financing road projects in india using ppp scheme€¦ · financing road projects in india using...

Financing Road Projects in India Using PPP Scheme

Satya Kalidindi1 and L. Boeing Singh2

1 Professor, Department of Civil EngineeringIndian Institute of Technology Madras, Chennai, India

Currently:Visiting Professor, Department of Civil, Construction & Environmental Engineering and Institute for Transportation, Iowa State University

2 Research Scholar, Department of Civil EngineeringIndian Institute of Technology Madras, Chennai, India

Outline of Presentation

• Objectives

• Highway Network in India

• Public Private Partnerships

• BOT Models used from Highway Projects in India

• Enabling Frameworks and Reforms

• Risk Allocation Framework for BOT (Toll) and BOT (Annuity) Projects

• Issues Limiting Greater Participation of Private Sector

2Mid-Continent Transportation Research Symposium, Ames, Iowa, Aug 20-21, 2009

Paper Objectives

• The various approaches that have been used for financing the National Highways projects through PPP route in India.

• The reforms, measures and procurement strategies that have been initiated to enable financing through PPP route in view of the risk profile associated with such projects.

Mid-Continent Transportation Research Symposium, Ames, Iowa, Aug 20-21, 2009 3

ROAD NETWORK SCENARIO1950-1951 1995-1996 Increase

Road network 0.4 million km 3.32 million km 8-foldRoads with proper surface

0.156 million km 1.517 million km 10-fold

Passenger buses 34,000 450,000 13-foldTrucks 82,000 1,785,00 22-fold


• Growing mismatch between traffic needs and available infrastructure

• The decline in the allocation of funds over various plan periods in terms of percentage of the total plan outlay

National Highways Network

• Total length - 65,659 km• Account for just 2% of the 3.3 million km

road network• Carry 40% of the total traffic


National Highways Development Program for 2007-2012


Name of Project Likely Cost(in INR Billion) US$

Completion of Golden Quadrilateral and East West-North South corridors (Phase I and II) 524.34 11.7

4-laning of 11,113 km under NHDP Phase-III 724.54 16.12-laning with paved shoulders of 20,000 km of National Highways under NHDP Phase-IV 27.8 0.6

6-laning of selected stretches of National Highways under NHDP Phase-V 412.10 9.2

Development of 1000 km of expressways under NHDP Phase-VI 166.80 3.7

Construction of ring roads, flyovers and bypasses on selected stretches under NHDP Phase-VII. 166.80 3.7

Total 2,272.58 50.5


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Procurement of Infrastructure

• Post liberalisation (1990s) – paradigm shift in mode of procurement of infrastructure including road infrastructure.

• PPP procurement route on certain stretches of road network

• Objectives of mode of procurement:– use the skills, innovations and managerial capability

of the private sector to optimize efficiency in infrastructure projects

– use private financing to address the funding needs, in the light of the competing demands on budgetary resources from social and economic sectors


Public Private Partnerships

• PPPs aim at financing, designing, implementing and operating public sector facilities and services through partnership between public agencies and private sector entities (UNECE 2008)

• Main consideration for public agencies for opting PPPs should be ensuring value for money


PPP Models Risk Transfer Continuum and Their Characteristics


(Adapted from ADB (2000) and World Bank (2004))

BOT Models in Use• BOT (Toll) Model

– The concessionaire is required to meet the upfront / construction cost, operational cost and the expenditure on annual and periodic maintenance. The Concessionaire recovers the costs along with the interest and a return on investment out of the future toll collection.

– Viability gap funding. • BOT (Annuity) Model

– The Concessionaire is required to meet the entire upfront/construction cost and the expenditure on annual maintenance. The Concessionaire recovers the entire investment and a predetermined cost of return out of the annuities payable by the granting authority every year.


Enabling Framework

• Constitution of National Highways Authority of India (NHAI) with the enactment of National Highways Authority of India Act, 1988– NHAI, put into operation in February, 1995, has been

responsible for the development, maintenance and operation of the National Highways.

• Amendment of National Highway Act, 1956 in June, 1995. – To enable the private investors to levy toll and allowed

participation in construction, maintenance, and operation of National Highways.


Key Institutional Reforms and Fiscal Incentives Introduced

• Government to bear the cost of project feasibility study, land for the right of way and way-side amenities, shifting of utilities, and environment clearance, cutting of trees, etc.

• Foreign Direct Investment up to 100 % in road sector.• Provision of subsidy up to 40% of project cost to make

projects viable. • 100% tax exemption in any consecutive 10 years out of 20

years after commissioning of the project.• Duty free import of high capacity and modern road

construction equipment.• Road sector has been accorded the status of an industry via

Section 18 (1)(12) of the Infrastructure Act.• Easier external commercial borrowing norms.


Model Concession Agreements

• MCA for – Major road projects costing more than INR 1 billion

undertaken under BOT (Toll) basis– Minor road projects costing less than INR 1 billion

undertaken under BOT (Toll) basis; and– For road projects undertaken under BOT (Annuity)

route.• Standard documents have been formulated for the

two-stage bidding process for PPP projects– Request for Qualification– Request for Proposal


Initiatives to Meet Financing Needs of Infrastructure Projects

• India Infrastructure Finance Company Limited (IIFCL) in 2006– to provide long term finance (debt or equity) to

infrastructure projects• India Infrastructure Project Development Fund (IIPDL)

– to provide financial support to the state and Central ministries for quality project development activities

• Viability Gap Funding Scheme in 2004– to meet the funding gap of economically essential projects

and make it commercially viable for private sector participation


Risk Allocation Framework for BOT (Toll) Projects


Risk Allocated toPermit / approval Granting authority/ ConcessionaireDelay in land acquisition Granting authorityDelay in financial closure Concessionaire

Traffic revenue risk ConcessionaireTime overrun during construction

Concessionaire

Change of scope Granting authority/ ConcessionaireOperation and maintenance risk Concessionaire

Competing roads Granting authorityChange in law Granting authority/ ConcessionaireForce majeure risk Granting authority/ ConcessionaireIndirect political risk Granting authority/ ConcessionairePolitical risk Granting authority

Risk Allocation Framework for BOT (Annuity) Projects


Risk Allocated toPre-investment Granting AuthorityResettlement and Rehabilitation Granting AuthorityPermit/ Approval Granting AuthorityDelay in Land Acquisition Granting AuthorityDelay in Financial Closure ConcessionaireTime and Cost Overrun during Construction ConcessionaireTime and Cost Overrun during O & M ConcessionaireDelay in Payment of Annuity Granting AuthorityChange of Scope Granting AuthorityTraffic Revenue Risk Granting AuthorityChange in Law Granting Authority/

ConcessionaireNon-Political Force Majeure ConcessionairePolitical risk Granting AuthorityPerformance Standards ConcessionaireLane Availability ConcessionaireInterest Rate Risk Concessionaire

Issues Limiting Greater Participation of Private Sector in Development of Road Projects

• The current policy of offering the project first on BOT (Toll) then on BOT (Annuity) and then on EPC contract is likely to introduce delay in the implementation of the project since government approval is required at each stage.

• In case of BOT (Toll) model, the degree of risk exposure to the concessionaire is high and the private sector is reluctant to take high risk exposure. There has been low private sector participation in bidding of projects.

• Though BOT (Annuity) exposes the concessionaire to a lower level of risk but the cost of the project procured through BOT (Annuity) route is higher. The cost of private capital is comparatively higher compared with the sovereign cost of borrowing.


Issues Limiting Greater Participation of Private Sector in Development of Road Projects

• The bidding process for PPP road projects has been standardized with the introduction of model Request For Qualification and Request For Proposal. However, there has been lack of investors’ interest in the PPP road projects on account of certain clauses in both the model documents.

– For instance, as per the model RFQ, only six applicants will be short-listed for the bidding stage based on the basis of their respective aggregate experience score.

– As per the model RFP, the bidder will not be eligible for bidding if the bidder was during the period of 2 months preceding the bid due date: (i) pre-qualified for the bid stage (second stage of bidding process) in relation to 8 or more projects; or (ii) declared as the selected bidder for undertaking 4 or more projects; or (iii) unable to achieve financial close for 2 projects within the stipulated time.

• Certain risks such as land acquisition risk, in spite of being allocated to the party best suited to manage them, have been a major cause for delay in timely completion of the project.


Thank You

20Mid-Continent Transportation Research Symposium, Ames, Iowa, Aug 20-21, 2009

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