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    Topic- Opportunities mapping and preliminary project attractivenessanalysis from financing perspective in Road sector in Northern region.

    TABLE OF CONTENTINTRODUCTION

    Overview of IndustryHistoryCompany ProfileSWOT analysis of the company

    RESEARCH METHODOLOGY

    Scope of studyObjectives of studyLimitations of study

    DISCUSSIONProblems in the IndustryCurrent issuesDevelopments in the industrySteps taken by the government

    POLICIES & FRAMEWORK

    Policieso Central Govt.o State Govt.o Tolling policy

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    Legal Framework

    INDUSTRY STATISTICS

    Road network in IndiaInvestments

    National HighwayState HighwayPlayers of the industry

    FINDINGS AND CONCLUSIONS

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    CHAPTER 1

    INTRODUCTION

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    Overview of the Industry:

    Road:A road is a way or route for travelling from one place to another, build on a land. It is

    a basic mode of transportation used for moving between two places.

    According to planning commission of India, road transportation is vital for economic

    development of the country as transport sector contributes 6.5% (approx.) in Indias total

    GDP out of which 4.5% comes from road sector.

    According to them India has the 2 nd largest road network in the world (3.3 million kms

    approx.) which carry 87% of the total passenger traffic and 53% of the total freight traffic

    which have made accessibility, flexibility of operations & door-to-door service easy.

    For the purpose of management and administration, roads in India are divided into the

    following five categories :

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

    The National Highways are intended to facilitate medium and long distance

    inter -city passenger and freight traffic across the country. The State Highways are

    supposed to carry the traffic along major centers within the State. Other District

    Roads and Village Roads provide villages accessibility to meet their social needsand also the means to transport agriculture products from village to nearby

    markets. Major District Roads provide the secondary function of linkage between main

    roads and rural roads.

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    In India planning and financing of road is the responsibility of central government and

    state governments.

    Central government is responsible for National Highways throughout the country (there

    are around 300 national highways in India), and state government for state highways and

    major district roads.

    Expansion of rural roads is largely under PMGSY (Pradhan Mantri Gram Sadak Yojna),

    but their implementation is the responsibility of the respective state government.

    The Ministry carries out the operations of National Highways through three different

    agencies, they are State Public Works Department (PWD), Border Roads Organization

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    (BRO) and National Highways Authority of India (NHAI).The daily management of

    most national highways in states are looked after by the respective PWD's. The BRO is

    primarily concerned with construction and maintenance of roads in border areas, also

    known as General Staff (GS) roads. The BRO has linked the border areas of North and

    North East with the rest of the country. It has played a vital role in developing the road

    network in states like Bihar, Maharashtra, Karnataka, Rajasthan, Andhra Pradesh,

    Andaman and Nicobar Islands, Uttarakhand and Chhattisgarh. Nearly 46,884 km of

    National Highways is managed by the concerned PWD's and BRO.

    Road Network in India:

    According to the Ministry of Road & Transport Highway (MoRTH), National Highways

    in India constitutes around 70,000 kms, which is only 2% of the total roads in India but it

    carries approx. 40% of the total traffic on Indian roads, while State highways and MDRs

    carry another 40% of the traffic and accounts for 18% of the road length.

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    Road transport is most frequent mode for freight traffic and passenger traffic. It is

    estimated that 53% of the total freight and 87% of the total passenger traffic is carried by

    roads. In 2000-01, roads accounts for 47% of the total freight traffic, which increased to

    52% in 2010-11. Comparatively, the railways, which contributed 39% in 2000-01 to the

    total freight transport, declined to 36% in 2010-11.

    History:

    Roads are definitely a cost efficient and popular mode of transport. It stretches across the

    length and breadth of a country and can be used by different sections of society. It helps

    in the movement of men and material from one mode to another.

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    It forges national unity and is instrumental in the nations socio economic development. It

    acts as a support system to other means of transport like railways, shipping, airways etc.

    Hence a well developed roadway is vital for promoting commercial interest of the

    country.

    During the first century AD the Mauryan Empire, one of the most successful empires and

    among the largest, had roads which connected many important centers. They are

    mentioned as many and connecting many important trade centers. The Greek

    ambassador, Megasthenes, was sent to Chandragupta Mauryas court and he recorded

    a Rajamarga or the kings highway which was also a trade route and a precursor to the

    modern grand trunk road. It was nearly 22 km wide and 2,400 km in length with a pillar

    every 1.8 km. It had trees, wells and rest houses on either side. Any traffic jam on theRajamarga was liable to punishment! And of course it goes without saying that

    maintenance of roads was a significant feature of Mauryan administration.

    The first evidence of road development in the Indian subcontinent can be traced back to

    approximately 4000 BC from the ancient cities of Harappa and Mohenjo-Daro of the

    Indus Valley Civilization. Around the 1st Century AD, the ancient Silk Road came into

    being, which passed through northern India and China.

    Ruling emperors and monarchs of ancient India constructed numerous brick roads in the

    cities. One of the most famous highways of medieval India is the Grand Trunk Road. The

    Grand Trunk Road began in Sonargaon near Dhaka in Bangladesh and ended at Peshawar

    in modern-day Pakistan. In India, it linked several important cities from Kolkata in the

    east to Amritsar in the west, while passing through the cities of Patna, Varanasi, Kanpur,

    Agra, Delhi, Panipat, Pipli, Ambala, Rajpura, Ludhiana, and Jalandhar. During the

    colonial period in the 19th century, the British upgraded the existing highway network

    and built roads in many treacherous areas such as the Western Ghats.

    Sixty years since Independence, India has made tremendous progress with respect to it

    transport system. The accelerated growth rate in the economy has helped the nation to

    bridge distance. The architect of the change is the development of thousands of km of

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    world class roads, dedicated freight corridors and improvement in rural roads.

    Immediately after Independence, India did not have the luxury of well networked

    roadways. The British had left behind only 4 lakh km of roads that linked major cities

    and the rural heartland. So the government then formulated a two pronged strategy-

    improve connectivity and provide infrastructure that stimulated economic growth.

    Unfortunately resources were meager (deficient in quantity) and the government was

    finding it difficult to sustain progress. As a result the quality of roads was poor and would

    often deteriorate after the monsoons. The establishment of the National Highways

    Authority of India (NHAI) in 1988 dramatically changed the future of roadways in India.

    The NHAI brought about standardization in terms of quality and management becamemore efficient.

    In the eighth plan the government gave the sector lots of incentives like customs free

    import of capital goods and freebies like tax holidays. The government came up with a

    proposal for an ambitious project called Golden Quadrilateral to connect the country

    through two different corridors the North-South and East-West corridor extending to a

    length of 25,000 km. It was funded by the World Bank and Asian Development Bank.

    The government came with a special cess on petrol and diesel to finance the project. The

    landscape for roadways changed dramatically after this.

    The number of roads have nevertheless not kept in pace with the increase in vehicles. So

    a phenomenon that has come to stay for a while is the traffic jam. These jams are steadily

    increasing in volume and time and threaten to engulf most of the city traffic in the urban

    centers and so alternative modes of transport are coming up. And yet amidst all this,

    many roads retain their charm, some because of the many trees on either side of them,

    some because of their quaint names and some others because of their majestic

    appearance. Rajpath, the road leading down from Rashtrapathi Bhavan, the presidential

    house in Delhi, to India Gate is a majestic one.

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    Company Profile:

    o OVERVIEW OF LARSEN & TOUBRO INFRASTRUCTURE FINANCE

    L&T Infrastructure Finance Company Limited (L&T Infra) is promoted by the

    engineering and construction conglomerate Larsen & Toubro Limited (L&T) and L&T

    Finance Holdings Limited (a subsidiary of L&T).

    L&T Infra, incorporated in 2006, is registered as a Non Banking Financial Company

    (NBFC) under the Reserve Bank of India (RBI) Act 1934, and is among the select few

    financial institutions classified as an Infrastructure Finance Company (IFC). It was setup with an initial capital of 500 crores (US$111 million) and has expanded at a rapid

    rate since inception.

    L&T Infra provides a wide range of customized debt & equity products as well as

    Financial Advisory Services for the development of infrastructure facilities in the

    country with a focus on power, roads, telecommunications, oil & gas and port sectors.

    L&T Infra functions with high Corporate Governance standards and Independent

    Directors constituting 50% of its Board and the key committees. As a testimony to its

    strong credentials and sound operating performance, L&T infra enjoys AA+ credit

    ratings by both CARE and ICRA.

    L&T Infra operates from is Mumbai, Delhi, Chennai and Hyderabad centers - and is

    managed by a team of experienced banking professionals, under the guidance of an

    eminent Board drawn from both L&T and banking industry.

    o THE ORGANISATION - L&T Infra:

    L&T Infrastructure Finance Company Ltd. (L&T Infra), is a 100% subsidiary of Larsen

    & Toubro (L&T) an AAA rated engineering and construction conglomerate having initial

    equity of INR.5 billion. L&T Infra was incorporated as a public limited company under

    http://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Crore
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    the Indian Companies Act, 1956 and commenced its business in January 2007 upon

    obtaining Non- Banking Financial Company (NBFC) license from the Reserve Bank of

    India (RBI). L&T Infra is L&T Groups visionary foray into the financing of

    Infrastructure sector. It will play the role of an activist financier in the infrastructure

    sector and has adopted a business model which offers complete financial solutions to

    the borrower. The company would not raise any funds by way of public deposits,

    substantive part of the regulatory framework is inapplicable, and applicable compliances

    are mostly procedural in nature. The types of projects, proposed include, Roads, Energy,

    Ports, Railways, Aviation, Shipping, Oil & Gas, Capital Equipment Financing viz. Oil

    Rigs, Mining Equipment etc., SEZs, Urban Infrastructure, and Value Added Commercial

    Infrastructures etc. L&T Infra invests in medium sized projects with project costs

    typically between Rs. 1000 million and Rs.1500 million. Projects of this size are notlikely to attract significant non-economic hindrances and therefore the chances of

    successful development and operations of these projects are high. L&T Infra will also

    enable investment into a larger number of projects, thereby reducing the specific projects

    risks.

    L&T Infrastructure Finance Co., Ltd. provides financial solutions. The company offers

    term loans, mezzanine debt, leasing, equity, preference capital, and hybrid capital. It

    funds infrastructure segment. L&T Infrastructure Finance Co., Ltd. operates as a

    subsidiary of Larsen & Toubro, Ltd.

    L&T Infrastructure Finance Company Limited (L&T Infra), offers financing options for

    projects, equipment suppliers and allied activities for Power, Transportation,

    Telecommunication, Oil, Gas & Chemicals, Capital Equipments, Urban Infrastructure,

    Agriculture Infrastructure, Tourism Infrastructure and Social Infrastructure.

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    Infra + Finance = L&T Infra

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

    L&T Infra was set up as a separate co. to ensure focus on infra financing.

    It is 100% subsidiary of L&T Ltd., and has received NBFC

    license in Jan 2007.

    It is dedicated to developing and financing of Infrastructure

    Sector.

    It is the largest capitalized subsidiary of L&T with an initial

    equity outlay of Rs. 500 crores.

    It has been rated LAA by ICRA for Long Term Borrowing

    Program.

    It has offices at Mumbai, Delhi & Chennai.

    It is managed by a team of accomplished professionals under

    the guidance of an eminent Board.

    L&T FinanceMajor force ininfraequipmentfinance &

    SMEForwardintegration10 years of successfultrack record

    L&Ts DominanceAs contractor in infraIn Infra equipmentmanufacturing

    L&T IDPL

    Major developer in Roads,Ports, Airports, UrbanInfra

    New InitiativesPower AviationShip Building

    L&T InfraResult of focuson financialservicesUse the domain

    expertise of L&T in infraand experiencein financegained over years

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    o BOARD COMPOSITION:

    Name DesignationMr. Y. M. Deosthalee ChairmanMr. B.V. Bhargava Independent Director Dr. R.H. Patil Independent Director

    Mr. Richard Tinsley Independent Director Mr. N. Sivaraman L&T NomineeMr. K. Venkatesh L&T Nominee

    o MANAGEMENT TEAM

    Suneet K Maheshwari Chief Executive

    27 years in advisory and financing of infrastructure projects at

    ICICI Bank, Feedback Ventures & SREI

    Ramesh Bhujang Head, Risk & Asset Management

    29 years in financial sector in India & abroad at AFIC, IDBI,

    UTI & UBI

    Anand K Gore - Head, Project Finance

    22 years in industry, corporate and project finance at ICICI

    Bank, Essar Steel & Lloyds Steel

    Virender Pankaj Head (North)

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    17 years in industrial/ project finance, advisory and

    developmental banking at State Bank of India

    o BACKGROUND AND PROMOTERS:

    The evolution of L&T into the country's largest engineering and construction

    organization is among the most remarkable success stories in Indian industry.

    L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers,

    Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly

    committed to developing India's engineering capabilities to meet the demands of

    industry.

    Beginning with the import of machinery from Europe, L&T rapidly took on

    engineering and construction assignments of increasing sophistication. Today, the

    company sets global engineering benchmarks in terms of scale and complexity.

    Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark,

    would not have dreamt, as they were learning about India in history classes that they

    would, one day, create history in that land.

    In 1938, the two friends decided to forgo the comforts of working in Europe, and

    started their own operation in India. All they had was a dream. And the courage to

    dare.

    Their first office in Mumbai (Bombay) was so small that only one of the partners

    could use the office at a time!

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    In the early years, they represented Danish manufacturers of dairy equipment for

    a modest retainer. But with the start of the Second World War in 1939, imports were

    restricted, compelling them to start a small work-shop to undertake jobs and provide

    service facilities.

    Germany's invasion of Denmark in 1940 stopped supplies of Danish products.

    This crisis forced the partners to stand on their own feet and innovate. They started

    manufacturing dairy equipment indigenously. These products proved to be a success,

    and L&T came to be recognized as a reliable fabricator with high standards.

    The war-time need to repair and refit ships offered L&T an opportunity, and led

    to the formation of a new company, Hilda Ltd., to handle these operations. L&T also

    started two repair and fabrication shops - the Company had begun to expand.

    Again, the sudden internment of German engineers (because of the War) who

    were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of

    installation - an area where their capability became well respected.

    In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of

    equipment used to manufacture products such as hydrogenated oils, biscuits, soaps

    and glass.

    In 1945, L&T signed an agreement with Caterpillar Tractor Company, USA, for

    marketing earthmoving equipment. At the end of the war, large numbers of war-

    surplus Caterpillar equipment were available at attractive prices, but the finances

    required were beyond the capacity of the partners. This prompted them to raise

    additional equity capital, and on 7th February 1946, Larsen & Toubro Private Limited

    was born.

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    Independence and the subsequent demand for technology and expertise offered

    L&T the opportunity to consolidate and expand. Offices were set up in Kolkata

    (Calcutta), Chennai (Madras) and New Delhi. In 1948, fifty-five acres of undeveloped

    marsh and jungle was acquired in Powai. Today, Powai stands as a tribute to the

    vision of the men who transformed this uninhabitable swamp into a manufacturing

    landmark.

    In December 1950, L&T became a Public Company with a paid-up capital of Rs.2

    million. The sales turnover in that year was Rs.10.9 million.

    Prestigious orders executed by the Company during this period included the Amul

    Dairy at Anand and Blast Furnaces at Rourkela Steel Plant. With the successful

    completion of these jobs, L&T emerged as the largest erection contractor in the

    country.

    In 1956, a major part of the company's Bombay office moved to ICI House in

    Ballard Estate. A decade later this imposing grey-stone building was purchased by

    L&T, and renamed as L&T House - its Corporate Office.

    The sixties saw a significant change at L&T - S. K. Toubro retired from activemanagement in 1962.

    The sixties were also a decade of rapid growth for the company, and witnessed

    the formation of many new ventures: UTMAL (set up in 1960), Audco India Limited

    (1961), Eutectic Welding Alloys (1962) and TENGL (1963).

    By 1964, L&T had widened its capabilities to include some of the best

    technologies in the world. In the decade that followed, the company grew rapidly, and

    by 1973 had become one of the Top-25 Indian companies.

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    In 1976, Holck-Larsen was awarded the Magsaysay Award for International

    Understanding in recognition of his contribution to India's industrial development. He

    retired as Chairman in 1978.

    In the decades that followed, the company grew into an engineering major under

    the guidance of leaders like N. M. Desai, U. V. Rao, S. D. Kulkarni and A. M. Naik.

    Today, L&T is one of India's biggest and best known industrial organisations with

    a reputation for technological excellence, high quality of products and services, and

    strong customer orientation. It is also taking steps to grow its international presence.

    For an institution that has grown to legendary proportions, there cannot and must

    not be an 'end'. Unlike other stories, the L&T saga continues...

    o SPONSORS BACKGROUND IN BRIEF L&T Ltd.

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    Set up in 1938 by two engineers: Henning Holck- Larsen & Soren Kristen

    Toubro from Denmark

    Technological leader in domestic Engineering & Construction and

    Switchgears

    Enhancing global presence with focus on Middle East and China

    Widely recognized for quality products & services and industry best

    practices

    Professionally managed Company

    AAA Credit Rated

    12 Operating Companies under 6 Operating Divisions to manage overall

    business

    L&T Infra 100% Subsidiary of L&T Ltd

    O VISION

    To be the 'Institutional Partner of Choice' for end-to-end Financial Solutions in

    the infrastructure space.

    O MISSION

    Partner our customers in developing infrastructure facilities by offering total

    financial solutions.

    Create long-term value for our customers through superior product structuring by

    capitalizing on our knowledge pool.

    Be an organization that promotes continuous learning & innovation by fostering

    an entrepreneurial work culture.

    Be a valued partner in the financial community by setting new standards.

    O CORE VALUES

    Performance Driven

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    Innovation

    Integrity

    Excellence

    Customer Focus Mutual Respect

    o TECHNOLOGY:

    In every sphere of L&T's operations, technology is the key enabler, reinforcing its

    leadership position, and sustaining its competitive strengths. While for some,

    technology is a means to an end, for L&T, technology represents endless possibilities.

    o CORPORATE SOCIAL RESPONSIBILITY (CSR):

    L&T believes that the true and full measure of growth, success and progress lies

    beyond balance sheets or conventional economic indices. It is best reflected in the

    difference that business and industry make to the lives of people. Through its socialinvestments, L&T addresses the needs of communities residing in the vicinity of its

    facilities, taking sustainable initiatives in the areas of health, education, environment

    conservation, infrastructure and community development.

    The company proactively provides assistance in situations such as natural calamities

    and assists victims of nature's fury or social neglect. Many social initiatives are

    undertaken in partnership with government agencies and NGOs.

    o POLICIES

    LENDING POLICIES

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    As such, our Company maintains its own internal credit policies and approval

    processes, which are developed and implemented according to the underlying

    nature of its operations and the particular nature of its customers and products.

    INVESTMENT AND CREDIT POLICY AND APPROVAL PROCESSOur Company manages its own investment and credit approval process in

    accordance with its internal infrastructure finance investment and credit

    policies, which are approved by the board of directors of our Company. A

    dedicated Investment and Credit Committee ("Infrastructure ICC") oversees

    the application of, and compliance with, these policies, and retains the sole

    responsibility for approving advances made by our Company at meetings

    generally convened once in every two week cycle.

    Eligibility and Policy Objectives

    Public sector and private sector companies, public-private sector SPVs under

    PPP initiatives, partnership firms, unincorporated joint ventures (but only

    where the joint venture partners are incorporated entities) and trusts and

    societies (aimed at establishing educational or medical facilities or for

    commercial purposes) are eligible borrowers from our Company.

    The policy objectives of our Company include, amongst others

    building a business model in conformity with the RBI's policies and

    guidelines for NBFCs, and that would optimize the benefits thereof for our

    stakeholders;

    building a sound and diversified asset portfolio through risk-pricing based

    lending and growth-oriented early-stage investments, with the aim of earning

    superior returns on capital employed; and Optimize the risk-return profile of the infrastructure loan portfolio with an

    emphasis on credit quality, supervision, timely collection and well-defined

    exit options from investments.

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    Project and Credit Assessment Process

    Before presenting a proposal for approval to the Infrastructure ICC, a dedicated

    team within the project finance segment, and a separate project development

    team, appraises the proposed project for which funding is sought and conducts

    due diligence investigations on the project and project sponsor. The following

    aspects of the project are assessed

    the project sponsor and the project group;

    the industry and sector in which the project is being undertaken;

    the nature of the project and structure of the concession;

    technical feasibility evaluation of the project;

    commercial and economic viability evaluation;

    credit checks and due diligence with the existing lenders and / or bankers of the

    sponsor(s) and or Credit Information Bureau (India) Limited;

    interaction with the key management personnel of the project group and sponsor

    to understand their perspective on the project and sector-specific commercial

    considerations and business dynamics;

    risk identification, risk allocation, risk mitigation and risk pricing of the

    transaction;

    site visits are undertaken by the appraising team to ascertain what local factors

    would have an impact on the project's viability;

    in the case of projects which require viability gap funding under a Government

    scheme, we ensure that due commitments from the relevant Government agencies

    for such a facility are in place;

    arrangements for the monitoring of the project and project assets by competentexternal technical agency, where considered necessary, are put in place; and

    in respect of specialized asset leases such as aircrafts, ships and oil rigs, an

    assessment of the residual values thereof is undertaken with the help of external

    agencies.

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    Once the proposal has been assessed, the Infrastructure ICC makes a determination

    on the size of the exposure to be taken, based on the findings of the assessment

    process, and by reference to our Company's exposure norms to an individual

    company, group or industry.

    Our Company has developed an internal ratings model, which is similar to models

    used by external rating agencies in terms of methodology and rating scales.

    Accordingly, all credit proposals are evaluated and their internal ratings presented to

    the ICC as an input for its decision-making process. Also, these internal ratings are

    periodically reviewed, based on operational performance and external developments,

    if any.

    Repayment Schedule:

    The repayment of loans and facilities is normally fixed on a case-by-case basis,

    depending on the nature of the project, its projected cash flows and the maturity

    profile of our Company's own funding mix. A pre-payment premium may be charged

    in case of early repayment of the facility. However, any post-approval changes in the

    repayment schedule would conform to the provisions of a "Schedule of Delegation of

    Powers for Investment and Credit approvals and Portfolio Management", as approved

    by the Infrastructure ICC.

    Exit Option:

    The fundamental element of the projects that our Company funds is the availability of

    clearly defined exit opportunities from the investments we make. As such, all of our

    equity investments, convertible instruments, mezzanine debt and any similar financial

    products, as well as operating leases, should necessarily have clearly identified (and

    agreed upon by the customer, where applicable) exit options. Any recommendation to

    exit particularly when earlier than as provided for in the documentation would be

    based on a detailed evaluation by our project finance team of the commercial merits

    of exiting the investment, and would conform to the provisions of the "Schedule of

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    Delegation of Powers for Investment and Credit approvals and Portfolio

    Management, as approved by the Infrastructure ICC.

    In addition, and in the case of operating leases, due diligence is carried out in

    conjunction with technical teams on the status of the assets and its residual values at

    the time of exercising such exit options.

    Security:

    The project assets typically form the security for the credit facilities we provide. The

    details of the security to be charged in favor of our Company are stipulated by the

    Infrastructure ICC and suitably reflected in the security documents in the credit

    approval process. The security package for each facility is structured in such amanner so as to adequately cover the risks associated with the facility.

    In the case of structured products, facilities can be approved by the Infrastructure ICC

    without requiring conventional security on the basis of a suitable financing structure

    and with comfort from other covenants such as a ceiling on overall debt-equity ratio,

    escrow account mechanism, negative lien agreement, pledge of shares or assignment

    of rights. In cases of funding which are serviced entirely from project revenues,

    escrow and / or water-fall arrangements are acceptable to support the security

    provided.

    In the case of loans made for specific infrastructure assets, the security is normally an

    exclusive or pari passu charges on the underlying assets to be financed. For short-

    term interim loans such as bridge finance facilities for infrastructure projects and / or

    the acquisition of assets, the security is generally in the form of a hypothecation of

    movables, corporate / personal guarantees and / or pledges of shares, as well as other

    forms of security considered sufficient by the Infrastructure ICC. Appropriate

    processes to create enforceable security in the form of a mortgage and or

    hypothecation are rigorously followed. The margin requirements for different types of

    security are decided by the Infrastructure ICC from time to time, and exceptions, if

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    any, will be handled in accordance with the guidelines of the Infrastructure ICC.

    Documentation

    Our Company only makes disbursements on the completion of all requisite legal

    documentation. The documentation process seeks to ensure that:

    our customers' obligations are clearly defined and established by the documents;

    the charges created on our customers' assets as security for the debt and / or other

    facilities provided are suitably registered and maintained, such that it is

    enforceable at all times during the term of the loan provided; and

    our rights to enforce the security for the recovery of the debt and / or facilities

    provided (including committed return thereon, if any), through a court of law or

    other applicable forum, is as extensive and unambiguous as possible under

    relevant statutes of limitations in jurisdictions of India as well as in the countries

    where the assets are registered or located.

    We evolve and adopt standard documentation and commitment processes for various

    products and services we offer. For each structured finance facility, specific

    covenants are designed in consultation with our legal counsel. Where any deviationfrom the terms of the standard facility documents is warranted, approval of the

    appropriate authority in accordance with the "Schedule of Delegation of Powers for

    Investment & Credit Approvals and Portfolio Management" approved by the

    Infrastructure ICC, is obtained. In addition, the Schedule prescribes specific

    procedures for the execution of standard facility agreements and documentation in

    respect of the creation of interim and final security. Such documentation, aimed at

    protecting our rights to recourse against the underlying security, is completed and in

    the process, all prevailing laws and regulations of relevant jurisdictions are observed

    and reflected in the documentation.

    In addition, we also ensure that comprehensive insurance of the secured assets is in

    place, and that such insurance policies are kept updated and valid. The insurance

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    policies are typically issued to our infrastructure customers, and assigned in favour of

    our Company and any co-financiers sharing the security on a pari passu basis, where

    applicable, as the loss-payees.

    o Fair Practice Code

    Introduction

    Pursuant to Reserve Bank of India (RBI) s Circular DNBS (PD) CC

    No.80/03.10.042 /2006-07 of 28 September 2006, issued to Non-Banking Financial

    Companies (NBFCs), the Board of Directors may adopt a Fair Practices Code at its

    meeting to be held on 12 January 2007 in Mumbai.

    The draft Code, as proposed herein below, is in conformity with the Guidelines on

    Fair Practices Code for NBFCs as contained in the aforesaid RBI Circular.

    Fair Practices Code:

    The Companys business would be conducted in accordance with prevailing statutory

    and regulatory requirements, with due focus on efficiency, customer-orientation and

    corporate governance principles all of which form part of LTIFCs Board approved

    Investment and Credit Policy.

    In addition, the Company would adhere to the Fair Practices Code in its functioning,

    the key elements of which are as follows:

    Applications for Loans and their Processing:

    o Loan application forms shall include necessary information, which affects the

    interest of the borrower, so that a meaningful comparison with the terms andconditions offered by other NBFCs can be made and the borrower can take an

    informed decision. The loan application form may also indicate the documents

    required to be submitted with the application form.

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    o The Company shall devise a system of giving acknowledgement for receipt of all

    loan applications. Further, generally, the time frame within which the loan

    application will be disposed of would also be indicated in the acknowledgement.

    Loan Appraisal and Terms/Conditions:

    The Company shall convey in writing to the borrower by means of approval letter

    or otherwise, the amount of loan approved - along with the terms and conditions,

    including the annualized rate of interest and method of application thereof. It

    would keep the acceptance of these terms and conditions by the borrower on the

    Companys files.

    Disbursement of Loans including Changes in Terms and Conditions o The Company shall give notice to all its borrowers of any change in the terms and

    conditions - including disbursement schedule, interest rates, service charges,

    prepayment charges etc. The Company shall also ensure that changes in interest

    rates and charges are affected only prospectively. A suitable provision in this

    regard shall be incorporated in the loan agreement.

    o Decision to recall / accelerate payment or performance under the agreement shall

    also be in consonance with the loan agreement.o The Company shall release all securities on repayment of its full dues or on

    realization of the outstanding amount of loan subject to any legitimate right or

    lien for any other claim the Company may have against its borrowers. If such

    right of set off is to be exercised, the borrower shall be given notice about the

    same with full particulars about the remaining claims and the conditions under

    which the Company is entitled to retain the securities till the relevant claim is

    settled/ paid.

    General

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

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

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    (unless new information, not earlier disclosed by the borrower, has come to the

    notice of the Company).

    o In case of receipt of request from the borrower for transfer of borrowal account,

    the consent or otherwise - i.e., objection of the Company, if any - shall be

    conveyed to the borrower within 21 days from the date of receipt of any request.

    Such transfer shall be as per transparent contractual terms in consonance with

    law.

    o In the matter of recovery of loans, the Company shall not resort to any harassment

    such as persistently bothering the borrowers at odd hours, use of muscle power

    for recovery of loans, etc.

    o The Company shall have a Grievance Redressal Forum comprising senior

    management team namely, the CEO, VP - Risk Management & operations and

    CFO - to resolve disputes arising, if any, in this regard. The said forum will meet

    within a period of 3 weeks from the date of receiving any grievance intimation. (It

    shall ensure that all disputes arising out of the decisions of lending by the

    Companys functionaries are suitably heard and disposed of at least at the next

    higher level.) The said forum shall provide the highlights of the issues and

    redressal if any to the Board of Directors for their review and compliance at each

    subsequent meeting.

    Wide Dissemination and Periodic Review:

    The Company shall put the above Fair Practices Code outlined hereinabove on its web

    site, for the information of various stakeholders. The Company would also review and

    refine the Code, as may be required periodically - based on its own experience and fresh

    guidelines, if any, to be issued by the RBI in this regard.

    o FOCUS SECTORS:

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    L&T Infra offers attractive financing structures for projects, equipment and for

    other infrastructure development requirements in the following industry segments:

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

    Transportation

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

    Ports And Shipping

    Ports

    Port Development Projects Port Handling Equipments

    Ship

    Bulk Carriers

    Tankers

    Railways / Container Trains

    Rail Corridor Development Acquisition of Wagons and Containers Railway Bridges

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    Urban Infrastructure

    Water Supply Sewerage Solid Waste Management SEZs IT Parks

    Agri Infrastructure

    Mega grain procurement centres and silos Large cold storage Cold chains

    Oil & Gas

    Exploration

    Extraction

    Transportation

    Telecommunication

    Passive Infrastructure Telecommunications & Broadband

    Social Infrastructure

    Hospitals Educational Institutes

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    SWOT Analysis (L&T Infra):

    Strengths:

    AA+ rating by CARE and ICRA

    Large Capital base

    Long term commitment of Larsen & Toubro ltd.

    Relationship driven

    Active support to clients from project development stage

    Deep understanding of the Indian infrastructure sector

    Full range of financial productsHigh corporate governance standards

    Speedy response to clients requirement

    Weakness:

    Newly established company (incorporated in 2006).

    Opportunities:

    Infrastructure development including road sector has a vast scope in future as

    the large part of the country lags infrastructural development.

    In coming days L&T Finance Holding (parent company of L&T Infra finance

    co. ltd.) is coming up with their IPO.

    Threats:

    Since the infrastructure sector has large opportunities, the company has to face

    cut-throat competition from various national and international companies like

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    HCC, NCC, J.P Associates, Gedem Construction Company, GMR Infra, Roko

    Construction ltd., Gammon India Ltd. Etc.

    Other companies borrowing funds from L&T Infra finance company ltd might

    not be able to repay back the interest and principle amount on time.

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    CHAPTER 2

    RESEARCH

    METHODOLOGY

    Scope of the study:

    The scope of the study is to find out the opportunities mapping and project

    attractiveness analysis in road sector in northern region from a view of financing.

    This study can be used by various companies financing and investing in the

    development of infrastructure mainly in road sector in northern region in India.

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    This study tells about the opportunities that are coming in near future in road

    sector.

    It tells about policies and procedures of the government in the road sector from

    financing perspective.

    Objective of the study:

    To study the road sector in India.

    To find out how the financing procedure takes place for the development of roads

    in north region in India.

    To find out the opportunities that are mapping in road sector from financing

    perspective.

    Another objective of the study is to understand the working of the financial

    institutes towards the development of road sector.

    Limitations of the study:

    Some investment options looking feasible today may not be feasible in future due

    to certain happenings in the environment.

    Accuracy of the study depends upon the accuracy of the sources from where the

    data is collected.

    Another limitation is that the study is done on the collection of secondary data

    which is updated once in a while.

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    CHAPTER 3

    DISCUSSION

    Problems in the Industry:

    Expansion of road infrastructure has not kept pace with demand. Growing costs of

    infrastructure and long completion schedules have constrained expansion of road

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    network. Vehicle population increased by 11% between 1952 and 2002, while road

    network increased by 4.3%. During the same period the number of HCVs increased by 7

    %. It is noteworthy that under personalized modes three-wheelers and cars have grown at

    an annual rate of 10.5 % and 9.4 % respectively during 1991 to 2004 and also the weak

    enforcement of existing regulations which have a bearing on safety and environment.

    There are significant barriers towards inter-state movement of freight and vehicles which

    impose heavy economic and social costs.

    According to the planning commission of India, the growth of vehicular traffic on roads

    has been far greater than the growth of the highways. Between 1951 and 2010 the vehicle

    population grew at a compound annual growth rate (CAGR) of close to 11 per cent

    compared to CAGR of 4.3 per cent in the total road length with National Highwaysegment increasing by a mere 2.1 per cent. A noteworthy aspect has been a step-up in the

    growth of national highway network in recent years which has grown at CAGR of more

    than 5 per cent with total vehicle population growing at close to 10 per cent CAGR.

    Composition of vehicle population in India reveals preponderance of two-wheelers with a

    share of more than 71 per cent in total vehicle population, followed by cars with 13 per

    cent and other vehicles (a heterogeneous category which includes 3 wheelers, trailers,

    tractors etc.) with 9.4 per cent. However, the share of buses and trucks in the vehicle

    population at 1 per cent and 5 per cent respectively is much lower compared to China.

    With a rising income and inadequate urban public transport system, in particular, the

    personalized mode of transport is likely to grow in importance in the coming years.

    Several of the factors leading to the relative high growth in road transport are structural.

    These include more dispersed industrial and business location patterns and increased

    need for just in time deliveries. Second, the sector is composed of many small private

    operators in a highly competitive and dynamic environment. Structurally, railways are

    confronted with the changing pattern of industrial production and geography away from

    traditional industries and clusters towards a more dispersed pattern embodying high value

    and low volume manufactures.

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    The following points states the problems faced by the Road Industry:

    Lack of sufficient maintenance funds is responsible for poor maintenance of road

    network and riding quality, due to this the transport throughout is severely eroded.

    The commercial vehicles are also to do only 200 to 250 km on average per day

    incurring high VOC (Vehicle Operating Cost) as compared to 500 to 600 km per

    day in the developed countries.

    The targets and the available sources of funds indicate a very big financing gap

    and, given the need for fiscal prudence and the competing claims of other sectors,

    it would not be possible to generate budgetary resources of the magnitude

    indicated.

    In India most of the Highways/ Roads need proper planning and adequate

    maintenance. In terms of capacity to sustain present traffic volume and load they

    are of inadequate structural specifications. They are being misused by users and

    inhabitants. Effective traffic rules and public awareness is not there. There are two

    reasons, one is insufficient funding for roads and the second is non availability of

    effective 'Roads and Road Users Act' and its enforcement.

    The borrowings from external agencies like the World Bank, ADB, bilateral and

    commercial sources also contribute to the fiscal deficit. They also add to thecountrys external and public debt. The scope of such borrowing is also limited as

    most institutions have country exposure limits and the available resources have to

    be allocated among different sectors.

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

    coats surface dressing is in practice. As per IRC code these roads are unsuited

    even for a single commercial vehicle per day.

    The Indian road network has increased from 0.4 MK (Million Kilometer) in 1951

    to 3.30 MK. Much of the increase in the road network has come through the

    construction of rural roads built to provide connectivity to remote rural areas.

    In, India category wise road shares are Primary Roads i.e. National Highways-

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

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    and Village & Other Category Roads-85.30% of total length. While the traffic

    share of Primary and Secondary Roads is about 90% of the total road traffic.

    Despite the impressive growth in road traffic and vehicles population, there has

    not been a matching growth of the highways network, both interims of the length

    and breadth as well as their quality. This is mainly due to less availability of funds

    for road construction and maintenance, which in real terms, have not increased

    substantially.

    The total economic loss due to road accidents is estimated to be over Rs. 4000

    crores per year.

    In India, Highways/ Roads are being exploited. Expenditure in terms of road

    revenue generated is about 35%, while is USA, JAPAN, Germany is 96%, 128%,

    82% respectively, similar trend is in UK and Australia.In few states construction of roads of 3 m width, 16 cm crust thickness with two

    coats surface dressing is in practice. As per IRC code these roads are unsuited

    even for a single commercial vehicle per day.

    Current Issues

    Private sector exposure has been below the expected levels. This is primarily due toreasons like reluctance of the private sector to participate in long-term projects, land

    acquisition problems and difficulty in toll collection in the operating phase in certain

    stretches.

    Although the Indian transportation infrastructure is one of the largest in the world, it

    is far from being the best. The population of the country is almost four times that of

    the U.S and has one of the highest growth rates in the world. The existing

    transportation system is not adequate to sustain the current rates of economic andindustrial development in the country. Demand has constantly outstripped the supply

    of transportation over the last fifty years. Compared to the U.S., the amount of

    freight traffic carried by highways in India is quite meager. This is partially due to

    poor surface quality of the roads. The Indian automobile industry today manufactures

    a large variety of multi-axle vehicles with turbo charged engines, but most of these

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    are currently exported. The Indian industry needs large freighters to transport goods.

    The automobile industry has necessary facilities to manufacture them in sufficient

    quantities. The inadequate road infrastructure hence acts as an economic bottleneck

    impeding growth of both these industries.

    The following points states the current issues faced by the Industry:

    Travel Time: The average speed on Indian highways is around 45 km/h, which is

    less than half of that on the U.S. Inter-State system. Most road surfaces are flexible pavement

    bitumen, with bearing capacities one fourth of the U.S. Inter-State highways. There is a

    need for improvement in this area. However, it may not be desirable to go in for an intricate

    system of expressways for freight and passenger traffic. It would be economically sound for the country to maintain a high share of railways in the overall surface transportation system.

    Also, construction and upgrading of roads requires major capital investments that may not

    be available. Hence, it might be better to go in for selective upgrading through identification

    of suitable higher priority corridors. The 2011 Road Plan proposes construction of about

    12,000 km of expressways. Seven years after the plan commencement, India has yet to see

    this starting in any major way. A major factor hampering road construction is availability of

    funds.Maintenance: Th e other major issue in freight transportation is increased use of

    containers. Larger sixteen wheel trucks and combination vehicles are replacing the old six

    wheel trucks. These heavier vehicles need higher bearing capacity of the pavement. Most

    roads in India currently have a bitumen pavement. This was initially adopted over concrete

    because high bearing capacity was not needed for passenger movement. Most military

    equipment in India is transported on rail, unlike the U.S., where the Inter-State roads were

    constructed to enable movement of heavy tanks and artillery. Use of heavy axle-load trucks

    has led to rapid deterioration in surface quality. Since immediate upgrading of all the major

    highways is neither required nor economical, there is a need for evolution of an adequate

    maintenance an d monitoring system. Use of heavy axle trucks would have to be restricted

    to certain roads, where alternate rail facilities are not available. A suitable strategy might

    be to restrict such trucks to roadways identified for upgrading in the 2011 Road Plan. This

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    would have to be coupled with improvement in the railway transportation system in

    areas where modal shift is desirable. An integrated approach would be necessary in this

    context.

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

    Just-In-Time (J.I.T.) approach is becoming increasingly popular in India. A number of

    perishable commodities are being transported over longer distances. Hence there is a need

    to increase average speeds on highways through improvement in the surface quality and

    increase the existing capacity. Road transportation needs to be faster and more reliable.

    Addition of more lanes and removal of bottlenecks may solve the problem in some cases;

    alternate strategies may be required in others. The Government has to be more accountable

    in terms of the funds collected and spent on roads. Over the last financial year, the total

    Government expenditure on roads was just 10% of the total revenue earned from roadtransportation. This figure is very low compared to U.S. (85%) and most other countries.

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

    two lanes or even lesser. The design of the highways is a matter of great importance since only

    properly designed highways can withstand the pressure created by heavy vehicles. Apart from

    being narrow they are also highly congested since quite a large part of India's freight is carried

    on these highways.

    Rural areas have bad roads: Most of the rural areas in India do not have access toall weather roads and hence have a tough time during the monsoons. This problem is more

    significant in the northern and northeastern part of the country. The government in its 11th five

    year plan has allotted Rs 100,000 crores for the construction and maintenance of roads in

    villages .

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

    the metropolitans today. Cities like Mumbai, Delhi, and Kolkata are extremely congested

    during office hours. This is mainly because of industrialization and the sudden rise in vehicle

    ownership over the last few years.

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    Development in the Industry:

    Awarding under NHDP by National Highway Authority of India (NHAI)

    accelerated in 2009-10 due to the resolution of policy issues that brought

    clarity towards bidding and implementation of national highway projects. NHAI awarded 3,213km of project in 2009-10.

    o Phase-wise progress of NHDP

    Phases I and II: Majority work completed

    Phase I main ly compr ise s Golden Quadr ila te ra l (GQ), port s

    connectivity and other stretches. Phase II comprises North-South andEast-West Corridors (NSEW). Both phases have mainly been executed

    an cash contracts. In Phase I, only 3 % of the total length remains to

    be completed. In Phase II, out of the total length of 7,300 km, the

    balance 500 km is expected to be awarded by 2012-13. Over the next 5

    years (2010-11 to 2014-15), an investment of Rs. 194 bil lion is

    expected in both phases.

    INDIAN ROAD SECTOR STATISTICSUNITS As of 2010

    Length of Roads Kilometers 3,516,452Main Roads Kilometers 666,452

    Paved Roads Percentage (%) 47.3Access to All-Season-Roads Percentag e (%) 61Road Density Km/1,000 sq. km. 1115

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    Phase III: Maximum awarding over the next few years

    This phase involves four- laning of two-laned roads that mainly

    connect s tate capitals and important places to GQ and other key

    corridors. Work on ground 9,098 km, out of the total length of 12,109

    km, is likely to be completed between 2010-11 and 2014-15 at an

    estimated cost of around Rs. 1,041 billion, with bulk of the remaining portion s expected to be completed by 2016-17.

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    Phase IV: Awarding to gain traction

    Phase IV involves improvement of national highways to two lanes.

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

    stretches have been identified by NHAI. With a view to providing

    balanced and equitable distribution of the improved/widened highways network

    throughout the country, NHDP-IV envisages up gradation of 20,000 kms of such

    highways into two-lane highways, at an indicative cost of Rs.27,800 crores. This

    will ensure that their capacity, speed and safety match minimum level for national highways.

    Phase V: Awarding on fast track

    This phase involves six-laning of existing four-lane national highways.

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    The total length of this phase is 6.500 km, out of which 4,974 km is

    expected to be const ructed dur ing 2010-11 and 2014-15 a t an

    estimated cost of around Rs. 638 billion. The government aims to

    implement all projects under this phase on BOT-Toll basis, as traffic

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

    concessionaire is allowed to collect toll on the existing four-laned

    highway from the date of financial closure of the project, which results

    in cash inflows even before commencement of construction. In 2010-

    11, we expect most of the projects in this phase to be awarded under

    BOT-Toll model.

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    Phase VI: Development of expressway

    With the growing importance of certain urban centres of India, particularly those

    located within a few hundred kilometers of each other, expressways would be

    both viable and beneficial. The Committee on Infrastructure has approved 1000

    km of expressways to be developed on a BOT basis, at an indicative cost of

    Rs.16, 680 crores. These expressways would be constructed on new alignments.

    Phase VII: Other highway projects

    This phase includes ring roads, flyovers and bypasses on selected

    stretches of national highways. The development of ring roads, bye passes,

    grade separators and service roads is considered necessary for full utilization of

    highway capacity as well as for enhanced safety and efficiency. For this, a

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    programme for development of such features at an indicative cost of Rs.16, 680

    crores, has been approved.

    Mega Projects

    Mega projects and the eastern peripheral expressway were announced

    by government in 2009-10. Nine mega projects have been identified

    with the length of each project varying from 390 km to 700 km. Out of

    the nine mega projects, feasibility study for the Kishangarh-Udaipur-

    Ahmedabad stretch is in underway. CRISIL Research estimates an

    inves tment of Rs. 423 b il lion and 2 ,930 km of s tretches to becompleted over the next 5 years (2010-11 to 2014-15).

    Expressway

    The government has outlined a new expressway programme, which

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    plans to build 18,637 km of Greenfield national expressway by 2022.

    The programme will be implemented in three phases with four-laned

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

    identified based on the traffic density on nearby stretches, economic

    activity in the surrounding areas and financial viability.

    o State roads

    State roads const itute around 18% o the countrys total road network,

    handling around 40% of the road traffic. State road comprise state highways,

    MDRs and rural roads, which dont come under the purview of PMGSY.

    These significantly contribute to the economy of mid-sized towns and rural

    areas and to the countrys industrial development by enabling movement of

    industrial raw materials and products.

    Over the last 5 years, there has been significant growth in the construction of rural roads , both in volume and value t erms , t he re has been a 53%

    compounded annual growth while in volume it has been 30%.

    Rural roads connectivity is a key compound of rural development as i t

    promotes access to economic and social services, thereby increasing income

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    levels and productive employment opportunities in India. However, despite

    efforts at the central and state levels through various programmes, about 40

    % of the countrys population is still not connected by all-weather roads. In

    places with connectivity, the quality of roads remains poor due to poor

    construction and lack of maintenance.

    To address this, the government launched PMGSY to provide all-weather

    access. PMGSY is centrally sponsored scheme; however, the responsibility of

    implementation is with the respective state governments.

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

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    Steps taken by the Government:

    The governments increasing focus on infrastructure is expected to invest Rs.

    6.3 trill ion over the next 5 years (2010-11 to 2014-15) in the roads and

    highways sector. National highways are expected to comprise a major share

    of the total investments at 43% followed by state highways (30%) and rural

    roads (27%). Further, the public sector will play a crucial role, funding

    around 69% of the road projects, with the remaining 31% financed by the

    private sector.

    Rural Roads:Expected length to be constructed

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    Present Scenario:

    It would be appropriate to briefly touch upon the present scenario of the Highway

    projects in India, which would reflect the true state of affairs:

    1. Construction Industry:

    The lack of well-developed highway contracting industry is the most important

    factor, which came in way of up gradation of highway system in the country.

    Increasing use of modern tools of management via computer programming and

    cost control methods is to be accelerated. The domestic contractors are still not

    geared up for undertaking large size projects and were not exposed to

    International Competitive Bidding (ICB).

    2. Quality construction:

    A new concept of Quality Assurance has gained currency lately. It is an

    important requirement of the day and this cannot be achieved without adequate

    interest and a sense of commitment by the engineers and contractors. However,

    we are still not in a position to guarantee quality Highways. Often, the life of

    newly constructed work is less than what obtains elsewhere in the world.

    3. Design Approach:

    The empirical method of pavement design adopted by the highway department

    has worked well for low traffic volume roads. The increase in frequency of traffic

    is causing failure which is hardly covered in the present design approach. This

    calls for a review of the present design system and adoption of more rational

    approach.

    4. Cost and Time Overruns:

    Cost and time overruns have been afflicting most of the projects. The analysis of

    projects undertaken by the Ministry of Programme Implementation has identified

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    main reason for this as inability to use right management technique or failure to

    apply the same in the matter of implementation.

    Emerging Scenario:

    With advanced technology and fully mechanized construction of highways with

    quality control standards highway construction work has become highly complex

    and requires very high degree of planning and monitoring in addition to execution

    of the work with heavy construction equipment requiring construction

    management skills of a very high order. Since highway construction has become

    highly capital intensive and fiscal resources being always short, there is an urgent

    need to have a groups of entrepreneurs comprising of skilled contractors, professional consultants and financiers for highway projects.

    Need for private sector participation:

    The National Highway system suffers from various deficiencies of capacity

    constraints, payment crust, geometric features and safety features. About 19,000

    Km of National Highway has single lane carriageway, which need to be widened

    to two-way carriageway as per NH standard.

    It has been assessed at the time of formulation of Tenth Five Year Plan that

    removal of deficiencies on existing highways network will require huge

    resources of around Rs.1,65,000 crores. While government is providing

    increasing budgetary allocations for projects in highway sector and has taken

    major up-gradation initiatives in high density corridors, it has not been

    possible to allocate sufficient funds matching the need due to competingdemands from other sectors.

    In flow of private sector funds thus, is expected to bridge the gap of demand and

    supply to some extent.

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    The nation has been losing Rs. 15,000 crores per annum due to congestion and

    other bad functional conditions of roads leading to avoidable excessive

    consumption of fuel and increase in vehicle operating costs (wear & tear).

    The investment could come from domestic or foreign firms opting for Build,

    Operate and Transfer (BOT) concept. Improvement in credit rating of the country

    due to impressive economic growth could induce confidence in foreign investors

    and could further encourage foreign direct investment.

    Hence, private investment is now inevitable in the Road sector to provide

    additional road capacity to match the demand and price these facilities.

    Therefore, there is an urgent need to tap new avenues of financing for improvement to countrys road network.

    Legislation by Government of India:

    Government of India (GOI) has made some laws in the road sector; some of them

    are as follows:

    Road sector has been declared as an industry to facilitate commercial borrowing.

    The Government has amended the National Highways Act, 1956 to

    provide for the legal framework for private sector participation. Under the

    amended Act, it is possible to:

    o Assign to the private entrepreneur responsibility for

    implementation and operation of projects for specified period

    given by an agreement with the Government.

    o Authorize the entrepreneur to collect and retain the users fee

    (toll).

    o Authorize entrepreneur to regulate traffic on BOT road.

    o Punish any person encroaching and misusing the highway

    developed by the entrepreneur.

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    Initiative by Government: (NHAI)

    In 1988 the National Highway Authority of India Act was enacted by the

    Parliament, which provided for the setting up of a central Authority for the

    Development, maintenance and management of National Highways vested to it.

    The authority became operational in 1995 with the appointment of a full time

    Chairman and Members.

    NHAI is an autonomous organization under the Ministry of Surface Transport has

    been entrusted with task of executing externally aided projects as well as

    implementation of private sector participation in the National Highways. Among

    its other functions is to develop wayside amenities on National Highways. The

    NHAI provided with a capital of Rs. 7 billion (US$ 234 million) to leverage funds

    for Road Development from the capital market.

    The mandate of NHAI under the Act is briefly as under:

    Develop, maintain and manage National Highways vested in it by

    the government. Collect fees on National highways, regulate and control the plying

    of vehicles on National highways for its proper management.

    Develop and provide consultancy and construction services in

    India and abroad and carry on research activities in relation to the

    development, maintenance and management of Highways or any other

    facilities thereat.

    Advice the Central Government on matters relating to highways.

    Assist on such terms and conditions as may be mutually agreed

    upon, any State Government in the formulation and implementation of

    schemes for highway development.

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    Initiatives Taken by Government to Encourage Private Participation

    In view of the budgetary constraints and in order to bring in new management

    techniques as well as latest technological inputs, to improve the efficiency,

    productivity and to bring-in competitiveness in providing highways services to the

    road user, the scope for private sector participation, both domestic and foreign, in

    the road development programme is quite large.

    Following Initiatives have been undertaken:

    Policy

    The government has adopted the following policy measures in order to

    encourage Private Sector Participation. The major extracts are as follows:

    Amendment in the National Highway Act, 1956 to provide for the

    building, maintenance, management and operation of the National Highways

    by private agencies for stipulated periods, and authorize the levy of fees to

    cover their costs and generate reasonable rates of return. Declaration of the road sector as an industry.

    Provision of capital subsidy up to 40 percent of project cost to make

    projects viable.

    Duty free import of high capacity and modern construction equipment.

    100 per cent tax exemption in any consecutive 10 years out of 20 year of

    operations.

    Provision of encumbrance free site for work, i.e., the Government shallmeet all expenses relating to acquisition of land and other pre-construction

    activities.

    Foreign Direct Investment up to 100 per cent in road sector.

    Easier External Commercial Borrowing norms.

    Higher concession period up to 30 years in specific cases.

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    Right to collect and retain toll.

    Four lane sections (both, budgetary as well as privately funded) to be

    tolled.

    o Toll in perpetuity.

    Revision of fee linked to Wholesale Price Index (WPI).

    Risk sharing:

    o Private sector to be compensated for Force Majeure.

    o NHAI to provide short-term credit for temporary short fall in

    revenue due to reduced traffic diversion.

    o Foreign exchange risk sharing pattern being worked out.

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

    conditions.

    Tax/Fiscal Concessions

    The government has introduced various tax and fiscal concessions in order to

    encourage Private Participation. These are broadly classified as follows:

    Concessions available for enterprise undertaking any project

    Under section 80(1)(A), corporations operating infrastructure facilities

    have been offered:

    o 100% deduction in profits for the tax purposes.

    o Such deduction to run for a continuous 10 out of 20 fiscal years at the

    assessees choice. Reduction in the rate of import duty in respect of specified construction

    plant and equipment.

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    Concessions available for Lenders/Investors

    As an incentive to financial institutions to provide finance for the

    infrastructure projects, deduction upto 40% of their income derived from

    financing of these investments is available provided the amount is kept in a

    special reserve.

    Exemption for infrastructure funds from Income Tax on the incomes from

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

    investments in the form of shares or long term finance in any enterprise set up to

    develop, maintain and operate an infrastructure facility.

    Subscription to equity shares or debentures issued by a public company

    formed and registered in India and the issue is wholly and exclusively for the

    purpose of developing, maintaining and operating and infrastructure facility, will

    be eligible for deduction equal to 20% of the tax payable by the subscriber. In

    case of such investment, the limit of Rs.60,000/- per year under Section 88 has

    been raised to Rs. 70,000/-.

    Availability of Long Term Finance

    The Government of India and Reserve Bank of India have decided to establish an

    Infrastructure Development Finance Company (IDFC), with an authorized capitalof Rs. 5,000 crores. The IDFC will be a direct lender, refinancing institution and

    provide financial guarantees for the infrastructure projects.

    Government Support

    The government will carry out all preparatory works for the projects identified for

    private investment and meet the cost of following items:

    Detailed feasibility Study.

    Land for right-of-way and enroute facilities.

    Relocation of utility services, resettlement and rehabilitation of the affected

    establishment.

    Environmental clearances- not necessary for existing routes.

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    Land acquisition procedures streamlined.

    CHAPTER 4

    POLICIES & FRAMEWORK

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    Policies

    Central Government:

    Policy measures for private participation:In order to encourage and facilitate private sector investment and participation

    in the roads sector, the central government has undertaken policy measures

    and provided fiscal incentives within the sector:

    o 100% Foreign Direct Investment (FDI) will be allowed in road sector

    projects.

    o Dispute resolution will be in line with the Arbitration and conciliation

    Act 1996, based on UNCITRAL provisions.

    Concession structure NHAI projects

    New Model Concession Agreement (MCA) for BOT toll-based projects has

    been prepared. The MCA identifies risks and specifies the terms and

    conditions for sharing between the private player and the government.

    Awarding of contracts:

    The future road projects would be awarded on BOT-toll, BOT-annuity and

    cash contracts concurrently, and not subsequently.

    The selection of the concessionaire, under the new MCA, is based on open

    competitive bidding. All project parameters such as the concession period, toll

    rates, price indexation and technical parameters are clearly stated upfront. Pre-

    qualified bidders are required to specify only the amount of grant sought by

    them. The bidder who seeks the lowest grant is awarded the contract. In some

    cases, instead of seeking a grant, a bidder may offer to share project revenues

    with the NHAI. In this case, the bidder offering the highest revenue share

    wins the contract.

    Grant:

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    The maximum grant provided will be 20% of the project cost. In case the

    grant is inadequate for making a project commercially viable, an additional

    grant up to a maximum of 20% of the project is to be provided. The entire

    grant would be disbursed to the concessionaire during the construction period.

    Concession fee:

    Concession fee is the amount concessionaire agrees to share with the NHAI

    out of the revenues of road project on the date of commercial operations date

    (COD). The premium would increase by 5% in each year of the concession

    period.

    Concession period:

    The concession period is typically 20 years, but may vary depending on the

    volume of existing and projected traffic for specific projects.

    o The provisions provide for an increase in the concession period by

    1.5% (subject to maximum of 20 %) for every 1% in shortfall in

    traffic. While provision that provides for reduction in the concession

    period on increase in traffic has been removed in interest of road

    players and bankers.o In case the daily passenger car units (PCU), traffic exceeds the design

    capacity of a stretch, yielding an assured equity IRR of 16% to the

    concessionaire and a maximum extension of 5 years would be allowed.

    Construction period:

    The time required for construction (typically 24-30 months) is included in the

    concession period. A concessionaire starts earning revenues from COD. This

    incentivizes the concessionaire to complete construction ahead of schedule.

    Financial closure:

    A time limit of 180 days is set for achieving financial closure by the

    concessionaire. In the event of failure, the bid security is forfeited.

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    The NHAI has introduced an additional condition for bidding road projects.

    Developers would be barred from bidding for new projects if there or more

    NHAI (BOT) projects are pending financial closure. However, if a bidder

    convinces NHAI about surety of arrangement of funds for the project, it can

    bid for more projects.

    Obligation of NHAI:

    The obligations of NHAI are:

    (i) To acquire and hand over the possession of 80% of the land required for

    the project till the letter of award (LOA) and balance 20% to be handed

    over within 90 days of project award

    (ii) Obtain all environment clearance for the project before financial closure is

    achieved

    (iii) NHAI will ensure that no competing road is constructed where

    NHDP is being implemented. NHAI will have to compensate the

    concessionaire if this is breached.

    State Government:

    States such as Maharashtra, Madhya Pradesh, Gujarat, Rajasthan, Karnataka, etc.

    have set up State Road Development Corporations (SRDCs) for the development and

    implementation of projects. In order to encourage private sector participation states

    such as Maharashtra, Rajasthan, Bihar, Punjab, Haryana follow their own MCA.

    The comparison of policies across states is shown in the table below.

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    Comparison of policies across States

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    Tolling Policy:

    Toll charges are based on the rates notified by the government. The New TollingPolicy came into force in December 2008 with effect from April 1, 2008. The key

    parameters in the policy are:

    Other Features in this policy include: Uniform rates for public and private funded projects

    Categorization of vehicles in five different types

    Change in base rates for four or more laned national highways

    Introduction of toll rates for two-laned national highways

    New Tolling Policy

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    Legal Framework:

    Central Level Initiatives:

    Administration of roads has to go hand in hand with the jurisdiction of the Central

    Government and State Government. Some of the legislations governing the roads

    sector are:

    o Indian Tolls Act, 1851

    This act enables the government to levy tolls on public roads and bridgeswithin certain rates. Certain states have modified this Act to enable toll

    collection by private investors in road projects.

    o Land Acquisition Act, 1894

    The Act empowers the center or state governments, and its agencies, to

    acquire land required for the construction of highways, by paying

    compensation.

    o Dispute Settlement Act, 1940

    Any dispute between the government and a domestic enterprise has to be

    settled through arbitration as per the Act.

    A dispute between the government and a foreign enterprise has to be

    settled either in accordance with the Dispute Settlement Act, 1940 or in

    accordance with the provisions of the United Nations Commission on

    International Trade Laws (UNCITRAL).

    o National Highway Act, 1956

    Legislations about national highways are as per the National Highways

    Act (NHA), 1956. The NHA authorizes the Central government to notify

    any highway as a national highway, and also assigns it the responsibility

    of developing and maintaining national highways.

    o Motor Vehicle Act, 1988

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    It is a Central legislation that consolidates and rationalizes the various

    laws regulating road transport in the country. The levy of road usage

    charge on the vehicles is governed by either the respective motor vehicle

    tax acts or equivalent acts.

    o National Highway Authority of India Act, 1988

    The National Highway Authority of India (NHAI) Act was passes in 1988.

    The act provides for the constitution of an authority for the development,

    maintenance and management of national highways in India. The Act

    specifies that the principal function of the authority would be to develop,

    maintain and manage national highways (or any other highway) entrusted

    to it by the Central government. The functional profile of NHAI, as in the

    Act, includes:

    1. Surveying, developing, maintaining and managing national highways

    and related facilities.

    2. Regulating and controlling the movement of vehicles on these

    highways

    3. Collecting fees/charges on behalf of the Central government

    State level initiatives:

    To stimulate private sector participation in roads project, several state

    governments have taken favorable initiatives such as making appropriate

    amendments to the Motor Vehicles Tax Act (Gujarat, Maharashtra, Rajasthan and

    Karnataka), the Indian Tolls Act (Madhya Pradesh and Andhra Pradesh) and

    enacting infrastructure developments acts (Andhra Pradesh and Gujarat).

    Ownership:

    The government usually owns the roads; it also has the right to develop and

    maintain them. However, in case of BOT projects, the right to develop, maintain,

    collection and retention of tolls [known as RoW (Right of Way)] is given to the

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    concessionaire of the project. However, even in such cases the ownership of the

    roads is not transferred to the concessionaire. These projects are transferred back

    to the government at the end of the pre-determined concession period.

    CHAPTER 5

    INDUSTRY STATISTICS

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    Road network in INDIA:

    According to the Ministry of Road & Transport Highway (MoRTH), National Highways

    in India constitutes around 70,000 kms, which is only 2% of the total roads in India but it

    carries approx. 40% of the total traffic on Indian roads, while State highways and MDRs

    carry another 40% of the traffic and accounts for 18% of the road length.

    Road transport is most frequent mode for freight traffic and passenger traffic. It is

    estimated that 53% of the total freight and 87% of the total passenger traffic is carried by

    roads. In 2000-01, roads accounts for 47% of the total freight traffic, which increased to

    52% in 2010-11. Comparatively, the railways, which contributed 39% in 2000-01 to the

    total freight transport, declined to 36% in 2010-11.

    Freight and Passenger Movement

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    Up-gradation of National Highway:

    National highways have been upgraded from single lane and double lane to four

    lanes. Single lane roads decreased from 35% on 2004-05 to 30% in 2008-09,

    whereas double lane roads have reduced from 56% to 53% during same period.

    Between 2004-05 and 2008-09, four lane roads have increased from 9% to 17%.

    Investments:

    Road planning and financing in India is the responsibility of the Central and State

    Government, with the centre responsible for construction, operation and maintenance of

    national highways, and state for state highways and major district roads (MDRs). In rural

    roads, expansion is largely under PMGSY, which is a centrally sponsored scheme, while

    implementation is the responsibility of the respective state governments and panchayats.

    Percentage of National Highways in term of width

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    With the government increasing its focus on infrastructure development, different

    researches estimates investments of Rs. 6.3 trillion in the road sector between 2010-11

    and 2014-15. Of this, the share of national highways would be 43% followed by state

    roads and rural roads at 30% and 27%, respectively.

    Trends in road sector investment

    Planned Investment in Road Sector

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    Financing of NHAI

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    The programme is primarily executed by National Highways Authority of India (NHAI),

    with the Public Works Department (PWD) of the various states and the Border Roads