency Crisil
25
2. Issuing of Infrastructure Bonds by Maharashtra State Road Development

Corporation (MSRDC):
Specifications
Nature Secured, Non-Convertible, Redeemable, Taxable Bonds
Guaranteed by State Government of Maharashtra for
timely payment of interest and repayment of principle.
Rating CARE (A+SO)
Rating Agency CARE
Tenor 7/10/12/15 years
Amount Offered 250 crores.
Put/Call option 5/7/10/none respectively.
Coupon Rate 11/11.25/11.50/11.72% respectively.
Category Non-Financial SLU
3. Issuing of Infrastructure Bonds by Roads and Bridges Development

Corporation of Kerala Ltd. (RBDCK):
Specifications
Nature Secured, Non-Convertible, Redeemable, Taxable Bonds
Guaranteed by State Government of Kerala for timely
payment of interest and repayment of principle.
Tenor 7 years.
Amount Offered 25 crores.
Put/Call option 5 years.
Coupon Rate 12.25% annually.
Category Non-Financial SLU
3.2.2 Private Sector Participation:

Public Private Partnerships (PPPs) are characterized by the sharing of investment, risk,
responsibility and reward between the partners. The reasons for establishing such
partnerships vary but generally involve the financing, design, construction, operation and
maintenance of public infrastructure and services. The underlying logic for establishing
26
partnerships is that both the public and the private sector have unique characteristics that
provide them with advantages in specific aspects of service or project delivery. The most
successful partnership arrangements draw on the strengths of both the public and private
sector to establish complementary relationships. The roles and responsibilities of the
partners may vary from project to project. As the roles and responsibilities of the private
and public sector partners differs on individual servicing initiatives, but the overall role
and responsibilities of government do not change. Public private partnership is one of a
number of ways of delivering public infrastructure and related services. It is not a
substitute for strong and effective governance and decision making by government. In all
cases, government remains responsible and accountable for delivering services and
projects in a manner that protects and furthers the public interest.
Public private partnerships can vary in:
o The degree of risk allocated between the partners.
o The amount of expertise required on the part of each partner to
negotiate contracts.
o The potential implications for user fee payers.
3.2.2.1 Government of India Initiatives:

The following measures have been implemented by the Government.
o Road sector has been declared as an industry. This facilitates
borrowing on easy terms.
o Provisions of Monopolies and Restrictive Trade Practices Act
have been relaxed to enable firms to enter the highway sector.
o National Highways Act has been amended to enable levy of fee
on National Highways, Bridges and Tunnels.
o The Road Sector has been declared as an infrastructure to
permit floating bonds.
o The establishment of the Infrastructure Development Finance
Company (IDFC).
o The establishment of National Highway Authority of India
NHAI.
27
o Permitting upto 100% foreign equity participation for the

projects set up by foreign private entrepreneurs.
o Significant import duty concessions available on equipment
and raw material being imported by projects in various Infrastructure Sectors.
3.2.2.2 Implementation Models

o BOT (Toll Based)
o BOT (Annuity)
o Govt. owned SPV
o MOU (negotiated deal)
o Govt. to Govt. Cooperation
Built, Operate and Transfer (BOT-Toll Based)

BOT stands for "Built, Operate and Transfer". BOT model uses private investment to
undertake the infrastructure development that has historically been the preserve for the
public sector. In a BOT project a private company is given a concession to built and
operate a facility that would normally be built and operated by the government. The
facility might be a power plant, airport, tollroad, tunnel or water treatment plant. The
private company is also responsible for financing and designing the project. At the end of
the concession period the private company returns ownership of the project to the
government. The concession period is determined primarily by the length of the time
needed for the facility revenue stream to pay off the company's debt and provide a
reasonable rate of return.
The various variants of BOT scheme are:
o Build, Own and Operate (BOO): The Government either transfer ownership and
responsibility for an existing facility or contracts with a private partner to build,
own and operate a new facility in perpetuity. The private partner generally
provides the financing.
o Build, Own, Operate and Transfer (BOOT): The private developer obtains
exclusive franchise to finance-build, operate, maintain, manage and collect user
28
fees for a fixed period to amortize investment. At the end of the franchise, title
reverts to a public authority or Government.
o Build, Lease/Rent and Transfer BLT/BRT): The Government contracts with
the private partner to build a facility to provide a public service. The private
partner then leases the facility to the Government for a specified period after
which ownership vests with the Government. This approach can be taken where
Government requires a new facility or service but may not be in a position to
provide financing.
o Build, Transfer and Operate (BTO): The Government contracts with a private
partner to finance and build a facility. Once completed, the private partner
transfers ownership of the facility to the Government. The Government then
leases the facility back to the private partner under a long term lease during which
the private partner has an opportunity to recover its investment and a reasonable
rate of return.
o Modernize, Own/Operate and Transfer (MOT): The private partner takes a
facility from the Government, expands or modernizes it, then operates the facility
under a contract with the Government. The private partner is expected to invest in
facility expansion or improvement and is given a specified period of time in
which to recover the investment and realize a return.
o BOR: Build, Operate and Renewal of the concession.
o DBFO: Design, Build, Finance and Operate.
o DCMF: Design, Construct, Manage and Finance.
o ROO: Rehabilitate, Own and Operate.
o ROT: Rehabilitate, Own and Transfer.
In a BOT project, the Government decides the need of the project and its scope. The
design, performance and maintenance of the project is tailored to the objectives of the
country and the private sponsors are selected by appropriate bidding or evaluation
process in order to arrive at the price that is fair to both the Government and the sponsors.
A properly drafted agreement limits the private sponsors to a reasonable rate of return
and ensures that the project serves the country's national interest and economy.
Advantages of BOT Scheme:
29
o Cost savings: With BOT Scheme, Government is able to realize cost savings for
both the construction of capital projects as well as the operation and maintenance
of services. For example, construction cost savings can often be realized by
combining design and construction in the same contract. The close interaction of
designers and constructors in a team can result in more innovative and less costly
designs. The design and construction activity can be carried out more efficiently,
thereby decreasing the construction time and allowing the facility to be put to use
more quickly. Private partners may be able to reduce the cost of operating or
maintaining facilities by applying economies of scale, innovative technologies,
more flexible procurement and compensation arrangements, or by reducing
overhead.
o Risk sharing: With public private partnership, Government can share the risks
with a private partner. Risks could include cost overruns, inability to meet
schedules for service delivery, difficulty in complying with environmental and
other regulations, or the risk that revenues may not be sufficient to pay operating
and capital costs.
o Improved levels of service or maintaining existing levels of service: Public
private partnerships can introduce innovation in how service delivery is organized
and carried out. It can also introduce new technologies and economies of scale
that often reduce the cost or improve the quality and level of services.
o Enhancement of revenues: BOT scheme may set user fees that reflect the true
cost of delivering a particular service. BOT scheme also offer the opportunity to
introduce more innovative revenue sources that would not be possible under
conventional methods of service delivery.
o More efficient implementation: Efficiencies may be realized through combining
various activities such as design and construction, and through more flexible
contracting and procurement, quicker approvals for capital financing and a more
efficient decision-making process. More efficient service delivery not only allows
quicker provision of services, but also reduces costs.
o Economic benefits: Increased involvement of Government in BOTs can help to
stimulate the private sector and contribute to increased employment and economic
30
growth. Local private firms that become proficient in working in BOTs can
export their expertise and earn income outside of the region.
Project Structure
G ov ernm ental
A gency
Su bscrip tion
A greem ent
I nsu rance L oan
I nsu rers P olicies
C on cessionaire A greem ent L en d ers
E ngineeri ng
P rocu rem ,ent
C onstru ction
C ontract
I nd ep enden t
D esign C onsu ltant
EPC
C ontractors
Disadvantages of BOT Scheme:

In the absence of historical traffic data, there is uncertainty involved in achieving the
estimated traffic on the new road facility based on a diversion analysis. The up-front
capital grant, which may be upto 25% of the project cost and will have to be matched by
at least an equal amount of equity contribution by the PD will provide enough confidence
to the private developers to bid for the project. The private participant will bid for the
grant amount on the basis of his perception of the various project risks viz. construction,
operations & maintenance, financing and revenue (traffic volume and toll collection).
31
BOT (Annuity Scheme)

In this option, a private developer is responsible for design, development, construction,
operation, maintenance and financing of the project. It is a kind of a BOT scheme in
which the prospective bidder for the road project submit their estimates of the annual
payment they expect from the Sponsors for taking up the project. The sponsors would
award the project to the bidders asking the lowest annuity payments. Revenue to the
concessionaire accrues from annuity payments to be made by the governmental agency,
which reduces the revenue risk for the concessionaire. In this type the governmental
agency may or may not retain the right for collecting the tolls from the users of the
facility.
Project Structure
Insurers Private Equity

Insurance Developers Investors
Policies
Subscription
Agreement
Concession
Agreement Loan
Governmental Promoters/ Agreement Lenders
Agency Land, Annuity Sponsor
Feasibility Studies
Independent
Consultant Contract
Tolling Engineering Operation &
Contract Procurement, Maintenance
Construction Contracts
Contract
Independent EPC O&M

Consultant Contractors Contracts
Advantages
o Selection of the private developer is through an international competitive bidding
process wherein the bidders asking for the lowest annuity amount is awarded the
BOT contract. This leads to induction of private party on the most competitive
terms.
32
o As the revenue (traffic volume and toll collection) risk is substantially mitigated,
financing for the project can be arranged on the most competitive commercial
terms.
Disadvantages
o The entire revenue risk will be fully borne by the Government.
o Impose a high financial burden on the Government is for a long period.
Govt. Owned Special Purpose Vehicle (SPV)

In this case the Promoter shall be responsible for the development and implementation of
the Project and form a Special Purpose Vehicle (SPV) as the implementing agency. In
this approach, a Private Developer (PD) shall be selected through an International
Competitive Bidding process. The Project shall be awarded to the PD on BOT basis for a
fixed concession period. The PD shall be responsible for design, development,
construction, operation, maintenance and financing of the Project. Promoter has to
provide a one-time capital grant to cover a part of the revenue shortfall risk.
The PD shall domicile the Project and all the activities related thereto in a Special
Purpose Vehicle (SPV). The investments made in the Project by the SPV and returns
thereon shall be recovered by way of revenues generated from the operation of the
project. The SPV shall be entitled to collect tolls from the users of the Project road at
rates to be specified in the Concession Agreement. The toll rates shall be indexed to
inflation (WPI, CPI, etc.) and may undergo annual revision.
Advantages
The advantages in this model are:
o As the SPV would be promoted by a Sovereign body, this will be looked upon
favourably by lenders / investors thereby facilitating financing on commercial
terms.
33
Project Structure
Governmental
Agency
Subscription
A greement
Insurance Loan
Insurers Policies SPV/ A greement Lenders
Corporation
Engineering
Procurement,
Construction
Contract
Independent
Design Consultant
EPC O&M
Contractors Contractor
Disadvantages
The disadvantages in such a strategy could be:
o It would be detrimental to the achievement of overall policy of public-private
partnership for infrastructure development.
o It would create a significant burden on the budget of Government/Promoter for a
long period.
Memorandum of Understanding (MoU negotiated deal)

As per this structure, the Project shall be awarded to a private Project Developer (PD) on
a Build-Operate-Transfer (BOT) basis based on negotiated terms for a pre-determined
(fixed/variable) concession period. The PD and Government shall enter into a
Memorandum of Understanding (MoU) for this purpose. The PD shall be responsible for
design, development, construction, operation, maintenance and financing of the Project.
34
Advantages
o This structure allows for harnessing the efficiencies (operational and financing) of
private sector
o Reduces financial burden on Government as only a one-time capital grant will be
required to be given to the project.
Disadvantages
o Selection of the private developer is not through a public/open process. Hence
issues of transparency may arise.
o As this would be a negotiated deal, this transaction may lead to price distortions
in the absence of a competitive mechanism for selection of the private participant.
Government to Government Cooperation

In this case a Memorandum of Understanding may be signed between Government of
India and Government of interested countries (e.g. Malaysia, Korea, Japan, Canada etc.)
or their nominated company/companies. The SPV will be formed by companies from the
country with whom the MoU is signed. The Project implementation shall be on BOT
basis, which will encompass design, engineering, financing, procurement, construction,
operating, maintenance and tolling of the Project highway.
Example
NHAI has signed an agreement with Government of Malaysia promoted Swarna
Tollway Limited in order to implement certain sections of two National Highways in the
State of Andhra Pradesh.
Advantages
The SPV implementing the project will have the backing of both the Government of
India and its own Government.
The structure allows for introduction of international experience in similar projects.
Disadvantages
35
The satisfactory conclusion of Government-to-Government negotiations may take

excessively long time.
As this would be a negotiated deal, this transaction may lead to price distortions in the
absence of a competitive mechanism for selection of the concessionaire.
Project Structure
Foreign Govt Foreign Govt Foreign Govt

Company 1 Company 2 Company 3
Subscription Agreement
Assignment of
Concession Loan
Agreement Agreements
Government
of India SPV Lenders
Independent Insurance
Consultant
Contract Policies
Independent
Consultant O&M Tolling Insurers
Contract Contract
EPC Contracts
EPC
Contract EPC
Contract
Section 1
Section 2
Contractor 1 Contractor 2
3.2.2.3 The Route Map already followed A Data Base on Indias Road Sector
Privatization Efforts
For realizing Indias ambitious growth plans, it is critical that this invaluable asset of road
network must be substantially upgraded to maximize the effectiveness. Towards this
capacity enhancement of the road network, both in qualitative and quantitative terms, the
NHDP and Pradhan Mantri Gramin Sadak Yojana are the major initiatives. These
projects have the vast potential in creating the employment. The Government in
collaboration with Private Sector has already awarded and completed various projects by
36
using different implementing models like BOT (Toll Based / Annuity), SPV, MOU and
Govt. to Govt. cooperation to ensure unobstructed mobility and accessibility and serving
the need of a modern India.
Private Sector participation through BOT (Toll Based / Annuity) and SPV Projects
Stretch NH No. Length (km) Status

BOT (Toll Based) Projects
Satara Kagal 4 133 Completed
Tumkur Neelmangla 4 32 Completed
Nellore Tada 5 111 Under Implementation
ROB at Kishangarh 8 1 4 Laned
Jaipur Kishangarh 8 90.38 Awarded
Delhi Gurgaon 8 27.7 Completed
BOT (Annuity) Projects
Palsit Dankuni 2 65 Under Implementation
Panagarh Palsit 2 65 Under Implementation
Maharashtra Belgaum 4 77 Under Implementation
Ankapalli Tuni 5 59 Under Implementation
Nellore Bypass 5 17.2 Approved for Award
SPV Projects
Jaipur Bypass 8 34.7 Completed
Ahmedabad Vadodara 8 50 Completed
Expressway
Moradabad Bypass 24 18 Completed
(The project details are given in the annexure)

37
4. Critical Issues Private Sector Road Financing

4.1 Stages in development of Road Sector Projects
1. Identification:
o Identify Project.
o Define Form of Financing.
o Preliminary Feasibility Study.
o Assign Project Manager and Team.
o Government.
2. Government Preparation for Tendering:

o Procurement Procedure.
o Prequalification.
o Project Agreement.
o Tender Documents
o Bid Evaluation Criteria.
3. Sponsor's Preparation to Bid:

o Form Consortium / Possibly Project Company.
o Feasibility Study
o Identification of Project Potential.
o Submit Bid Package.
4. Selection:
o Evaluate Bids.
o Clarifications / Adjustments.
o Project Award.
5. Development:
o Form Project Company.
o Equity Contributions.
38
o Loan Agreement.
o Financial Closing.
o Construction Contract.
o Supply Contract.
o Off-take Contract.
o Insurance Contract.
o Operation & Maintenance Agreement.
6. Implementation:
o Construct facility and Install Equipment.
o Testing.
o Acceptance.
o Technology Transfer and Capability Building.
o Evaluation.
7. Operation:
o O&M during the Concession Period.
o Inspection.
o Training.
o Technology Transfer and Capability Building.
8. Transfer:
o Transfer Procedures.
39
4.2 Financial Structuring of BOT Road Projects

The various types and sources of capital are available for financing the BOT Road
Projects. As each type of capital bears different level of risks so by means of various
financing techniques and legal instruments different types of capital are matched to
different project risks. Financial Structuring is done to establish the appropriate mix
of debt, equity and mezzanine capital and also to ensure that funds are arranged from
appropriate sources. This process is also referred as assembling the financial
package.
4.2.1 Project Financing: In BOT projects financing is done through "Project Finance"
technique. Lender seeks finance either through limited recourse basis or a non-recourse
basis. The lender in a non-recourse financing arrangement will look only to the project's
asset and revenue stream for repayment, not to the additional sources of security, such as
the total assets or balance sheet of the project sponsors. But most of BOT projects are
financed on a limited recourse basis rather than Non-recourse basis because in this
recourse is available against the project company and its assets, including real estate,
plant and equipment, contractual rights, performance bonds, insurance, government
guarantees and other commitments the project company has obtained. The rate of return
of a BOT project must be sufficient not only to repay the lenders but also to reward the
sponsors for committing their equity and know-how and for assuming the risks involved
in such projects.
In such financing, a separate project company is established by the project sponsors to
implement the project. This type has several advantages for sponsors:
o It allows the sponsors to borrow funds to finance a project without increasing
their liabilities beyond their investment in the project. On the sponsors balance
sheet, therefore, their exposure to the project is the amount of their equity
contribution to the project and nothing more.
o Lenders to the project assume a part of project risks, since they are lending
without full recourse and primarily on the basis of the project assts.
40
BOT financing is a specialized form of project financing. Some of the common features
of BOT financing are as follows:
o It involves the financing of a discrete venture that is more often defined by its
revenue stream than by its products or markets.
o It involves several interrelated contracts with third parties, such as suppliers,
purchasers and Government agencies, which are crucial to the credit support for
the project.
o Project loan repayments are secured by project cash flows, as specified in
contractual agreements or as indicated by demand forecasts, rather than project
assets.
o Project sponsors will rely primarily on guarantees to minimize their exposure to
project risks and uncertainty.
4.2.2 Means of Financing

Financing or capital is required for the implementation of all the projects. The types of
funds available for the projects are:
o Equity Capital.
o Debt Capital.
o Mezzanine Capital.
o Institutional Investors.
o Capital Market Funding.
o International Financial Institutions.
o Support by Export Credit Agencies.
o Combined Public and Private Finance.
Each type of capital plays a specific role in the project financing and has its own risk
characteristics so the return on each type of capital depends on the risk characteristics of
each type.
1. Equity Capital:
Equity is the lowest-ranking capital of all in terms of its claims on the assets of a
project. It represents the funds injected by the owners of the project. In this all the
41
project obligations are to be met before any distributions made to the equity investors.
If a project fails, all other claims must be met before any claims made by equity
investors. Equity investors therefore bear a higher risk than any other provider of the
capital so, equity capital is also referred as risk capital. However, if a project is
successful, then the surplus after all obligations are met will entirely accrue to the
shareholders and results in the capital gains. In BOT project, the fixed assets are
transferred to the Government at no cost, so the equity investors return on investment
will come only from the revenues generated during that period so these investors
must be fairly compensated for being the highest risk takers.
2. Debt Capital:
Project's senior debt has the highest ranking of all the capital. Senior debt has first
claim over all the assets of a project and must be repaid first. Only after the claims of
senior debt are satisfied, the claims of other capitals are considered. As the senior
debt bears the limited risk so the returns are limited just to the payment on the loans,
irrespective of the profitability of the projects. Equity investors prefer a high debt-
equity ratio, while creditors prefer a low debt-equity ratio because a higher debt-
equity ratio leads to lower cost of capital and vice-a-versa. Generally the BOT
projects financed in India are at debt-equity ratio of 70:30.
3. Mezzanine Capital:
It is a more flexible instrument than either pure equity or debt, as it has characteristics
of both the debt and equity capital. So the risk involved is between debt and equity
capital. Examples of mezzanine financing are subordinated loans and preference
shares. The subordinated loans and preference shares both have the characteristics of
the debt as the regular payment of interest and capital is to be made, but the payments
are subordinated to senior debt and to be made only when the project funds are
available. For project sponsors, the advantage of mezzanine financing is that it
enables projects to be financed with more debt and less equity.
4. Institutional Investors:
42
In addition to subordinated loans provided by the project sponsors or by

Governmental financial institutions, subordinated debt can be obtained from
financing companies, investment funds, insurance companies, collective investment
schemes and other institutional investors. The institutions normally have large sums
available for long-term investment and may represent an important source of
additional capital for infrastructure projects. The main reasons for accepting the risk
of providing capital to infrastructure projects are the prospects of remuneration and
interest in diversifying investment.
5. Capital Market Funding:

Funds may be raised by the placement of preferred shares, bonds and other negotiable
instruments on a recognized stock exchange. The public offer of negotiable
instruments requires regulatory approval and compliance with requirements of the
relevant jurisdiction.
6. International Financial Institutions:

International financial institutions also play a significant role as the provider of loans,
guarantees or equity to privately financed infrastructure projects. A number of
projects have been financed by World Bank, Asian Development Bank, International
Finance Corporation or by other development banks.
7. Support by Export Credit Agencies (ECA's):

Export credit agencies provide support to the projects in form of loans, guarantees or
a combination of both. The participation of export credit agencies may provide a
number of advantages, such as lower rate of interest than commercial banks and
longer-term loans.
8. Combined Public & Private Finance:

The public funds originate from Government Income and sovereign borrowing. They
are combined with private funds as initial investment or as long-term payments, or
may take governmental grants or guarantees. Infrastructure projects are sponsored by
43
the Government through equity participation in the concessionaire, thus reducing the
amount of equity and debt needed from private sources.
4.2.3 Components of Project Costs

While deciding the type of capital and sources of finance to be used, it is important to
first identify the main components of project costs, so that the needs and risk
characteristics of each can be matched by the appropriate funding. The main components
of project costs are as follows:
o Pre-investment Costs.
o Bidding & Procurement Costs.
o Project Development Costs.
o Construction Costs.
o Operating Costs.
o Termination Costs.
1. Pre-investment Costs: These are the costs incurred by the project sponsors in
developing the project concept and preliminary project design.
2. Bidding & Procurement Costs: A project concession can be awarded through either
competitive bidding or direct negotiation with sponsors. In both the cases, the
government agency responsible for awarding the concession has to carry out an
outline study of the project to collect information needed for the bidding documents
and prepare themselves for negotiations with sponsors. The bidders and sponsors also
have to undertake extensive design and analysis work to prepare their bids and to
have meaningful negotiations with the government.
3. Operating Costs: These are the costs involved while operating the facility upon
completion of construction.
44
4. Project Development Costs: On the basis of the preliminary project design, the
project sponsors have to further develop and refine the BOT scheme during the
bidding and the post-concession award period.
5. Construction Costs: This is the main expenditure in any project. It includes the
construction of the entire facility, including the purchase and installation of
equipment.
6. Termination Costs: At termination the costs may or may not be involved. If the
project agreement requires the facility to be transferred it may involve a cash payment
by the government agency taking-over that facility.
4.3 Procurement Issues and Selection of Concessionaire

An adequate procurement strategy or procedure must be in place before a BOT policy can
be carried out. The success of a BOT project will depend to a large extent on what has
occurred before the sponsor group was selected. Procurement procedures are influenced
by various factors like the business environment, the infrastructure policy and the nature
of the particular BOT project. There are two approaches for procurement are:
o Competitive Tendering
o Negotiated System
Following objectives should be satisfied before choosing a particular procurement
procedure:
1. Satisfy the needs of the particular BOT project.
2. Ensure procedural clarity, fairness and transparency.
3. Promote competition.
4. Encourage private sector innovation and alternative solutions.
5. Assure investors, lenders and other parties that government has
selected the right BOT proposal.
6. Strengthen public confidence in the BOT approach to
infrastructure development.
7. Promote an early award of an project.
8. Minimize the cost of developing BOT projects.
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4.3.1 Bidding Criteria

The selection process of the Project Developer shall be based on technical competence of
the bidder and a financial bid. While the parameters of technical competence are only
qualifying in nature, the financial bids shall form the criteria of selecting the Project
Developer. In the financial bid, the criteria for selection may be one of the following:
o Bidding on the basis of least grant sought from the Government with pre-specified
toll rates and concession period.
o Bidding on the basis of length of the concession period with pre-specified grant
element and toll rates. However NHAI had finally adopted the bidding criteria on
the basis of grant.
o Bidding on the basis of least toll rates with pre-specified concession period and
grant.
o Returns (IRR / NPV basis) expected by the bidder as calculated on the basis of a
pre-specified formula. In this case, the concession period shall be flexible and
shall expire once the pre-specified returns are achieved. The toll rates shall be pre-
specified.
4.4 Governments Role in facilitating BOT Projects

One of the advantage of the BOT concept for the Government is that a considerable
workload, including responsibility for financing, designing, construction and operation of
the projects, is transferred from the Government agencies and ministries traditionally
responsible for infrastructure projects to the private sector. However, this does not imply
that Governments role is limited to supervision and monitoring of BOT projects. BOT
infrastructure projects require that the Government play an active role, in preconstruction
and pre-investment phases of a project. It is the Government that initially approves the
use of the BOT concept in connection with the infrastructure projects. It decides the
procurement process, manages the procurement proceedings and defines the criteria for
the selection of BOT sponsors.
The various facilities that the Government should provide to BOT projects are:
4.4.1 Supportive Legal Framework for a BOT projects: The attractiveness of a BOT
project to the private sector depends to the large extent on the way the
46
Government address the fundamental legal issues, such as enforcement of

contracts, private ownerships, security arrangements, taxes, remittance of foreign
exchange and profits. Inadequate legal framework can undermine the strength and
effectiveness of contracts for BOT projects. The elements of a legal and
regulatory framework for implementing a successful BOT projects are:
o The basic legislative authority for awarding BOT projects: It includes
designating the individual ministries, government agencies authorized to procure
and implement BOT project. It also includes passing regulations that define the
responsibilities of the government agencies and ministries for the development
and implementation of the projects, issuance of licenses and permits and central
Government approvals.
o Enabling public legislation: The Government may have to enact legislation
authorizing the acquisition of land for the project, the transfer of public assets to
the project and provision of work permits or other necessary government input.
o Adequate security legislation: The creation and protection of security interests,
mortgages and liens in respect to project assets in favour of the lenders and
enforcement of remedies under the security package should be assured by
countrys legal system.
o Legislation to promote foreign investment: Various incentives should be given
to the sponsors like the right to exchange local currency into foreign currency,
simplified import licensing and custom procedures, right of foreign investors to
establish companies in the country, tax regime for foreign investment etc.
o Protection of contract rights under the governing law and by adequate legal
institutions.
4.4.2 Administrative Framework for BOT projects:

The Government must establish a credible and efficient administrative framework to
successfully implement the BOT projects. The potential sponsors and lenders will
evaluate the organization, experience and procedures of the procuring administrative
entity, an efficient administrative framework will accelerate private sectors investment in
BOT projects.
47
o Planning and coordinating: The governmental agency helps the private

sector in doing the proper economic and financial analysis of BOT projects. It
also helps by drafting the model or standardized project agreements and provides
consultancy services for examining the implementation of BOT projects.
o Administration for BOT projects: As a BOT project requires approvals,
permits and licenses from several ministries, agencies and local authorities the
Government helps the private sector in getting clearances to avoid costly and
unnecessary delays.
o BOT training programmes for administrative personnel: The Government
should train its administrative staff personnel to understand and appraise BOT
projects thus, helping in meeting the Governments objective.
4.4.3 Government incentives and other forms of support

The Government recognizes the need to provide incentives and some direct or indirect
support to BOT projects. The extent and type of support varies considerably, depending
on other things like force majeure risks, the feasibility of the project, the countrys need
for the project etc.
o Tax incentive and concessions: Private sector investors in BOT projects
enjoys tax concessions, like exemption from corporate tax, exemption from
income tax for foreign project staff, reduction from real estate tax, reduction of
import duties on equipment, raw materials etc.
o Land and other Logistical facilities: Government provide the land on which
the project is to be built, constructs the associated infrastructure facilities,
including access roads, transmission lines and communications.
o Contribution of existing assets by the Government: In this the Government
gives the right to the sponsor to operate and earn revenues from existing assets
like toll roads etc.
o Government guarantees and stand-by financing: The Government provides
various guarantees like protection against the loss of expected revenues due to
competing projects, provides with the subsidy support to cover the difference
between the full commercial price and the actual user charges. It also provides the
protection against currency exchange risk and uninsurable force majeure events.
48
o Loans and Equity contributions: Government provides direct loans and

direct equity investment from Government assures the private sector the
Governments involvement in the project and thus helping in bringing down the
cost of the project.
o Attractive risk-reward provisions: The Government allows the project
company to earn a certain return on their equity investment and after that to
distribute the excess revenue between the company and the Government entity
according to the pre-arranged formula.
4.5 Contract Package and Project Agreements
A BOT project involves a number of important contractual arrangements among the
participants. In a BOT project, the agreements are used to define the respective rights,
obligations and risks of each party. The various contracts or agreements involved in
Contract Package and Project Agreements are:
o Consultant Agreement.
o Preliminary Consortium Agreement.
o Project Company Agreement.
o Concession Agreement.
o Construction Agreement.
o Equipment Supply Contracts.
o Operation and Maintenance Contracts.
o Insurance Contracts.
o Financing Contracts.
o Security Package.
1. Consultant Agreement: As the Government lack expertise in the field of BOT

agreements and related matters so it needs to recruit outside consultants to help in
identifying and defining the project and putting together its request for the proposal.
This includes three types of expertise:
o Technical expertise in Road Sector.
49
o Financial Consultancy, for knowledge about potential sources of funding,

financing structures and instruments, foreign exchange, capital markets,
feasibility studies etc.
o International Business legal counsel to help the Government draft or review
necessary documentation, and help establish the contractual documents with
project sponsors.
2. Preliminary Consortium Agreement: It is the first contract between the initial
sponsors referred to as preliminary consortium agreement or joint venture agreement.
The initial sponsors enter into this agreement in order to respond to a government
request for proposals. The agreement among sponsors provide terms for initial
sharing of the substantial costs required to do the feasibility studies, to hire outside
advisers, to prepare tenders and to do other preliminary development work.
3. Project Company Agreements: In a BOT scheme, the project company includes
a number of active and passive sponsors, such as contractors, equipment and material
suppliers, government agency, operators and investors so, the contractual agreements
among the final consortium members will expand and will establish long term
binding commitments among the parties.
4. Concession Agreement: The project agreement is central to the BOT projects.
The project agreement sets forth the rights and obligations of the Governmental
agency and the project company.
The obligations of the Government are as follows:
o Authorize the project company to be engaged in the project for the period of
concession.
o Provide the land, rights etc. required for the project.
o Provide access roads and utilities for the project.
o Agree not to authorize competing projects.
o Provide for inflation adjustment, foreign exchange convertibility and
exchange rate protection to the degree necessary.
The obligations of the Concessionaire are:
o Design, develop, finance, construct, complete, test, commission, operate and
maintain the project according to specific design and performance criteria.
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o Protect the environment through appropriate use of pollution control

equipment and environmentally sound construction and operation techniques.
o Provide periodic reports to the supervising government agency and give it
access to the project for inspection purposes.
o Provide insurance coverage for the project, pay liquidated damages to the
government for delay or failure to complete the project or to meet the
expected performance.
o Transfer the project in a good working condition to the Government at the
transfer date.
5. Construction Agreement: It is the agreement that is signed between the project
company and the contractor for the construction of the facility, it puts the project
company, the equity investors and lenders and the Government at risk. This
agreement ensures that the project construction is completed timely and within the
budget and it meets the standards of performance.
6. Equipment Supply Contracts: If the project requires substantial heavy
equipment in addition to the construction itself, the project company will sign a
contract with equipment supplier for the supply of such equipments.
7. Operation and Maintenance Contracts: In many BOT projects, the project is
not operated and maintained by the project company itself but is contracted out to a
firm experienced in the operation and maintenance of the facility. The O&M contract
will define parameters for operating efficiency, it includes penalties for failure to
meet the efficiency level.
8. Insurance Contracts: A BOT project requires extensive insurance coverage,
including casualty, third-party liability and business interruption insurance.
9. Financing Contracts: These are the contracts between the project company and
the lenders for the commitments of the loans or principle debt amount or the standby
loans or bank guarantees to cover cost overruns or delays during construction or
revenue shortfall during operations.
10. Security Package: The lenders to the BOT project requires fairly elaborate
security arrangements. Like the project revenues are usually paid not to the project
company but in the escrow accounts maintained by an escrow agent. The escrow
agent is one of the banks hat are acting as lenders to the project. Payments are made
51
from the escrow account according to the stipulated priorities. The lenders insist that
escrow accounts are to be maintained in order to pay debt service for a minimum
period before any distributions are made to the equity investors. The benefits of the
various contracts entered into by the project company as well as the other assets of
the company are assigned to a trustee for the benefit of the lenders. Numerous
policies insuring against a variety of risks are secured. Lenders requests the
Government support to protect lenders against the risks which are out of control and
causes the project to fail.
4.6 Identification of Risk Matrices and Instruments for

Mitigation
4.6.1 Risks involved in Road Sector Projects
Choosing among the options for private participation depends on the particular needs of
the country and the nature of risk sharing between the public and private sectors. The risk
to which each party is committed through the contract is to be clearly defined as well as
understood so that disputes may not occur and the responsibilities will be based on the
assignment spelled out in the contract.
The rule of thumb is that private road infrastructure projects work best when project risks
and responsibilities are assigned to the party that can best bear them. The private sector is
generally better managing commercial risks and responsibilities, such as those associated
with construction, operation and financing. In contrast, toll roads may also depend on
public participation in areas such as acquisition of right-of-way, political risk and in some
cases, traffic and revenue risk. The government considers giving financial support or
guarantees if traffic levels in the early years are insufficient.
The main risks involved in road sector projects are:
o Political Risks
o Construction Risks
o Market and Revenue Risks
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o Finance Risks
o Legal Risks
o Operating Risks
In addition, contracts commonly address Force Majeure and legal liability because they
have proven to be the serious sources of cost overruns in the sector.
1. Political Risks:
Political risk concerns government actions that affect the ability to generate earnings.
These could include actions that terminate the concession, the imposition of taxes or
regulations that severely reduce the value to the investors, restrictions on the ability to
collect or raise tolls as specified in the concession agreement etc. Many projects are
delayed because of the difficulties of acquiring right-of-way or environmental
clearances that both the governments and the operators underestimate. Government
generally agrees to compensate investors for political risks, although in practice,
governments may cite justifications for their action to delay or prevent such
payments. Thus, private investors generally assume the risks that are associated with
the dispute resolution and the ability to obtain compensation if the government
violates the concession agreement.
2. Construction Risks:
A common cause of cost overrun stems from design changes and unforeseen weather
conditions during the construction phase. The private sector typically bears primary
responsibility for the construction uncertainties and attempts to cover it through
insurance. The public sector may assume responsibility for risks under its control
such as competing complementary facilities or allowing cost increases associated
with major design changes.
3. Market and Revenue Risks:
Demand uncertainty continues to be a major factor in most of the projects. Traffic and
toll levels may not be sufficient to cover all costs, including construction, operation
and maintenance. The private sector fully depends upon the government for the
handling of the traffic and revenue risks.
4. Financial Risks:
53
Financial risk is the risk that project cash flows might be insufficient to cover debt
service and then pay an adequate return on sponsor equity. Financial constraints like
lack of long-term debt capital hinder the road development projects. Non-availability
of local or domestic finance markets may lead to the higher risks for road sector
projects which need long-term financing.
Currency risks involve the impact of exchange rate fluctuations on the value of
domestic currency. It can subject to the convertibility as the operator may not be
allowed to convert the local currency into the foreign currency.
Financial risks are best borne by the private sector but a substantial government risk
sharing is required either through revenue or debt guarantees or through participation
by state or multilateral development institutions.
5. Legal Risks:
Regulatory risk stems from the weak implementation of regulatory commitments built
into the contracts and the laws or other legal instruments that are relevant to the value
of the transactions as it was originally assessed. The major risk lies on the part of the
concessionaire like lack of power and capacity.
6. Operating Risks:
Operating risks are the risks that emerge at the time of the operations of the project on
the part of operators default. It can also involve the risks like force majeure risks that
are beyond the control of both the public and private partners, such as floods or
earthquakes, or other non-political factors such as strikes and industrial disturbances
that impair the projects ability to earn revenues. Sometimes private insurance is
becoming available for catastrophic risks but generally public sector faced with the
need to restructure the project if such disaster or problem occurs.
4.6.2 Instruments for Mitigating Risks:

54
1. Equity Guarantees: These provide a concessionaire with the option to be bought out
by the government at a price that guarantees a minimum return on equity. Although
the liability is contingent, the government effectively assumes project risk and
reduces the corresponding private sector incentives.
2. Debt Guarantees: These guarantee that the government will pay any shortfall related
to principal and interest payments. Sometimes, the government also guarantees the
scheduled refinancing. This creates significant government exposure and reduces
private sector incentives, although it may decrease the cost or increase the amount of
debt available to the project.
3. Exchange Rate Guarantees: These are the guarantees where the government agrees
to compensate the concessionaire for increases in financing costs due to exchange rate
effects on foreign financing. Exchange rate guarantee helps in increasing the
incentive to use foreign capital.
4. Grants/Subsidies: Government can furnish grants or subordinate loans at project

inception, which helps in buying down the size of the project that needs private
finance. Generally these grants or subsidies have no provision for repayment.
5. Subordinated Loans: These can fill up a gap in the financing structure between
senior debt and equity. These types of loans have attractive features that they can be
repaid with a return if the project is successful. Subordinated loans improve
feasibility by increasing the debt service coverage ratio on senior debt and by
reducing the need for private equity that needs higher return.
6. Minimum Traffic and Revenue Guarantees: In these types of loans government

compensates the concessionaire if traffic or revenue falls below a minimum threshold,
which is generally set 10 to 30 percent below the expected volume. Traffic and
revenue guarantees help in retaining the financial incentives in the project.
7. Shadow Tolls: In this the government contributes a specific payment per vehicle to
the concessionaire as toll, rather than the user. These are the ongoing revenue stream
55
from the government in lieu of an up-front grant or loan and as these are paid over
time, these leads to a less burden on the public on the public budget.
8. Concession Extensions and Revenue Enhancements: These provide financial

support that involves limited public sector risk, but they do little to support or
enhance private financing. A government can firstly extend the concession term if
revenue fall below a certain amount and can restrict the competition from the
ancillary services.
1. Political Risks.
Potential Risk Exposure of Risk Mitigation Measures.
Concession
Company &
Project Lender
Lack of power and capacity Obligations of

Legal due diligence
of Grantor Grantor to bind the
State, and to pay
compensation
(and/or pay
operating charges),
are void
Nationalization; Obtain right for Company to

Project is lost or is
discriminatory changes in compensation from Grantor for
not
law; political force majeure project loans, equity and lost
viable
event; abandonment of profits; exclude right of Grantor to
Project by Grantor; default terminate in these circumstances;
by Grantor obtain political risk insurance
56
Change in law not specific Returns to Sponsors Obtain right for Company to
to the Project; increase in are less; debt increase tariff; require Sponsors to
taxes service may be put in new money; otherwise a
jeopardized project risk
Breach by the Grantor of Users may use If serious enough and not cured
exclusivity obligation; competing obtain right for Company to
failure by the Grantor to concession terminate; otherwise obtain right
meet undertakings to assist facilities; viability for Company to claim damages
of the Project is from the Grantor
threatened
Approval of tariff increases Project is not viable Obtain right to appeal tariff
is not given decision; obtain right to
compensation of the Company by
the Grantor for cash deficiency;
require Sponsors to put in new
money; otherwise a project risk
2. Construction Risks.
Concession
Company &
Project Lender
Cost overruns; unanticipated Delays, increased Require a lump sum, fixed time
variations, time extensions project debt construction contract with little
scope for variations; claim
damages; call performance bonds;
57
draw on standby loans; require

Sponsors to put in new money;
otherwise a project risk
Contractor is an investor in Contractor has a Ensure independent Sponsors and

the Company conflict of interest Project Lenders are involved in the
and construction negotiation of Construction
contract may be too Contract;
easy on Contractor
Contractor/Supplier defaults Delays Due diligence on Contractor/

or goes bankrupt Supplier; claim damages call
performance bonds
Site acquisition problems; Delays Ensure there is expropriation

problems with removing legislation
squatters
Access problems to adjacent Delays Ensure that Grantor obtains access

areas rights for Company
Adverse site conditions Delays, increased Obtain a comprehensive site

costs survey; pass this risk on to the
Contractor; require adequate
insurance
Existing environmental Delays Obtain agreement by the Grantor

damage/ for compensation payments to the
Archeological remains Company, and right to extend the
58
concession period
Change in law or Grantor Project cost is Obtain agreement of Grantor to

unilaterally requires design increased; Project accept responsibility for payment
changes may not be viable; of design changes or to authorize
new loans may not tariff to be increased to pay
be able to be raised; additional finance costs
Delays
Variations and changes in Increased finance Ensure that the Company, the
design requested by costs and delays Grantor and the Contractor agree
Company, Contractor or to back to back claims principle;
third party require Sponsors to put in new
money in the required amount
Environmental damage and Delays, increased Require adequate insurance; claim

force majeure events costs on insurance; obtain right for the
Company to terminate the
concession or to be granted an
extension to concession period
3. Market and Revenue Risks.

Concession
Company &
Project Lender
Inadequate traffic or Deficiency in debt Due diligence - require sound

tolls/fares are inadequate service and traffic studies; try to have right to
inadequate returns increase tariff; try to have
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to Sponsors deficiency guarantee or subsidy

from Government; increase
concession period and refinance
loan facilities; Sponsors required
to put in subordinated loans;
otherwise project risk.
Consumers do not accept Deficiency in debt Require Grantor to compensate

tariff levels and traffic drops service and Company for cash deficiency
off inadequate returns where due to breach by Grantor of
to Sponsors its obligations; otherwise a project
risks.
Concession fees and Deficiency in debt Ensure fees and profits are
Grantors profit shares, are service and subordinated to debt service
too high inadequate returns payable to Project Lenders
to Sponsors
Authorization for tariff Deficiency in debt Require Grantor to compensate

increases is not granted by service and Company for shortfall (by
the Grantor inadequate returns reference to debt service
to Sponsors coverage); require Sponsors to put
in new money; otherwise a project
risk.
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4. Finance Risks.
Concession
Company &
Project Lender
Borrowings in local Increase in debt Raise loans in foreign currency;

currency carry high interest service structure with balloon payment at
rates and/or loans with long end of loan term repayment of
tenors are unavailable which is guaranteed by
and/or there is limited multilateral; refinance at end of
ability to enter into swaps loan term
Loans are raised in foreign If foreign currency Require that Company hedges its
currency and there is a is borrowed, when forex exposure; obtain right for
devaluation of local converted, there is Company to increase tariff by a
currency insufficient money, percentage related to the rate of
to pay debt service devaluation
Increase in interest rates Increase in debt Fix interest rates; enter into swaps;
service obtain right to increase tariff by a
percentage related to interest rate
increase; drawdown of standby
loans; require Sponsors to make
subordinated loans
Increases in operating costs Decrease in funds Obtain right to increase tariff

due to inflation available for debt based on CPI basis or based on
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service rate of increase in prices of

component costs
Foreign currency Obtain agreement from Central

Foreign currency is not
debt is not able to Bank to procure foreign currency;
available
be repaid in foreign obtain agreement from Project
currency Lenders to accept equivalent value
in local currency
5. Legal Risks.
Concession
Company &
Project Lender
Concession Company does Security is Site inspections and legal due

not have ownership or rights worthless; viability diligence; make this an event of
of use of key assets of Project may be default under Loan Agreement
in doubt
Concession Company not Concession Ensure that conditions precedent

able to satisfy conditions Contract may be are within Companys control
precedent in Concession terminated by the
Agreement Grantor; Sponsors
and possibly
Project Lenders
lose their upfront
costs and expenses
Concession Company Concession Obtain grace periods and step-in

breaches Concession Contract may be rights for the Project Lenders in
Contract terminated by the Concession Contract; obtain debt
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Grantor; Project assumption agreement or

Lenders risk loss of obligation to repay the project
principal and loans from the Grantor; Sponsors
interest lose their equity
Concession Company is Concession Obtain grace periods under

bankrupt, insolvent or Contract may be Concession Contract; Ensure that
another event of default able to be Project Lenders have right to
occurs under Loan terminated by enforce security; obtain right for a
Agreement Grantor; Project Substituted Entity to take over the
Lenders risk loss of Concession
principal and
interest
Security is not enforceable Project Lenders risk Legal due diligence; obtain
or is deficient loss of principal guarantees from Sponsors
and interest
6. Operating Risks.
Concession
Company &
Project Lender
Lack of exclusivity to Inadequate traffic Obtain traffic studies and get an

prohibit competing which may lead to exclusivity agreement from the
concessions a debt service Grantor/other Governmental
deficiency Agencies
Lack of interconnection and Inadequate traffic Analyze interconnection

contribution of existing which may lead to requirements and get Grantor /
infrastructure a debt service Transport Authority to implement
63
deficiency them
Force majeure events Interruption in Ensure there is adequate

operations which insurance; require the Company to
may lead to the claim on insurance and/or draw on
Grantor being standby loans to pay for the
entitled to damage repairs; obtain grace
terminate the periods and right for extension to
concession and to a the concession period in the
debt service Concession Contract
deficiency
Operator default, or Interruption in Claim on performance bonds;

becomes bankrupt operations; claim damages from Operator;
Concession ensure there are grace periods in
Contract may be Concession Contract; terminate
terminated O&M Contract; appoint new
Operator
Default by Concession Operator may claim Ensure there are grace periods in
Company under O&M damages; O&M Contract; obtain step-in
Contract Concession rights for the Project Lenders
Contract may be
terminated
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Strikes and industrial Interruption to Ensure that Company obtains the

disturbances operations; agreement for the Operator to be
Concession responsible for this and ensure
Contract may be there is a right to claim damages;
terminated obtain grace periods in Concession
Contract; obtain step-in rights for
the Project Lenders
Operating costs are too high Reduction in cash Ensure that there are controls in
available for debt the O&M Contract; ensure there
service are termination rights for the
Company in the O&M Contract if
costs remain high
Failure of technology Interruption to Due diligence; obtain technology

operations; feasibility reports; ensure there is a
Concession right for the Company to claim
Contract may be damages from technology
terminated providers
5. Lessons from International Experience

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5.1 International Practices

The principle countries pursue four different approaches or forms of entities for
construction and operation of Road Sector Projects. The four approaches are as follows:
o Government Agency
o Public Corporation
o Private Concessions
o Public-Private Partnerships
All of these approaches have their on advantages and disadvantages.
1. Government Agency: In case of a government agency as entity, which is
a case in Indonesia, Malaysia, the Philippines, Thailand and United States, the
advantage is the potential for comprehensive, systematic and uncontradictory network
planning and extension. The disadvantages are the need for prioritization of
competing fund usage because public funds are often not enough to meet network
development needs timely and the difficulties often faced to improve cost
effectiveness and operational efficiency.
2. Public Corporations: The Public Corporations as entities are employed

in countries like Japan, Indonesia, Thailand, France and the Philippines. The
advantages in this case are their stronger impact in pursuing in a coherent manner
government road and expressway network development goals, but the potential for
cross subsidizing among routes in a network. Disadvantages of Public Corporations
are normally that they lack incentives to respond timely and efficiently to changing
market conditions and they lack incentive for cost reductions and they are generally
less efficient than private entities.
3. Private Concession: Private Concession entities are widely pursed now in
Argentina, Brazil, Chile, Colombia, France, Hungary, Mexico, Spain, Hong Kong,
SAR(China) and the United States. The advantage in this type is that they are more
efficient and they show a stronger tendency to respond quickly to changing market
conditions. The main disadvantage of this type is that they can lead to difficulties in
overall network planning and extension realization.
66
4. Public-Private Partnerships: Public-Private Partnerships as entities are

employed in countries like Hungary, Columbia, SAR(China), Indonesia, and
Philippines. The advantages of this type are that they bring additional resources to the
project and complete in a shorter time, leads to increase in efficiency in construction
and project operation, through market discipline, assuring the project is completed on
schedule and within the budget.
5.2 Advantages and Disadvantages of Common Government

Support Measures for Toll Road Development
Support Measures Contents Advantages Disadvantages
Comfort Letter A legally non-binding Can provide Not legally
China letter issued by financiers and binding
government to give sponsors a
support to certain minimum level of
actions not clearly assurance when
stated in contractual no implicit
agreement such as government
performance of a support is
public corporation as a attainable.
grantor of concession
Land Acquisition Expropriation of right Helpful for the Delays
China, Thailand, of way for toll road concessionaire
United States construction. Cost of because the right
land acquired maybe of expropriation
borne either by the usually resides
government or the with the
concessionaire. government. This
support usually
improves "project
economics" to a
great extent when
implemented at
67
no cost to the
sponsors.
Extension of Measure to provide Improves project Effect on current
Concession Period compensation for the economics. cash flow is
Indonesia and others loss of profit due to small.
circumstances caused
by the government
Construction of Construction of Contributes Construction
Related Facilities connecting roads, significantly to delays may
United Kingdom, access ramp, etc. the project since critically impair
Thailand and others connecting roads the
and other commencement
facilities are of operation.
critical elements
for
commencement
of operation.
Revenue Support Revenue support is Facilitation of the Weak design
Malaysia, China usually done with a finance closing may impose a
(SAR) minimum threshold for and the project. large contingent
compensation paid by liability on the
the government. government.
Revenue Sharing Deriving revenue from Possible Revenue sharing
with Existing an existing toll road mitigation of formula requires
Facilities facility; can take the revenue shortfall careful design.
Malaysia, Thailand, form of taking over the risk in the startup Possible burden
United Kingdom and complete facility years. when all assets,
others including employees debts, and
and assets as well as employees are to
debts. be transferred.
Shadow Toll Toll is paid by Facilitation of Possible financial
United Kingdom and government according private financing burden/fiscal
Argentina to the vehicle-km of the without inflexibility in
traffic counted stimulating the later years;
68
automatically. resistance to may hinder

tolling. transition to real
tolling.
Provisions of Right of commercial Enhancement of Excessive
Development and development along the project dependence on
Third-Party Revenue toll road to supplement economics. this measure may
Malaysia and China project economics. impair project
(SAR) economics.
Subsidies/Grants Government support Enhancement of Arrangement
Chile, Colombia and both in cash and in project may be time
Spain kind such as land and economics. consuming and
facility. implementation
may be delayed;
possible risk of
undue
governmental
intervention,
"moral hazard,"
etc.
Subordinated Loans A type of loan for Facilitation of Possible
Malaysia and others which repayment is finance closing deterioration of
subordinated to the because it is project
senior loan (ordinary treated as equity; economics due to
loan). Government, could be used as higher interest
parent company and, in stand-by facility cost.
some cases, to mitigate risks
institutional investors such as cost
are providers of the overrun and
loan. The intersect rate revenue shortfall.
is higher than for a
senior debt.
Foreign Exchange Compensation for Facilitation of Possible large
Guarantees impact caused by finance closing in contingent
69
Indonesia, Philippines devaluation of local foreign currency liability for the

and Spain currency. It could be when country risk government in
built into the tariff in this respect is the event of large
formula. high. currency
devaluation.
Loan (Bond) Guarantee on Facilitation of Possible large
Guarantees repayment of loan and finance closing. contingent
China and others on redemption of bond liability for the
government;
moral hazard for
concessionaire
and lenders.
Equity Guarantees Guarantee of equity Facilitation of Possible large
investment. project proposals contingent
and liability for the
implementation. government;
moral hazard for
concessionaire
and other
investors.
70
5.3 Examples of Toll Adjustment Procedures

Country Example Description of Approach
France Government Toll rate adjustments are at the discretion of the
discretion. Ministry of Finance, which tends to approve larger
increases for less profitable companies. The French
approach avoids unnecessarily high returns to
investors, but at the risk of sacrificing efficiency by
undermining incentives to make exceptional efforts
to control costs or improve productivity.
Japan Use of an advisory The Japanese toll revenue pooling system requires a
committee to the reexamination of total cost redemption every time
Prime Minister. there is an expansion of the expressway network (i.e.
when the Minister of Construction issues a
construction order for a network addition). When the
cost of constructing a network expansion or other
significant improvement requires a toll rate
adjustment and/or an extension of the toll collecting
period, the proposal goes through official
government procedures involving a review and
examination by a Toll Committee and approval by
MOC and MOTC reflecting public hearings.
Spain Use of formula Spains approach to regulating the toll rates of
linked to inflation. concessionaires is based on a formula linked to price
inflation. The Spanish approach has the merit of
promoting new investment and efficiency, and it has
only limited risks of unnecessarily high returns to
investors, since excess profits are moved to a
Special Reserve.
Hong Kong A sophisticated yet If traffic and therefore revenue falls below a forecast
SAR straightforward toll volume, the TAM will allow the operator to advance
adjustment the prespecified date of a toll increase. Conversely, if
formula(TAM)-be the amount of revenue received by the operator is
st Practice. above the forecast, resulting in a rate of return that
71
exceeds a specified range, a toll increase will be

deferred.
Philippines An advanced toll Mandated by Presidential Decree No. 1894, it is
adjustment based upon a parametric formula that takes into
procedures. account prevailing local and foreign interest rates,
the consumer price index, currency values, and a
construction materials price index. However, if toll
road investors happen to receive a windfall, there is
no profit-sharing clausethe investors keep all of
the reward.
Indonesia Uncertainty in Under Law No. 13/1980, the designation of a road
adjustment section as a toll road and the determination of initial
procedures. toll tariffs require Presidential approval of proposals
made by Minister of Public Works. The concession
company proposes tariff adjustments every two or
three years based on a formula incorporating the
consumer price index, but approval cannot be
guaranteed by the government. Uncertainty over the
toll adjustment procedure may discourage private
investors.
Mexico Uncertainty in Both toll increases and decreases typically require
adjustment approval of the Secretariat of Communications and
procedures. Transport, which restricts most concessionaires
abilities to responsively adjust pricing to optimize
revenues once the roads were open to traffic.
Malaysia An approach for The proposed new method is to annex the forecast
addressing traffic volume to the concession agreement. If the
uncertainty- similar actual traffic level is more than the forecast level at a
to that of Hong specified time, the Government could request either
Kong SAR. the deferral of a toll rate increase or lowering of the
level of toll rate increase; but if the actual traffic is
less than forecast, the concessionaire could request
to bring forward the timing of toll rate increases.
72
73
6. The Way Forward Opportunities for PSP in Road

Sector Development
6.1 Opportunities exist in
o Highway construction.
o Widening of about 38 percent of National highway from single to double
lanes.
o Strengthening of about 60 percent of the two lane roads.
o Highway related on route activities like restaurants, motels and rest/parking
areas as may be decided by the Implementing Agency.
6.2 Findings
o Private sector is still reluctant to invest in the infrastructure projects because of
the high risk of traffic volume and long gestation period.
o In the annuity projects the entire revenue risk is fully borne by the government
and it imposes a high financial burden on the government for a long period.
o Government departments have abundant technical expertise but there is a lack in
financial management.
o Infrastructure financing is in its recent stage, only few projects have been
completed under these implementing models, the agreements or documents
related to these have not been scrutinized in the court of law or no judgements
have been passed yet.
o Undeveloped Domestic Capital Markets, lack of proper instruments to meet the
requirements for the infrastructure projects.
o No foreign funding in infrastructure projects.
o No single window clearances: Lengthy procedures for getting clearances.
74
6.3 Recommendations / Suggestions

o Government should try to remove the bottlenecks in the financing of
infrastructure projects and ease the legal procedures and formalities.
o Single window clearances for the projects, like environmental clearances, land
acquisition problems etc.
o Government should try to provide as many incentives as it can like tax incentives
and concessions, loans and equity contributions, land and other logistical
facilities, risk rewards etc.
o Need to develop innovative mechanisms / products for private sector participation
like securitization, annuity model, assured returns etc.
6.4 Conclusion The Middle Path

The country is poised to take up infrastructure projects comprising huge road network of
expressway standard and other similar roads. Adoption of private financing for such
projects is an almost inevitable course of action. However, it appears that the private
sector is not yet ready to handle all these projects, particularly the mega projects costing a
few hundred crores for various reasons. Conscious efforts must be made by the
Government to nurture the private sector to acquire the competence to handle this
mammoth job. Building up of conducive environment for private participation should
also be task on hand. However in the intervening period, the execution of such projects
through the medium of Government corporations acting as BOT entrepreneurs
seems to be the most appropriate option, this can be termed as the contemporary
middle path. The maturing of the investing community in course of time will result in
the emergence of lenders and investors with different risk profiles and the capacity to
assess and assume risks of varying types and degrees. As most infrastructure projects
have long gestation periods, entirely different set of investors may be associated with the
project during their development, construction and operation phases depending on their
risk appetite.
75
Mobilization of resources on the scale required for appropriate road infrastructure

development would be possible only in the environment which protect the interests of the
road users and also assures a reasonable rate of return to the investors. In this context, the
need for strengthening the institutional setup as well as adopting new financial
instruments is self-evident and needs no reiteration. Innovative application of new
financing modalities would, perhaps, provide the required impetus for attracting large
private investment flows in road infrastructure projects.
76
Model
7.1 Description
This is a BOT (Toll Based) model of a four lane, 53 km long road project. A BOT (Toll
Based) project involves private party bidders who invest in the project and get returns
from the tolls collected during the operations. The total project cost is Rs. 322.60 crores
and the construction period is 30 months beginning from 1st April 2008. In the model, the
expenditure phasing has been done for a typical road project. The impact of financing
pattern on expenditure phasing and thus on the overall cost of the project can be easily
analyzed in this exercise. Also taken into account is the tax holiday afforded to the
infrastructure projects in the Union Government Budget to compute the tax provisioning
requirements.
In this project EPC cost, traffic volume and phasing of the cost is provided by the
Governmental agency and is given to make the project financial feasible by using the
various mix of the finance options available for the project in order that the project can
attract the private investors with a good rate of return. In the end the sensitivity analysis
has been done to study the impact of changes in the interest rate and financing pattern on
the Project IRR and the total Project Cost.
The model is prepared in Excel Sheet and involves the calculation of Toll Revenues
expected, DSCR i.e. Debt Service Coverage Ratio.
(see appendix B)
77
7.2 Sensitivity Analysis
BOT (Toll Based) Model
CASE - I CASE - II Case III

No Grant 10% Grant 20% Grant
DEBT 70% 60% 50%
EQUITY 30% 30% 30%
GRANT 0% 10% 20%
GEARING 2.33 2 1.67
Equity Amount 99.75 98.25 96.78

Debt Amount 232.76 196.51 161.3
Grant Amount 0 32.75 64.52
Project IRR 11.39% 11.42% 11.25%

Cost of Capital 13.40% 12.00% 10.60%
Avg. DSCR 1.17 1.19 1.37
(Amounts in crores)
(see appendix B)
7.2 Internal Rate of Return & Debt Service Coverage Ratio
The IRR is that discount rate that makes the net present value of the expected returns of a
project zero. The advantage of IRR is that it can be used even when the discount rate is
unknown. Here we have calculated IRR based on the cash flows generated from the toll
78
collected and then its compared with the total investment of the project. Further the IRR
is compared with the cost of capital to get a clearer picture w.r.t. the financial
attractiveness of the project.
As we know that if the IRR > cost of capital then accept that project and if IRR < cost of
capital then reject the project.
Here we can see that the IRR of the project is 11.25% which is greater than the cost of
capital of the project which stands at 10.60%.Hence, we can clearly judge that the project
is an attractive project.
Further to measure the monthly debt payment ability of the project we have calculated the
DSCR i.e. Debt Service Coverage Ratio because it refers to the amount of cash flow
available to meet annual interest and principal payments on debt, including sinking fund
payments.
This ratio should ideally be over 1. That would mean the property is generating enough
income to pay its debt obligations and the higher this ratio is, the easier it is to borrow
money for the enterprises property.
If DSCR is less than 1 then it would mean a negative cash flow. A DSCR of less than 1,
say .95, would mean that there is only enough net operating income to cover 95% of
annual debt payments
In general, DSCR = Net Operating Income / Total Debt service.
As we can see that after making necessary calculations the DSCR comes to 1.37, which is
greater than 1, so, we can comfortably conclude that the project is a lucrative one and the
interested entrepreneurs should not hesitate to bid for such toll based BOT projects, but
only after one follows the method prescribed here in this research.
(see appendix B)
Bibliography
Reports & Other Publications
1. Seminar on Financing, Implementation and Operation of Highways in 21st Century

(New Delhi, 24 25 March, 2008.)
79
2. A Report on Road Sector in India, IIM Ahmedabad.

3. The Feasibility Study on the construction of Expressways in the NCR in India: Final
Report, IL&FS.
4. Guidelines for Infrastructure Development through BOT Projects, NHAI.
5. Privatization and Regulation of Transport Infrastructure, World Bank Institute.
6. National seminar on Road Development, The Emerging scenario, 14 March 2008,
New Delhi held by Confederation of Indian Industry.
7. Brochure of NHAI.
8. India Today July 24 2007 edition.
Concession Agreements:
I. Moradabad Bypass Project.
II. Delhi Noida Project.
Websites / Weblinks
I. www.nhai.org
II. www.nic.in
III. www.worldbank.org
IV. www.indiainfoline.com
V. www.ciionline.org
VI. www.ficci.org
VII. www.jkr.gov.my
80
APPENDIX: A
81
Model of Concession Agreements under BOT scheme
Moradabad Bypass Project:
Details Construction of 4-Lane Expressway along an 18.22 km

stretch from 148.43 to166.65 on NH-24 in Uttar Pradesh
Promoter NHAI
Method of Special Purpose Vehicle (SPV) on BOT basis.
Financing
Concessionaire Moradabad Toll Road Company, incorporated underthe
provisions of the Companies Act 1956
Concession Period 30 years
Agreement Date 22 Feb 1999.
Financial Package Project Cost 103.5 crores.
Debt-Equity Ratio 70:30.
Debt 72.45 crores: 40 crores from IDFC @ 13.25%
: 32.45 crores from SBI
Equity 31.05 crores : 26.55 crores by NHAI
: 4.5 crores by EPC Contractor
EPC Contractor UP State Bridge Corporation
Repayment Borrower has to repay the principal amount of loan in 36
Schedule quarterly installments commencing from September 15,
2004.
Repayment Backended.
Pattern
Financial Risk & The project has been funded through non-recourse
Mitigation project financing, thus no claims on NHAIs balance
Framework sheet.
NHAI has provided a debt service coverage of Rs 5
crores, until the debt service revenue is build up.
Demand / Market The need to the project is well established by the
Risk & Mitigation congestion levels in the city thus alleviating the non
Framework usage risk by the users.
NHAI levies uniform toll rates thus alleviating the non
usage risk by the users.
Legal / Regulatory NHs Act has been amended thus enabling the
Risk & Mitigating Government to offer concession to the private party
Framework to finance, design, construction, operate, maintain the
facility and collect toll from the users.
Construction Risk The EPC contractor owns the design risk by
& Mitigating constructing the project as per his own design.
Framework Contractors equity has been adjusted against
payments due to them for construction work
82
completed.
Operating Risks & Incase cost overruns in maintenance, it would be
Mitigating directly funded byNHAI.
Framework Incase, minimum revenue is not achieved NHAI has
agreed to take the residual risk by providing revenue
shortfall loan to the project company.
Delhi Noida Project:
Details Project involves construction of 552.5 m long 8-lane

bridge across river Yamuna in Delhi with about 5 km
long approach roads, grade seperated interchanges to
ease the traffic movement and semi-automatic toll plaza.
Promoter / Sponsored by: Government of Uttar Pradesh, NOIDA
Sponsor Promoted by: IL&FS
Method of Special Purpose Company (SPC / SPV)
Financing
Concession NOIDA & NTCBL.
Agreement
Concessionaire Noida Toll Bridge Company Limited (NTBCL)
incorporated under the provisions of the Companies Act
1956.
Concession Model Fixed Return and Variable Period.
Return on 20% p.a.
Investment
Concession Period 30 years and extendable till assured returns achieved.
Financial Package Project Cost 408 crores.
Debt-Equity Ratio 70:30.
Debt 288 crores: Raised from IL&FS, World Bank
Equity 120 crores: Participants NOIDA, IL&FS, IFCI, AIG
Sectoral fund, Prudential fund.
EPC Contractor NTBCL and EPC Contractor (Marubeni and Mitsui,
JAPAN). Contract based on item rate contract and least
project cost.
O & M Agreement NTCBL & Inter-toll.
Delivery of Project Unencumbered and vacant possession of the project

sites sites to be delivered by the respective state
governments to NTBCL as a condition precedent.
The cost of land to be borne by Government and cost
of rehabilitation and relocation of displaced people to
be borne by NTBCL.
83
Transfer On conclusion of the Concession Period, the bridge hal

be transferred to NOIDA and ashram Chowk Flyover,
part of the project, to be handed over to Delhi
Government.
Lenders Rights Other than the security of the assets of the project,
additional rights as follows granted:
Right to cure a Concessionaire event of default if the
Concessionaire is unable to resolve the problem
within the cure period provided.
If NOIDA moves to terminate the agreement after the
Concessionaire and lenders inability to cure the
event of default, Lender has the right to a substitute
Entity to replace the Concessionaire.
Technology Risk Performance Bond from the EPC Contractor post
Mitigation plan construction 18 months
Strict construction monitoring by the Project engineer
Risk of shortfall in Provision to extend Concession agreement incase of
traffic Mitigating non-achievement of 20% return over the 30 year
Plan period.
A debt service reserve to be maintained to ensure
that servicing does not get adversly affected in the
short run.
Concession Agreement provides for the land
development rights upon the certification by
independent auditor, incase of inadequacy of Project
revenues from tolls
Risk of competing Concessionaire assured of exclusivity till the bridge
traffic routes achieves rated capacity.
mitigating plan
Poor Maintenance O&M contract has strict maintenance standards with
of the facility performance based compensation package to the
Contractor and penalties for non-compliance.
Risk of O&M Costs O&M Contract is a fixed price contract with the risk of
being higher than cost overruns being borne by the O&M contractor
anticipated
Force Majeure Comprehensive Insurance Coverage.
Risk Mitigating
Plan
Political and Social NOIDA to atleast pay a compensation to meet the
Risk mitigating outstanding liabilities of NTCBL towards lenders, incase
plan of termination.
84
APPENDIX: B
85
Financing Parameters
Length of Highway 53 Kms
Total Project Cost (incl. development, financing costs

etc.) 322.60
Equity Brought upfront 0.50
Debt as % of Project Cost 50%
Equity as % of Project Cost 30%
Debt /Equity Ratio 50 : 30
Gearing 1.67
Grant as % of Project Cost 20%
% of total
Equity Equity Cost
Rupee Equity 96.78 100% 12%
Forex Equity 0 0%
Total Equity 96.78 100%
Economic Assumptions
Date of Base EPC Cost 01-Sep-07

WPI 6.25%
Toll Escalation Rate 6.25%
Date of Base Toll Rates 01-Apr-08
Expenditure Parameters
Annual O&M Expenses
- for Original Capex 0.50% of Original Project Cost
- for Insurance 0.50% of Original Project Cost
Resurfacing after every 5 years 18.20 crores (as on COD)
Escalation Rate for O&M 6.00% p.a.
Book Depreciation Rate (SLM Basis) 5.59% (95% of COD)
Tax Depreciation Rate (WDV Basis) 10%
Lenders Upfront Fee 1.05%

Corporate Tax Rate 35.70%
86
Traffic Assumptions 1
Growth
Vehicle Type Traffic Volume Rate
2011-
As on Toll Plaza 1 1-Apr-01 COD 1992-99 2000-05 2006-2010 2015 After 2015
Cars 850 1114 7.00% 7.50% 7.50% 7.20% 6.80%
LCV 375 482 6.50% 7.50% 7.00% 6.80% 6.30%
MAV 100 129 6.50% 7.50% 7.00% 6.80% 6.30%
Bus 600 772 6.50% 7.50% 7.00% 6.80% 6.30%
HCV 2000 2573 6.50% 7.50% 7.00% 6.80% 6.30%
Total PCUs 9663 12451 5.97%
*Leakage may occur because of incomplete journeys/purely local
traffic.
Leakage may have to be provided for based on traffic study/survey. 2.68 17.00 5.97%
Traffic Assumptions
Growth
Vehicle Type Traffic Volume Rate
1996- 2000- 2010 -
As on Toll Plaza 2 1-Apr-01 COD 2000 2005 2005-2010 2015 After 2015
Cars 700 918 7.00% 7.50% 7.50% 7.20% 6.80%
LCV 200 257 6.50% 7.50% 7.00% 6.80% 6.30%
MAV 150 193 6.50% 7.50% 7.00% 6.80% 6.30%
Bus 400 515 6.50% 7.50% 7.00% 6.80% 6.30%
HCV 1500 1930 6.50% 7.50% 7.00% 6.80% 6.30%
Total PCUs 7375 9505
Toll Rate Assumptions

Vehicle Type Unit Rate (Rs./km)
As on 1-Apr-97 1-Apr-05
Cars 0.40 0.65
LCV 0.70 1.14
Multi Axle Vehicles 1.40 2.27
Bus 1.40 2.27
HCV 1.40 2.27
87
EPC COST 247.00
1-Oct- 1-Jan- 1-Apr- 1-Jul- 1-Oct- 1-Jan- 1-Apr- 1-Jul- 1-Oct- 1-Jan- 1-Apr-
Quarter Beginning 08 09 09 09 09 10 10 10 10 11 11
0.53% 5.03% 11.83% 16.65% 9.91% 11.50% 20.23% 19.49% 4.63% 0.21% 100.00%
Total Cost 1.30 12.43 29.23 41.11 24.47 28.40 49.96 48.15 11.44 0.51 247.00
Retention Money Repayment 0.00 0.00
Escalation 0.11 1.25 3.44 5.53 3.72 4.82 9.36 9.90 2.56 40.69
Contingency 0.03 0.25 0.58 0.82 0.49 0.57 1.00 0.96 0.23 0.01 4.94
Vehicles(Ambulance, crane, jeeps
etc) 0.2 0.20
Supervision Charges 0.00 0.39 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.14 1.79
Preliminary Expenses 0.86 0.44 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.35
Preoperative Expenses 0.04 0.05 0.06 0.05 0.05 0.05 0.05 0.06 0.06 0.02 0.49
Mobilisation Advance 0.00 0.00
Interest During Construction 0.00 0.00 0.00 0.48 1.28 1.98 2.95 4.22 5.15 5.54 21.60
System for Toll Plaza 1.00 1.00
Lenders Fee 1.69 1.69
Insurance
Charges 0.00 0.02 0.06 0.11 0.15 0.19 0.26 0.33 0.36 0.37 1.86
Total Project
Cost 3.92 13.68 31.40 46.19 32.16 35.09 59.22 63.27 27.32 10.35 322.60
Retention Money 0.00% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Adjustment of Mobilisation Advance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Balance Mobilisation Advance 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net Project Cost 3.92 13.68 31.40 46.19 32.16 35.09 59.22 63.27 27.32 10.35 322.60
Funds Drawdown Schedule

Total Equity 3.92 13.68 30.79 8.17 5.69 6.21 10.47 11.19 4.83 1.83
Loan Drawdown 27.23 18.96 20.69 34.91 37.30 16.11 6.10 161.30
Equity Initial Upto 50% 3.92 13.68 30.79 0.00 0.00 0.00 0.00 0.00 0.00 0.00 48.39
Equity Final 8.17 5.69 6.21 10.47 11.19 4.83 1.83 48.39
Grant Drawdown 0.61 10.79 7.51 8.20 13.83 14.78 6.38 2.42 64.52
Total Funds Drawdown 3.92 13.68 31.40 46.19 32.16 35.09 59.22 63.27 27.32 10.35 322.60
88
Projection of Average Daily Traffic Volume

Year Beginning 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15 1-Apr-16 1-Apr-17 1-Apr-18
Cars 947 1018 1094 1177 1265 1360 1462 1571
LCV 410 441 474 509 548 586 627 671
MultiAxle Vehicles 109 118 126 136 146 156 167 179
Bus 656 705 758 815 876 938 1003 1073
HCV 2187 2351 2527 2717 2921 3125 3344 3578
Total PCU's 10583 11377 12231 13148 14134 15130 16195 17336
Cars 780 838 901 969 1042 1120 1204 1294
LCV 219 235 253 272 292 313 334 358
MultiAxle Vehicles 164 176 190 204 219 234 251 268
Bus 437 470 505 543 584 625 669 716
HCV 1640 1763 1896 2038 2190 2344 2508 2683
Total PCU's 8079 8685 9336 10037 10789 11550 12364 13235
Total Traffic 18662 20062 21567 23184 24923 26679 28559 30572
1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27

1689 1816 1946 2087 2237 2398 2571 2745 2932
718 768 820 876 936 999 1067 1134 1206
191 205 219 234 250 266 285 303 322
1149 1229 1312 1402 1497 1599 1708 1815 1929
3828 4096 4375 4672 4990 5329 5692 6050 6432
18558 19865 21223 22674 24225 25881 27650 29405 31272

1391 1495 1603 1718 1842 1975 2117 2261 2415
383 410 437 467 499 533 569 605 643
287 307 328 350 374 400 427 454 482
766 819 875 934 998 1066 1138 1210 1286
2871 3072 3281 3504 3743 3997 4269 4538 4824
14168 15167 16204 17313 18497 19762 21114 22454 23880
32726 35032 37428 39987 42721 45643 48764 51860 55152
Projection of Toll Rates (in Rs.)

89
Year Beginning 1-Apr-07 1-Apr-08 1-Apr-09 1-Apr-10 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15
Cars ( 1 PCU) 34.43 36.58 38.87 41.30 43.88 46.62 49.54 52.63 55.92
LCV 60.26 64.02 68.02 72.28 76.79 81.59 86.69 92.11 97.87
MultiAxle Vehicles 120.51 128.05 136.05 144.55 153.59 163.18 173.38 184.22 195.73
Bus 120.51 128.05 136.05 144.55 153.59 163.18 173.38 184.22 195.73
HCV 120.51 128.05 136.05 144.55 153.59 163.18 173.38 184.22 195.73
Actual Toll Rates (in Rs.)
Year Beginning 1-Apr-07 1-Apr-08 1-Apr-09 1-Apr-10 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15
Cars ( 1 PCU) 35.00 35.00 40.00 40.00 45.00 45.00 50.00 55.00 55.00
LCV 60.00 65.00 70.00 70.00 75.00 80.00 85.00 90.00 100.00
MultiAxle Vehicles 120.00 130.00 135.00 145.00 155.00 165.00 175.00 185.00 195.00
Bus 120.00 130.00 135.00 145.00 155.00 165.00 175.00 185.00 195.00
HCV 120.00 130.00 135.00 145.00 155.00 165.00 175.00 185.00 195.00
1-Apr-16 1-Apr-17 1-Apr-18 1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27
59.42 63.13 67.08 71.27 75.73 80.46 85.49 90.83 96.51 102.54 108.95 115.76
103.98 110.48 117.39 124.72 132.52 140.80 149.60 158.95 168.89 179.44 190.66 202.57
207.97 220.97 234.78 249.45 265.04 281.61 299.21 317.91 337.77 358.89 381.32 405.15
207.97 220.97 234.78 249.45 265.04 281.61 299.21 317.91 337.77 358.89 381.32 405.15
207.97 220.97 234.78 249.45 265.04 281.61 299.21 317.91 337.77 358.89 381.32 405.15
1-Apr-16 1-Apr-17 1-Apr-18 1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27
60.00 65.00 65.00 70.00 75.00 80.00 85.00 90.00 95.00 105.00 110.00 115.00
105.00 110.00 115.00 125.00 135.00 140.00 150.00 160.00 170.00 180.00 190.00 205.00
210.00 220.00 235.00 250.00 265.00 280.00 300.00 320.00 340.00 360.00 380.00 405.00
210.00 220.00 235.00 250.00 265.00 280.00 300.00 320.00 340.00 360.00 380.00 405.00
210.00 220.00 235.00 250.00 265.00 280.00 300.00 320.00 340.00 360.00 380.00 405.00
90
Projection of Annual Toll Revenues (In Rs. cr.)
Cars 1.71 1.84 2.26 2.43 2.93 3.15 3.77 4.45
LCV 1.14 1.32 1.53 1.65 1.90 2.17 2.46 2.79
MultiAxle Vehicles 0.84 0.98 1.09 1.26 1.45 1.65 1.87 2.11
Bus 3.83 4.46 4.98 5.75 6.61 7.53 8.54 9.66
HCV 13.17 15.34 17.12 19.77 22.72 25.88 29.37 33.22
Total Toll Revenue 20.69 23.94 26.98 30.85 35.61 40.37 46.01 52.24

4.79 5.61 6.52 6.99 8.07 9.27 10.60 12.02 13.60
3.32 3.73 4.17 4.66 5.41 6.24 6.91 7.87 8.92
2.38 2.75 3.07 3.51 3.98 4.51 5.09 5.80 6.57
10.90 12.56 14.05 16.03 18.21 20.62 23.27 26.50 30.05
37.47 43.17 48.30 55.11 62.61 70.88 79.99 91.10 103.29
58.86 67.82 76.12 86.29 98.28 111.51 125.85 143.29 162.43
91
Net Toll Revenue 20.69 23.94 26.98 30.85 35.61 40.37 46.01 52.24
Less : O & M Expenses for initial 2 lane 3.23 3.43 3.64 3.87 4.11 28.51 4.64 4.93
Profit before Depn., Interest and Tax 17.46 20.51 23.34 26.99 31.50 11.87 41.37 47.31
Less : Book Depreciation @ 5.59% 18.03 18.03 18.03 18.03 18.03 18.03 18.03 18.03
: Interest on Rupee Debt 22.58 22.58 22.58 22.32 21.49 20.31 18.75 16.77
Profit before Tax -23.15 -20.10 -17.27 -13.36 -8.02 -26.47 4.59 12.51
Less : Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Profit after Tax -23.15 -20.10 -17.27 -13.36 -8.02 -26.47 4.59 12.51
Cumulative Profit After tax -23.15 -43.25 -60.52 -73.88 -81.90 -108.37 -103.77 -91.26
Dividend 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Dividend Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Retained Earnings -23.15 -20.10 -17.27 -13.36 -8.02 -26.47 4.59 12.51
Cumulative Retained Earnings -23.15 -43.25 -60.52 -73.88 -81.90 -108.37 -103.77 -91.26

58.86 67.82 76.12 86.29 98.28 111.51 125.85 143.29 162.43
5.24 5.57 38.60 6.28 6.68 7.09 7.54 8.01 8.51

53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 153.92
18.03 18.03 18.03 18.03 18.03 18.03 18.03 18.03 18.03
14.30 11.19 7.40 2.96 0.00 0.00 0.00 0.00 0.00
21.29 33.04 12.09 59.02 73.58 86.39 100.28 117.25 135.90

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 36.97
21.29 33.04 12.09 59.02 73.58 86.39 100.28 117.25 98.92
-69.97 -36.93 -24.84 34.18 107.76 194.15 294.44 411.69 510.61
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
21.29 33.04 12.09 59.02 73.58 86.39 100.28 117.25 98.92
-69.97 -36.93 -24.84 34.18 107.76 194.15 294.44 411.69 510.61
92
Year Beginning 1-Oct-08 1-Apr-09 1-Apr-10 1-Apr-11 1-Apr-12 1-Apr-13 1-Apr-14 1-Apr-15 1-Apr-16
Total outflow excl. IDC 17.60 141.11 142.29 0.00 0.00 0.00 0.00 0.00 0.00
Inflows
PBDIT 17.46 20.51 23.34 26.99 31.50 11.87
Less Tax 0.00 0.00 0.00 0.00 0.00 0.00
Net Inflow -17.60 -141.11 -142.29 17.46 20.51 23.34 26.99 31.50 11.87
Project IRR 11.25%

Cost of Capital 10.60%
1-Apr-17 1-Apr-18 1-Apr-19 1-Apr-20 1-Apr-21 1-Apr-22 1-Apr-23 1-Apr-24 1-Apr-25 1-Apr-26 1-Apr-27
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
41.37 47.31 53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 153.92
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 36.97
41.37 47.31 53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 116.95
93
Profit before Depn., Interest but after Tax 17.46 20.51 23.34 26.99 31.50 11.87 41.37 47.31
Add fresh inflows through unsecured loans 8.51 5.46 0.00 4.43 0.00 22.99 0.00 0.00
Sub-total 25.97 25.97 23.34 31.42 31.50 34.85 41.37 47.31
Interest Payment on first loan 22.58 22.58 22.58 22.32 21.49 20.31 18.75 16.77
Interest Payment on second loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Debt Repayment for first loan 0.00 0.00 0.00 5.00 7.50 10.00 13.00 16.00
Debt Repayment for second loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Sub-total for first loan 22.58 22.58 22.58 27.32 28.99 30.31 31.75 32.77
Sub-total for second loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Repayment 22.58 22.58 22.58 27.32 28.99 30.31 31.75 32.77
DSCR for the loan 1.15 1.15 1.03 1.15 1.09 1.15 1.30 1.44
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
53.62 62.26 37.52 80.01 91.61 104.42 118.31 135.28 116.95

0.00 0.00 6.07 0.00 0.00 0.00 0.00 0.00 0.00
53.62 62.26 43.59 80.01 91.61 104.42 118.31 135.28 116.95
14.30 11.19 7.40 2.96 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
20.50 25.00 30.50 33.80 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
34.80 36.19 37.90 36.76 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
34.80 36.19 37.90 36.76 0.00 0.00 0.00 0.00 0.00
1.54 1.72 1.15 2.18 n.a. n.a. n.a. n.a. n.a.

0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00
0.00 0.00 0.00 1.37 0.00 0.00 0.00 0.00 0.00
94
RESPONSE SHEETS
95
Thesis Response sheet
Response sheet number: 1 (one)
Thesis Topic: Financial Viability Analysis of the Road Sector Projects in India.
Date: 22/05/08
Name: Vijay Garodia

Batch: SS/ 06-08
Alumni Id: DS68-F181
Phone No: 9971619555
Email Id: vijaygarodia@gmail.com
Progress of the work : I have collected data that is required for my thesis but still
preparing the questionnaire. I have also met my guide to help me out for the same, as of
now I am sending the introduction of my thesis.
Introduction
annum.
96
Scope of thesis:-
An Overview of Indian Road Sector

Classification of Roads:
97
Indian Road Network

(*NHs are less than 2% but carry more than 40% of traffic)
National Highway Network

Trend in Road Traffic

Freight Passengers
1951 11 89 28 72
1961 28 72 42 58
1971 35 65 59 41
1991 53 47 79 21
2000 65 35 87 13
2015 80 20 92 8
(estimated)
98
Freight transport by road has risen from 6 billion tonne km (BTK) in 1951 to 400 BTK in
1995 and 800 BTK in 2001. Passenger traffic has risen from 23 billion-passenger km
(BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The annual growth of road traffic is
expected to be 9% to 10%. Current boom in the automobile sector may even increase the
future growth rate of road traffic. While the traffic has been growing at a fast pace, it
has not been possible to provide matching investment in the road sector, due to the
competing demands from other sectors, especially the social sectors, and this has led to a
large number of deficiencies in the network. Many sections of the highways are in need
of capacity augmentation, pavement strengthening, rehabilitation of bridges,
improvement of riding quality, provision of traffic safety measures, etc. There are
congested road sections passing through towns where bypasses are required. Many old
bridges are in need of rehabilitation/replacement along with capacity augmentation.
Deficiencies in Road Sector


State Highways 60,000 1,37,119 128%
Total 4,00,255 33,15,231 728%
lane.
movement.
99
Revenue from road transport and expenditure on roads

Economic losses due to poor conditions of roads

Comments from internal/external guide:
My thesis guide pointed out that some of the figures was not updated and were not the
latest ones. Thus I tried my best to get those updated and some are left, for which I am
still working and will be updated soon.
Signature of the external guide: Signature of the internal guide:
Signature of the Student:

Vijay Garodia
Response sheet number: 1 (one)
Date: 22/05/08
Name: Vijay Garodia

100
Batch: SS/ 06-08

Phone No: 9971619555
Progress of the work : I have collected data that is required for my thesis but still
preparing the questionnaire. I have also met my guide to help me out for the same, as of
now I am sending the introduction of my thesis.
Introduction
annum.
101

Scope of thesis:-
An Overview of Indian Road Sector

Classification of Roads:
Indian Road Network
102

(*NHs are less than 2% but carry more than 40% of traffic)
National Highway Network

Trend in Road Traffic

Freight Passengers
1951 11 89 28 72
1961 28 72 42 58
1971 35 65 59 41
1991 53 47 79 21
2000 65 35 87 13
2015 80 20 92 8
(estimated)
Freight transport by road has risen from 6 billion tonne km (BTK) in 1951 to 400 BTK in
1995 and 800 BTK in 2001. Passenger traffic has risen from 23 billion-passenger km
(BPK) to 1,500 BPK in 1995 and 3000 BPK in 2001. The annual growth of road traffic is
expected to be 9% to 10%. Current boom in the automobile sector may even increase the
future growth rate of road traffic. While the traffic has been growing at a fast pace, it
has not been possible to provide matching investment in the road sector, due to the
competing demands from other sectors, especially the social sectors, and this has led to a
large number of deficiencies in the network. Many sections of the highways are in need
103
of capacity augmentation, pavement strengthening, rehabilitation of bridges,

improvement of riding quality, provision of traffic safety measures, etc. There are
congested road sections passing through towns where bypasses are required. Many old
bridges are in need of rehabilitation/replacement along with capacity augmentation.
Deficiencies in Road Sector


State Highways 60,000 1,37,119 128%
Total 4,00,255 33,15,231 728%
lane.
movement.
Revenue from road transport and expenditure on roads

Economic losses due to poor conditions of roads

104
My thesis guide pointed out that some of the figures was not updated and were not the
latest ones. Thus I tried my best to get those updated and some are left, for which I am
still working and will be updated soon.

Vijay Garodia
Response sheet number: 2 (Two)
Date: 1/06/08
Name: Vijay Garodia

Batch: SS/ 06-08
Phone No: 9971619555
Progress of the work :

Research Methodology:
The research design which I have planned for my thesis will be of the following nature.
Research : Analytical & Exploratory.
Data Source : Secondary data.

105
Research approach : Survey method.
Research instrument : Personal interviews & Financial Model.
Type of questionnaire : Structured non-disguised.
Type of questions : Open ended.
I would be working on secondary data because of the fact that the various financial
aspects of the projects like the Projects Initial Investment, the Payment Pattern, duration
of the project, Project IRR, etc. have to be analysed to show the viability of such projects.
For this purpose I will have to indepth and exhaustive study of all the available secondary
data like journals, websites and other related documents.

The guide offered me a lot of support in the preparation of the above and showed me the
right path to be taken in-order to carry out my analysis.

Vijay Garodia
Response sheet number: 3rd (Third)
Date: 05/06/08
Name: Vijay Garodia

Batch: SS/ 06-08
Phone No: 9971619555

Opportunities exist in- Highway construction.
Widening of about 38 percent of National highway from single to double lanes.
Strengthening of about 60 percent of the two lane roads.
Highway related on route activities like restaurants, motels and rest/parking areas as may
be decided by the Implementing Agency.
106
Findings- Private sector is still reluctant to invest in the infrastructure projects because
of the high risk of traffic volume and long gestation period.
Government departments have abundant technical expertise but there is a lack in financial
management. Infrastructure financing is in its recent stage, only few projects have been
completed under these implementing models, the agreements or documents related to
these have not been scrutinized in the court of law or no judgements have been passed
yet.
Limited foreign funding in infrastructure projects.
Comments from internal/external guide: I have shown the above work to my

external guide and she has given her approval for the same.

Vijay Garodia

Response sheet number: 4th (Fourth)
Date: 6/06/08
Name: Vijay Garodia
Batch: SS/ 06-08
Phone No: 9971619555
Progress of the work : Structure of the thesis:

Introduction- Study Background, Scope, Limitations.
An Overview of Indian Road Sector.
Classification of Roads, National Highway Network, Trend in Road Traffic.
Deficiencies in the Road Sector

107
Economic losses due to poor conditions of roads, The dwindling Public Sector
Outlay on Transport, Agencies involved in Road Sector Development in India,
Road Development Plans, Current status.
Trends in Road Sector Financing- Traditional Financing Mechanism,
Budgetary Allocations, Central Road Fund, Foreign Aid to Road Sector, Private
Sector Participation, Government of India initiatives,
Implementation Models- BOT (Toll Based), BOT (Annuity), Govt. owned SPV,
MOU (Negotiated Deal).
Critical Issues Private Sector Road Financing.
Stages in development of Road Sector Projects, Financial Structuring of BOT

Road Projects.
Opportunities & Findings.
Recommendations/Suggestions & Conclusion The Middle Path.
Financial Viability Analysis.
Sensitivity Analysis, Details of some of the successfully undertaken projects.

Bibliography.

Vijay Garodia
108
Response sheet number: 5th (Fifth)
Date: 09/06/08
Name: Vijay Garodia
Batch: SS/ 06-08
Phone No: 9971619555

Recommendations / Suggestions
Government should try to remove the bottlenecks in the financing of infrastructure
projects and ease the legal procedures by single window clearances for the projects, like
environmental clearances, land acquisition problems etc.
Government should try to provide as many incentives as it can like tax incentives and
concessions, etc. and also need to develop innovative mechanisms for private sector
participation like securitization, annuity model, assured returns etc.
Conclusion The Middle Path
The country is poised to take up infrastructure projects comprising huge road network of
expressway standard and other similar roads. Adoption of private financing for such
projects is an almost inevitable course of action. However, building up of conducive
environment for private participation should also be task on hand. In the intervening
period, the execution of such projects through the medium of Government corporations
acting as BOT entrepreneurs seems to be the most appropriate option, this can be termed
as the contemporary middle path. As most infrastructure projects have long gestation
periods, entirely different set of investors may be associated with the project during their
development, construction and operation phases depending on their risk appetite.

Vijay Garodia

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Financial Viability Analysis of the Road Sector

UNDER THE GUIDANC

PREPARED AND SUBMITTED BY

Further Private participation is crucial to meet the investment goal in infrastructure

Chapter II: An Overview of Indian Road Sector. 3

Chapter III: Trends in Road Sector Financing. 16

Chapter IV: Critical Issues Private Sector Road Financing. 37

Chapter V: Lessons from International Experience. 65

Chapter VI: The Way Forward Opportunities for PSP in 73

optimum utilization of available resources, challenges to domestic contracting industry to

2. An Overview of Indian Road Sector

Indian Road Network

Total Length 33,15,231

2.2 National Highway Network

2.3 Trend in Road Traffic

Traffic Movement in Bar Chart

2.4 Deficiencies in Road Sector

Category 1951 2007 % Change

2.5 Revenue from road transport and expenditure on roads

2.6 Economic losses due to poor conditions of roads

2.7 The dwindling Public Sector Outlay on Transport

Ninth & Tenth Five Year Plan:

2.8 Agencies involved in Road Sector Development in India

NHAI (National Highways Authority of India)

CRRI (Central Road Research Institute)

IRCC (Indian Road Construction Corporation Limited)

NITHE (National Institute of Training For Highways Engineers)

IABSE (Indian National Group of the International Association for

Public Works Department (PWD):

construction of National Highways as an agent of Government of India is the

2.9 Road Development Plans

National Highway Development Plan: For augmenting the capacity of National

National Highways Development Project (NHDP)

2.10 Current Status

Research : Analytical & Exploratory.

Data Source : Secondary data.

Research approach : Survey method.

Research instrument : Personal interviews & Financial Model.

Type of questionnaire : Structured non-disguised.

Type of questions : Open ended.

3. Trends in Road Sector Financing

3.1.4 Foreign Aid to Road Sectors:

India: Third National Highways Project

2. India: Gujarat State Highway Project

3. India: Karnataka State Highways Improvement Project

PROJECT DESCRIPTION: This project will finance road widening and

4. India: Grand Trunk Road Improvement Project

India: Kerala State Transport Project Loan

India: Mizoram State Roads Project

CREDIT AMOUNT: IDA- US $ 60 million

3.1.4.3 Asian Development Bank Aided Projects:

1. Loan No. 918-IND: Road Improvement Project

2. Loan No. 1041-IND: Second Road Improvement

3. Loan No. 1274-IND: National Highways Project

4. Loan No. 1279-IND: Bombay-Vadodara Expressway Technical Assistance

5. Loan No. 1747-IND: Surat-Manor Tollway Project

6. Loan No. 1839-IND: Western Transport Corridor Project

7. Loan no. 1870-IND: West Bengal Corridor Development Project

3.1.4.4 OECF/JIBC Aided Projects:

Date of Amount of Interest Repayment Grace

National Highway-5 11,360 2.6% 30 years 10 years

National Highway-24 28 Feb 1995 4,827 2.6% 30 years 10 years

National Highway-5 28 Feb 1995 5,836 2.6% 30 years 10 years