Bids invited for road project in Chhattisgarh

November 9, 2010

The NHAI proposes to develop a highway in Chhattisgarh on BOT (Toll) basis under DBFOT pattern under NHDP Phase IV.

The Authority has invited bids for four-laning of Orissa Border-Aurang section from Km 88/000 to Km 239/000 of NH-6. The road having a length of 150 km is to cost Rs 1,260 crore. The bids have to be submitted by 7 December 2010.

Written by ITW Editor · Filed Under BOT, NHAI, NHDP

Now that the Toll Industry has had a few years of maturity. What is the summary of expections from Toll Collection System from a concessionaire’s point of view.

May 10, 2010

(This needs an in-depth analysis on broad parameters. However I have tried to analyze few problems associated with toll roads.)

M S V Ramu
Profession – Contract Manager
Date: May 4, 2010
E-mail: [email protected]

Introduction: with a need a build good infrastructure and lack funds available to finance these Highway project government has undertaken to built highway on Public Private Partnership either toll based or annuity based.
The private developers who bids and undertake constructions of Highway on toll basis needs to implement a through pertinent “risk” management system with the help of the government to mitigate all the risks that come with development.

To understand the various consequence of “tolled” roads there needs to through study to undertaken which is not my purview at the moment. Hence I dwell over some of these consequences based my exposer these projects.

Toll based Highways:
The idea of “Toll based” highways was imported into India from experiences of others countries like Europe, Malaysia or North America. The model “Concession Agreement” was drafted by the Government to suit India needs.

The toll categories of roads are those wherein there are sufficient traffic which can be tolled by the Concessionaire and recoup the investment made him and also make profit. In the event there are not enough tollable traffic to recoup the investment made, it will be offered on annuity basis or with VGP (Viability gap funding) by the government.

The tolled based roads wherein the Government grants private developer specific rights to design, finance, construct operate and maintain the roads. The developer called “Concessionaire” develops covers the investment costs and carry commercial risks since he relays on operation revenue from the tolls remunerated. At the end of the concessional period the road reverted back to government at no extra charges. However if the estimated revenue does not materialize during Concession period the Concessionaire may have to negotiate the concession period (as in other countries) which is yet to happen in India as we are just starting!

In south America there is method of bidding known as “Least Present Value” wherein the winning bidder is the one who asks for “smallest Net Present Value” and period of the concession period ends when the present value of revenue equal to winning bid. This model has not been tried in India.

Risk management in “Toll based” Concession

In the present circumstances the Concessionaire undertakes risks to constructs road which is generally divides normally into three parts:

Certainty – decision maker know exactly the outcome
Uncertainty – here the decision maker does not know the risks due to non availability of any data
Risks – are those which can be determined by statistical terms and can be analyzed but it differs from uncertainty

In risk management all the risks are quantified and analyzed and decision taken by the Concessionaire to mitigate the same by way of disciplined approach to critical situation

Developmental risk involves “Land Acquisitions” needed for the project. This is one of the biggest risk faced by the Indian developers as most of the times project gets delayed due non-availability of Land. NHAI does not meet the contractual requirements specified in the Concession agreement thereby causing unnecessary hardship to concessionaire. This risk falls under “uncertainty” which can not be quantified

Financial Risk: Soon after award of Project, the Concessionaire needs to raise the necessary capital required for execution project

There are two major risks involved:

Ability to raise the finance and make financial close as required by the Concession agreement.
High interest rate during the currency of concession period (due to floating interest charged by lenders) – mitigation of this risk in extremely important).

Construction risks

Whether the construction undertaken by the Concessionaire himself or by other contractor there are many risk involved

Poor performance of the contractor
Different site condition which normally experience contractor many not have thought off which is problematic and end up in high cost due additional items of work to be executed.
High price escalation of all the inputs of construction – Example: steel pricing going through roof last year.

All above risk has to be born by the Concessionaire which needs proper approach in the initial stages itself

Operational risks

Operation risk involves mainly the following

State support agreement – needs to signed by the concerned state and they shall support the collection of tolls which important to the concessionaire. NHAI who are promoters of the project should take full responsibility in getting the agreement signed with Concessionaire as Concessionaire can not exert any pressure on the states

Toll Level: the estimated toll level uncertainty during pre-bidding stages can lead to inaccuracies in revenue estimation which the Concessionaire has based his bid. Hence this risk needs to shared by the NHAI

The traffic volume projected in financial model may not materialize as it completely depends on economic growth projected during pre-bidding stage

Any fall in traffic volume will automatically bring down the IRR value projected. Expert estimate that 10% drop in volume of traffic will result in reduction of 1-7% – 1.9% percent reduction in IRR.

Toll collection
The Concession agreement does give any standard specification for the installation of tolling equipment. This has resulted in haphazard manner the tolling equipment being installed by the different Concessionaire. This needs to change. For example a RFID card issued at New Delhi should also hold good down south. By such an arrangement the road user can travel effortlessly any ware in India.

The technology used by the Concessionaire needs to be streamlined on all India basis for all Concessionaire.

Toll fee: The price escalation of “toll/Fee” charged by the Concessionaire is based on all India WPI index. This is incorrect as in some states it may be very high. In my opinion there should be “Toll Regulator” on all India basis to regulate toll based on each state WPI or any other base model

HTMS: Here there is no comprehensive approach. For example the “variable message system” is limited to one project length only! This also needs an all India approach.

Suggestion: at the moment there are so many “Toll” based road are in operation and also on the horizon. All the toll based roads owners are “Special purposed vehicle” promoted by the concessionaire.

So why not a “over the counter” stock listing be arranged of these SPV and listed in Stock exchanges which can also traded in F&O section. I am sure this arrangement will automatically will mitigate many risks and also give scope for improvement in roads as the Concessionaire would like increase the traffic by enhancing the many amenities for road users.

Thanks for taking time for reading this articles.

Written by ITW Editor · Filed Under BOT, Construction, Expressway, Highway, Infrastructure, Investment and Finance, NHAI, NHDP, Projects, Tolling

Indian government has finally realized the importance of road sector

April 26, 2010

Huge opportunities are unfolding in the Indian road sector. This means most Indian infrastructure and construction companies will benefit from the announcement of new orders or projects in the long run.

Also, a large number of these projects are on Build Operate and Transfer (BOT) and annuity basis, which means the companies will have a steady flow of cash through annuity or toll. This development spells good news for investors who can make full use of this golden chance and earn high returns in the long run.

WHY NOW?

The question that may cross your mind is why now? Ever since Kamal Nath took over as the Union minister for roads and transport, the Indian road segment has taken a new turn. He created various milestones since he was given this portfolio.

The most important announcement he made was the construction of the national highway at the rate of 20 km per day to expedite the achievement of National Highway Development Programme (NHDP) targets. This is significantly higher than the current execution rate of about 6 km per day. The ministry has also been working towards faster clearances related to procedures, land acquisitions and other formalities.

CREATION OF FUNDING

Kamal Nath is aware of the fact that improved road network in the country would not just lead to better connectivity but would also lead to increased energy efficiency in transport operations. He also travelled across different countries on road shows to international investors to highlight opportunities and potential in the Indian road sector.

Through these measures, the government has and will be able to rope in huge investments needed for the sector from international and national long-term investors.

Earlier it was difficult to raise money for more than five years or so as money was available only for a short period. However, now that the corporate debt market is developing, long-term investors like pension funds, mutual fund houses, insurance companies and even banks are coming forward to provide long-term capital. Most road projects, particularly the BOT ones need huge long-term investments in the form of debt and equity to fund them.

INCREASING VIABILITY

In terms of the less viable projects, the government increased the viability gap funding (VGF) or grant to 40% from 25%. Formerly, the grant used to be given after the completion of the project. But now it is handed over at the beginning of the project. In this manner the construction of the project does not get delayed for want of funds.

The government is also working on creating innovative ways of structuring non-viable projects like allotment of land, which can be monetized by developers so that the returns on investments are reasonable.

Other aspects like increasing the role of private players through public private partnership (PPP) and awarding of projects on BOT basis would mean that private players now have a bigger role to play in the construction of viable road projects.

A LONG WAY TO GO

India currently has about 33 lakh km of road network spread across the country. This is the third largest network in the world. But, in terms of density and quality of roads, India still lags behind many developed and developing countries of the world.

In relation to our population, the country’s roads are about 3 km per 1,000 persons, which is significantly lower than the world average of about 7 km per person. In terms of quality, about 80% of our roads are in a poor condition and require huge investments for repair, renovation and increase in the number of lines.

Majority of India’s roads are single line in spite of increasing traffic and congestion. Even the conditions of our existing roads are so bad that India’s logistical cost as a percentage of total production cost is considered to be about twice the world average of 7%.

No wonder due to the poor road infrastructure, India is ranked 87th in the world on the basis of quality of roads, which is very low and considered to be the biggest hindrance for economic growth as envisaged by the government for the coming years.

Surprisingly, within this vast network of roads, only about 2% is accounted for by national highways and a very minuscule part is accounted for by express highways, which is very critical considering that about 40% of the total road traffic is handled by national highways.

The slow transportation of goods has also affected the movement of goods among states, delaying exports and imports of the country. Especially, in the case of transportation of perishable goods like milk, vegetables and flowers among other things, which are procured from the hinterland takes so much time that they become stale or get destroyed before they can actually reach the end consumer and the export market.

This leads to wastage of goods due to the delay in reaching the markets. Express road connectivity to the main ports of the country and to major cities is very important to improve trade volumes and discover better prices for farm goods.

WHAT IS CHANGING?

The government has realized the importance of better roads in the country so that it can support the growth of the economy in the coming years. Roads are critical for any economy, especially a growing economy like India with a large population and different topographies.

The role of roads is of paramount importance for commercial and economic activities in the country. In India, passenger traffic is growing at about 12% per annum, while cargo traffic is growing over 15%, which will continue to rise as economic activities improve along with the increase in foreign trade.

India’s foreign trade is growing at 10-12 % and there is an immediate need to connect all the major ports of the country. The government has taken the first step in this direction. Under the NHDP (phase II), the government will connect major ports and build freight corridors, which will connect many states from the eastern part of India to western India.

In phase III of the NHDP, all major capitals will be connected with highways. Also major cities and points that could not be connected in phase II will be connected with better road infrastructure. Besides, plans are afoot to improve and connect rural India to major cities of the country soon.

EASING HURDLES

Most of these plans are not just on paper. In fact the government has already awarded projects to achieve this goal. The government formed the BK Chaturvedi Committee, which presented its findings and suggestions to make progress in the sector.

Based on the findings of the committee report, several changes have been incorporated and more importantly, the government is seriously working on the recommendations, which are quite innovative and provide solutions to various problems that the companies have been facing.

Changes have been incorporated with regard to land acquisition, which is the biggest problem for construction of roads in the country.

Now, NHAI will work along with the state governments for facilitating land acquisition and all state governments have been directed to coordinate for the same. NHAI now awards road projects only after 80% of the land has been acquired.

FEW SPEED BREAKERS

Tackling delays in approvals, decision-making, faster resolution of disputes and coordination among different departments are few other highlights of the recommendations of the committee report.

Essentially, most of the changes are already in effect and new orders are awarded to interested parties. The flow of new road orders in the last few months was the highest in the last several years. This itself speaks volumes about the commitment of the government and its intention to put things on ground.

Also, the projects which were not viable and did not attract private participation were given extra focus and restructured within time frame along with consultations of private players while changing the terms and conditions of the project. There are other measures also which have attracted private participation in road projects.

Large projects will be built on a BOT basis, which are expected to have a higher return of about 18% to 20% on investments as compared to 14% to 16% earlier. Additionally, the new guidelines that have been framed are such that once a project is awarded for a particular road, the private player is given an assurance that there will not be any competition or construction of road, which will make sure that the cash flow in terms of the collection of the toll is protected.

What is more remarkable is that the government now has experts as representatives from development agencies like the World Bank, the Asian Development Bank, who make sure that the projects are not delayed and hurdles are resolved.

These representatives keep track of projects and act as a liaison between government agencies and private parties. They also bring their experience to structure the project in such a manner that it gets executed.

QUANTUM OF OPPORTUNITY

There are different estimates about the size of the opportunity. But there is little or no doubt that the opportunity is far bigger than what it used to be a few years ago.

When we talk about 20 km per day of the construction of roads, this in itself is self-explanatory. This means that the country will have to build about 7,300 km of roads every year. This is significant as the current run rate is just about 2,500-3,000 km of roads built every year.

One could also imagine the kind of work that will now flow. For the eleventh five year plan which will end in 2012-13, about Rs 3.14 trillion will be invested as compared to Rs 1.45 trillion invested in the tenth five year plan. This is still the tip of the iceberg. India’s investment in the roads segment is expected to be in the range of Rs 10.5-11 trillion over the next decade.

In the near term, about 5,000 km of new expressways will be built and the projects will be awarded for the same. Also, NHAI has plans to award work for about 37,000 km of roads over the next three years.

Besides, under the NHDP’s different phases, the government will award work relating to the upgradation of about 55,000 km of roads over the next 8-10 years.

WHO WILL BENEFIT?

Most construction and infrastructure companies are focusing on this particular segment and their exposure has gone up in the recent past. IRB Infrastructure and IL&FS Transport Network (ITNL) are popular in the roads segment having the highest exposure to the road segment. In the case of IL&FS, the company has recently come out with an IPO and was listed recently.

ITNL is amongst the largest private sector BOT road operators in the country having integrated business model providing service for projects, from conceptualization, construction to operating and maintenance of the road projects. The company has already bagged about 19 road projects.

Apart from roads, the company is also looking for opportunities in airport segments and plans to bid for more projects in this segment. The company’s advantage is its large portfolio of BOT assets and a long experience in the sector. The company has presence across different parts of the country and has about 9,397 lane km of road projects under its belt.

IRB Infra too is a leading player in the roads segment generating almost 100% of its revenue from this segment. The well-known Mumbai-Pune highway, one of its kind in India, is operated by IRB Infra.

The company has an integrated business model having large experience in toll roads and highways sector. The company has about 1,100 km of road projects in its kitty, which is the second largest among private players in the whole of India.

As opportunities are growing, the company should be able to procure more projects and increase its current portfolio. The company will not only benefit on account of the construction of these projects but also due to the collection of toll and annuity from these projects, providing stable future cash flow.

Also most of its projects are strategically located in major traffic areas like Mumbai-Pune, Mumbai-Surat, etc. The company also won projects in other states like Rajasthan and Punjab and is gradually focusing on becoming a pan-India player in the road segment.

Source: stockmarketsreview.com

Written by ITW Editor · Filed Under BOT, Construction, Expressway, Highway, Infrastructure, NHAI, NHDP, Tolling

Infrastructure sector set to receive

April 26, 2010

More bank credit will soon flow to build infrastructure in the country with the Reserve Bank of India (RBI) on Tuesday reducing the level of provision against substandard loans to the sector from 20 per cent to 15 per cent.

The central bank’s decision to treat annuities and toll collection rights under build-operate-transfer (BOT) road and highway projects as tangible securities has also come as a major relief to infrastructure companies.

Banks and institutional lenders said the move on provisioning would enable lenders to loosen their purse strings for the infrastructure sector where long gestation projects often end up with issues that are beyond the control of both the lender and the borrower.

“There are many uncertainties in the infrastructure sector. Often there are delays due to reasons such as obtaining environment clearances and delay in equipment supplies that lead to assets becoming substandard. The RBI move will definitely encourage banks to go ahead and provide more advances to the infrastructure sector since it will provide a comfort factor,” SS Kohli, chairman and managing director of India Infrastructure Finance Company (IIFCL), the government’s flagship infrastructure finance company, told Financial Chronicle.

SBI chairman O P Bhatt said the announcement on infrastructure lending would help banks to finance such projects. “The treatment of annuities as tangible securities under BOT scheme will help attract private equity and give a boost to infrastructure sector,” he added.

UCO Bank chairman and managing director SK Goel echoed the view. “RBI move will reduce the burden of banks since loans to infrastructure projects often become substandard due to technical reasons. With only 15 per cent provisioning requirement, banks will be encouraged to lend more,” he said.

CMD of Bank of Maharashtra (BoM), Allen C A Pereira, said banks have been raising concerns over project delays and asset-liability mismatches in their infrastructure portfolio.

“Infrastructure projects are long gestation projects and several times things do not work out the way it was originally planned. Therefore, there was a strong case for easier provisioning norms for substandard assets. The RBI move is to ensure that banks do not suffer,” Tourism Finance Corporation of India CMD Archana Capoor said.

According to the planning commission, projected investment in infrastructure such as ports, airports, railways, power, irrigation, water supply and sanitation during the 11th plan (2007-11) is Rs 20,54,205 crore. The huge demand for funds can be gauged from the fact that the road ministry alone plans to award projects to build around 18,000 km during this financial year worth more than Rs 1,50,000 crore. Of this, 65 per cent of projects would be on BoT toll basis, 20 per cent on annuity and remaining 15 per cent on engineering, procurement and construction (EPC) model.

However, bankers said the RBI move was not to make banks meet their overall credit growth target when of offtake to sectors such as real estate has slumped. “These issues are not linked. The slowdown in overall lending and to the housing sector may be due to other reasons. Housing loan borrowers may be adopting a wait-and-watch approach,” Pereira of BoM said.

UCO Bank’s Goel agreed: “This is purely to encourage flow of funds to infrastructure sector. Overall credit growth and trends for specific sectors cannot be linked.”

Meanwhile, infrastructure companies have welcomed the decision to treat annuities and toll collection rights under BOT projects as tangible securities, saying the decision would give private road developers easier access to funds at lower interest rates.

At present, in BOT road projects, there is nothing that can be considered as tangible asset. This is because the concessionaire has to transfer the land either to the National Highways Authority of India (NHAI) or the state government after about 30 years of the agreement. Toll collection is also uncertain and therefore treated as an intangible asset. This makes it difficult for developers to obtain loans under the secured category.

“Now that the RBI has allowed annuity and toll collection rights as tangible securities, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, it will make banks pro-active to lend to the sector,” Issac A George, chief financial officer of GVK Power and Infrastructure, said.

In its credit policy, RBI said annuity and toll collection rights should be treated as tangible securities subject to the condition that banks’ right to receive them is legally enforceable and irrevocable.

“Most banks offer loans to road developers under secured categories. However, there are lots of provisions and agreements that the parties work out among themselves. The developers also pay a higher interest rate of up to one and a half per cent for unsecured loans. The RBI announcement will help developers to save the additional interest cost and avoid legal troubles,” said Vishwas Udgirkar, an executive director at PricewaterhouseCoopers.

The move is also expected to lower the cost of road projects. “The RBI move to treat annuities and toll collection rights as tangible securities will create a healthy market for securitisation of toll portfolio, thereby reducing the cost of road projects after construction,” said Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance.

Source: mydigitalfc.com

Written by ITW Editor · Filed Under BOT, Highway, NHAI, NHDP, Tolling

TEXT-Fitch affirms SNBTPL ‘s bank loans at BBB-(ind)

April 19, 2010

April 16 – Fitch Ratings has today affirmed SEW-Navayuga Barwani Tollways Pvt Ltd.’s (SNBTPL) senior long-term project bank loans aggregating INR5,474m at ‘BBB-(ind)’, and subordinated bank loans of INR300m at ‘BB+(ind)’. The Outlook is Stable.

SNBTPL enjoys an 18-year concession from National Highways Authority of India [NHAI.UL] (NHAI, ‘AAA(ind)’/Stable) to design, engineer, build, finance, construct, operate and maintain on a Build, Operate and Transfer (BOT) basis an 82.8km road stretch on the National Highway 3 (NH-3) in the state of Madhya Pradesh. The estimated cost of the project is INR7.9bn, with the scheduled commercial operations date (COD) in May 2011.

The affirmations follow SNBTPL’s reasonable progress over the last year in achieving different project milestones during the critical construction phase. Fitch does note however that the company is slightly behind plans. The entire right of way (ROW) required for the project is reportedly in the company’s possession, with the exception of a three-km stretch of forest land; however, first-stage approvals have been received from the forest department.

As of March 2010, the project has received equity infusions (61.3%), and has been drawing down on term loans – 58% of senior debt and 57% of sub-debt – as per schedule.

The ratings are constrained by the residual completion risk, although a fixed-price construction contract with SEW, whose terms mirror those in the concession, offer protection. Base-case debt service coverage metrics are extremely modest and vulnerable to various deep stress tests Fitch performed. A three-year tail in the concession allows the banks to restructure the loans, if necessary. Some liquidity support is available in the form of a fully-funded debt service reserve account (DSRA), equivalent to three months’ principal and interest payment.

Fitch has factored into its rating the operational track record and financial strengths of the sponsors. This includes the credit enhancement value of their undertaking to finance the cost and time overruns, to replenish the senior and subordinated DSRA and to provide unconditional and irrevocable bank guarantees if event project cash flows are inadequate to create the DSRA. Additionally, SEW has executed a letter of undertaking to the senior to infuse INR100m, after the COD, to augment debt payment capacity and to inject additional funds in case operations and maintenance expenses exceed the base case projections submitted to the banks.

The agency believes that the road has long-term economic potential, and that its locational advantage should have a beneficial impact on tollable traffic. Also, it is situated on the highway that represents the shortest distance between Mumbai and Agra.

SNBTPL is a 74:26 JV between SEW infrastructure Ltd (SEW, ‘AA-(ind)’ / Stable) and Navayuga Engineering Constructions Ltd (NECL). Following inter-se adjustments among the sponsors, SEW has increased its equity stake in the project to 74% from the 51%, resulting in a reduction in NECL’s holding to 26%.

Applicable Criteria available on Fitch’s website at www.fitchratings.com: “Rating Criteria for Infrastructure and Project Finance”, dated September 29, 2009.

Source: in.reuters.com

Written by ITW Editor · Filed Under BOT, Construction, Expressway, Highway, Infrastructure, Investment and Finance, NHAI, NHDP, Projects

GMR consortium wins Hungund-Hospet highway project

February 15, 2010

The consortium of GMR Infrastructure (Q,N,C,F) and Oriental Structural Engineers (OSE) has won the prestigious Hungund-Hospet highway project on a build, operate and transfer (BoT) basis through the international competitive bidding route.

GMR Group will hold 51% equity in the consortium and 49% will be held by OSE. The consortium received the Letter of Award from National Highways Authority of India (NHAI) on Feb. 08, 2010. This is ninth highway project of GMR Group after successfully completing six projects as per schedule. Two projects measuring 211 kms are currently under development.

The project measuring 99 kms on NH-13 with an estimated project cost of Rs 17 billion entails designing, engineering, finance, procurement, construction, operation and maintenance of four laning of the Hungund Hospet section in the state of Karnataka. This will ease traffic congestion and provide a tremendous boost to trade and commerce in the state. Apart from reduction in travel time, this development is expected to improve safety levels for travelers since it will be built to world-class specifications.

Several national and international consortia participated in this bidding process in which GMR Group-OSE Consortium was adjudged as the preferred bidder. The project will be implemented through a special purpose vehicle (SPV) set up by the Group which will be signing the concession agreement with the NHAI for a period of 19 years. All activities leading to the concession agreement signing have been initiated.

Commenting on the significance of the project, Srinivas Bommidala-business chairman (Urban Infrastructure and Highways) of GMR Group said, “The project is of strategic importance to us since it provides vital link in the movement of major industrial and tourist traffic across Karnataka. We are delighted to be a part of this development and are keen on ensuring that the project caters to the needs of multiple stakeholders.“

GMR Group had entered the highways business in 2001 by winning two projects with benchmark annuity offer. It has even received an early completion bonus from the NHAI for completing the Tambaram-Tindivanam project in Tamilnadu ahead of schedule. Today, the group has a balanced portfolio of four annuity and four toll projects (toll operations for three projects have already commenced) totaling 630 kms across the length and breadth of the country. All six projects have been completed as per schedule and two are currently under developmental stage.

Shares of GMR Infrastructure declined Rs 0.5, or 0.89%, to trade at Rs 55.55. The total volume of shares traded was 845,260 at the BSE (1.29 p.m., Tuesday).

Source: myiris.com

Written by ITW Editor · Filed Under BOT, GMR, Highway, NHAI, NHDP, Projects

Backward-bending policy to take toll

January 5, 2010

The B K Chaturvedi committee has suggested ways for expeditious financing and implementation of the National Highways Development Project (NHDP). It has rectified problematic rules concerning the exit policy, bid security, security to lenders, request for qualifications (RfQ) and request for proposal (RfP). These belated measures will surely make highway projects more attractive for investors.

However, some other recommendations bear unmistakable signs of fear psychosis, perhaps caused by the reduced private investment in highways during 2008-09. The decline was largely due to two reasons: the detrimental and mid-course changes made in RfQ and RfP rules, and the economic downturn. But in a typical panic-driven response, the committee has confused symptoms with the causes. Thus, it has introduced some questionable changes in the model concession agreement (MCA) for tolled projects. Conversely, several crucial issues have been ignored.

To put arguments in perspective, recall the pre-August 2008 scenario: 9%-plus growth rate, upbeat credit and financial markets, and bullish investors scrambling for projects to invest in. During 2006-07, more than 60 highway projects attracted private investment. In fact, there was a shortage of well-structured projects on offer.

The extant rules regarding the viability gap funding (VGF) and termination of contract posed no threat to the attractiveness of highway projects. Yet, the committee has targeted these rules to implement investors’ wishlist. Under a BOT-toll contract, an investor is granted the right to charge toll from users.

There are two main justifications for this concession: investors provide upfront funding for projects, alleviating the taxpayers’ burden, and bear the construction, maintenance and commercial risks. VGF grant is provided to make a socially-desirable but unprofitable project attractive for an investor. The underlying objective is not, and should not be, to add to the upfront financing — that is for the private sector to do. Limited funds are available for VGF. The MCA rules allow VGF up to 40% of the project cost; 20% during construction phase and the rest during maintenance phase.

In contrast, the committee has offered the entire grant during construction phase itself, and has reduced
it to a mere cost-sharing device. Further, compared to what would have been possible under the earlier rules, now the grant requirement of fewer projects will be met with. So, at least in the short run, fewer grant-dependent projects will take off.

Besides, an investor can borrow 20% of project cost at concessional rates from the IIFCL, a public sector company. Indeed, excluding the profit margins, an investor can meet up to 70% of cost just using grants and other funds raised by public sector entities. Simply put, what was to be the investor’s responsibility has been passed on to the taxpayer, undermining the rationale of VGF as well as toll contracts. Moreover, an investor is reimbursed 90% of due debt if the contract gets terminated. So, the new rules are likely to create moral hazards during construction phase and later.

Under MCA rules, if actual traffic turns out to be less (greater) than predictions, the concession period is increased (reduced) proportionately. If traffic increases beyond the designed capacity, to avoid congestion, the concessionaire is required to widen the road at his cost. These rules imply that road users get satisfactory service, and the investor and the taxpayer share the unanticipated losses (gains) arising from traffic-risk. In contrast, under the new rules, if the government asks for capacity expansion on account of high traffic, it will have to compensate the investor. Moreover, the contract period cannot be reduced. So, the event of traffic exceeding the designed capacity has become lucrative for the investor. It would ensure them unexpectedly high profit.

Source: economictimes

Written by ITW Editor · Filed Under Highway, NHAI, NHDP, Projects

By 2022, govt to lay 18,637km of expressways

December 3, 2009

NEW DELHI: The government has drawn up an ambitious target to lay 18,637km network of brand new expressways by 2022. These high-speed, access-controlled roads will be of the four-lane and six-lane variety with 3,530 km to come up in the next three years.

The highways ministry is ready with a Master Plan for the National Expressway Network. The new target of expressway length was projected after receiving observations from 11 states including Madhya Pradesh, Bihar, Gujarat, Karnataka and Uttar Pradesh. Earlier, the final draft report prepared by the highways ministry had proposed to develop 17,661 km of expressway network.

The expressways network will not be an upgraded national highway network but will be developed entirely as greenfield projects. These will preferably be built with three-metre high embankments and will have service roads along the stretches where there is a need. Officials said there was an urgent need to develop expressways network as road transport would remain the mainstay for sustaining the economic momentum of the country.

“The existing arterial network cannot meet the latent and the emerging demands for connectivity and accessibility while ensuring the desired level of safety,” said a senior ministry official.

As per estimates, the construction cost per km would be Rs 14 crore in case of 4-lane and Rs 20 crore in case of 6-lane expressways excluding land acquisition and other expenses. A recent presentation made before the top brass of National Highways Authority of India (NHAI) and the ministry also mentioned that while majority of identified stretches would be built on build-operate-transfer (BOT) mode, stretches which were unviable could be developed on annuity basis.

The Master Plan document has also phased the expressway development programme for 2012, 2017 and 2022 and this has been done on the basis of financial viability, relative traffic intensity along various corridor segments, network comprehensiveness, connectivity warrants and relative economic potential of each proposed project.

The ministry is already in the process of preparing a draft for creation of a National Expressways Authority of India (NEAI) on the lines of NHAI and the highway regulator has also got an exclusive wing for the expressway as a stop-gap arrangement.

Source: timesofindia.indiatimes.com

Written by ITW Editor · Filed Under BOT, Expressway, Highway, NHAI, NHDP

Bumps in road funding to be eased

December 3, 2009

NEW DELHI: The government is exploring ways to improve flow of funds to developers executing road projects by making funding of such projects
attractive for financial institutions, including insurance companies.

The panel on highway development, headed by the Planning Commission member BK Chaturvedi, is now working on the second part of its report on expediting work on the ambitious National Highways Development Project (NHDP).

“We have sorted out funding issues of the NHAI through cess and government guarantees, at least for one year. Now we have to look at the issue of financing of people who are building the roads,” Mr Chaturvedi said in an exclusive chat with ET.

The government has already accepted Chaturvedi panel’s recommendations on relaxing the norms for public-private projects (PPPs) in the road sector, continued funding of National Highways Authority of India through road cess collection and government guarantee for its borrowings.

The government has set a target of constructing 7,000 km of road annually, which translates into building 20 km of roads a day. It is planning to hand out contracts for nearly 12,000 km of highways to private developers in the next one year.

“We are examining what kind of safeguards are required to make insurance companies lend to road projects,” he said, adding that they would want the government to share risk and also give guarantees that the debts would be repaid.
The panel is still in the process of collecting information from the industry and other parties concerned and hopes to finish its report by January-end.

The government has decided to guarantee NHAI’s borrowing for the current year. The financing of NHAI in the years to come is yet to be decided. “ The empowered group of ministers set up on road financing will look at how the funding requirements of NHAI will be handled in the following years,” Mr Chaturvedi said.

Although NHAI does involve the private sector to fund projects through the build operate and transfer (BOT) mode of finance, it has its own financing needs as well.

NHAI has to invest in all projects carried on EPC or cash contract basis, which is the standard financing format in the North East and J&K where private players are not too keen to take risks because they are commercial unviable in these areas.

NHAI has to make some investments even in projects that are handed out to private road developers through the build operate transfer (BOT) basis to the extent of making them commercially viable, through what is called viability gap funding.

It has to pay an annual annuity to developers under the BOT annuity option and provide capital grant to increase viability of projects under the BOT toll option where private developers are allowed to collect toll for recovering costs and earning profits.
Source: economictimes.indiatimes.com

Written by ITW Editor · Filed Under NHAI, NHDP, PPP

NH-6 extention plan till Hazira port to be put on fast track

May 21, 2009

With the Congress-led UPA government taking over at the Centre, widening and extending of the 132-km stretch of road project between

Gujarat-Maharashtra border and Hazira port on 2,000-km long National Highway-6 (NH-6) is likely to be put on the fast track by National Highways Authority of India (NHAI).

The project was caught in a logjam for quite some time as a few industries were unwilling to part with the required tract of land.

The Cabinet Committee on Economic Affairs (CCEA) of UPA government had approved the project costing Rs 1,661 crore on February 5 this year. With the bidding process for the project already underway, the new government is likely to clear roadblocks soon, said sources in NHAI.

The process began in May 2008 with NHAI inviting tenders for short listing suitable agencies to implement the project. But, nothing concrete could be achieved, largely due to some public sector undertakings (PSUs) lobbying hard for an alternative route, as widening of existing road requires strip of land under their jurisdiction.

The plan to extend NH-6 was stuck after National Thermal Power Corporation (NTPC) and Krishak Bharati Co-operative Ltd (KRIBHCO) made several representations to NHAI in May last year stating that they were not in a position to spare additional strips of land near their facilities.

According to a letter in April last year by NHAI to all industries in Hazira, an additional land strip of 36 m to 42 m along the existing road was required on the stretch of 8.7 km from KRIBHCO to NTPC and on 5.7 km near Essar Group in Hazira area.

An alternative suggestion was made by KRIBHCO to avoid widening the existing road in Hazira and NHAI. “But a truncated stretch was not possible and hence not a substitute to the proposed highway up to Hazira port,” a senior official in NHAI told TOI.

NHAI, a central government agency, is keen on executing this project.
Source: timesofindia.indiatimes.com

Written by ITW Editor · Filed Under Highway, NHAI, NHDP

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