Highway Projects in India

FINANCING | PROFITABILITY & BIDDING INTEREST | CONTRACTING STRUCTURES

SAURABH SUNEJA

saurabh.suneja@crisil.com

Introductions
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Introductions
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We provide advisory services in the areas of strategy, valuation opinions, financial markets, public-private
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This presentation
Suitable financing avenues vs. worthy projects: weighing
constraints
Contract arrangements in a PPP risk management

An snapshot of PPP developers profitability

Discussion on modes of contracting beyond BOT Toll

Financing constraints vs. Bankability

Not one or the other

In the news

Liquidity crunch hits road sector | September 03, 2012

The Ministry of Finance recently suggested that all public sector banks
disburse loan for road projects only after ensuring that 100 percent right-ofway has been acquired by the National Highways Authority of India or state
governments.

Points of View
View: Article in The Economist, Infra
Red

Counterview: (letter published) 2

weeks after the article

Ambitious infra development targets

investment requirements

Its a myth that infra investments in India

have been hampered by dearth of
sufficient funds

Large proportion to come in as private

investments
Pace of infrastructure development has
been slow one reason is low pvt.
Investment
There is a need to increase avenues of
debt financing available for pvt infra
investments
Reduce risk factors that can derail or
slow down projects (land acq, govt
approvals etc.)

No observed example of a bankable

project that has not been taken up mainly
due to lack of equity or debt funds

Fundamental issue with most projects is

lack of dependable revenue model
Poor investment climate / governance
issues have hampered investments
states with best infra are the ones with
efficient govts.

Points of view
Large Commercial Bank:
We are looking forward to evaluating toll road projects, but there
are few projects in the market right now

in the past 1 year we have assessed and turned down financing

for several road projects because of aggressive bidding /
viability issues

Large NBCF:
We keenly consider projects that would pass our risk
assessment criteria
We constantly watch out for potential risks so we wont
finance a power project without a robust fuel supply
arrangement, or a road project with land or environmental
issues
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Risk management through contracts

a quick overview

Contracts reflect allocation & mitigation of risks NHAI

Roads
Concession
Agreement

JV Partners

Escrow Bank

Lenders

EPC Contractor

SPV

State
Government

O&M Contractor

EPC Contract

O&M Contract

Concession Agreement

SGSA

Escrow Agreement

Substitution Agreement

Risk Allocation b/w Govt.

& Concessionaire

Major implementation
risks that State Govts can
address

Risk of
misappropriation of
accruals

Mitigating lenders
risk

Design Risks

Pre-construction risks

Construction Risks

Clearances

Risk of debt not

being serviced

Traffic & Toll rate Risks

Competing Facility Risk

O&M exp.not paid

Risk to lenders of
concessionaire
not performing

Service Quality Risks

New taxation Risk

Under reporting of
revenues

Mitigation for risks

transferred

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View on profitability of PPP developers

and a closer look at traffic forecasts

Developer profitability on a downturn

Downturn in profitability:

Present low bidding interest:

- Aggressive bidding

- High volume of projects at hand, high

debt: this limits capacity to take up
further projects; many developers
looking to exit assets to raise funds

- Economic slowdown, further

dampening commercial prospects
- Financing more expensive than
anticipated

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Key faults in traffic estimates

WHY
High toll tariffs and
miscalculation regarding
willingness to pay
Recession / economic
downturn
Some expected
developments not
materializing
Time savings were lower
than expected

Key Metric: Actual / Forecast Traffic

Improvements on
competing toll-free routes

WHAT

Considerably lower usage

by trucks than expected

-Study: Analysis of 32 toll road projects worldwide. In only 4 cases

actual traffic > forecast traffic; at an average actual traffic volumes
were around 73% of projections
-points to general optimism in forecast exercises (including studies
commissioned by banks)

Lower off-peak / weekend

traffic

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Traffic growth estimates | toll bridge

TAZARA Railway
Line
Bridge on Nelson
Mandela Road

Proposed
Kigamboni Bridge

TAZARA Railway
Bridge

Estimated baseline
for year 2009
intraffic
Tanzania
Estimated baseline
traffic for year 2009

Traffic growth based on:

Expected population

Estimated baseline
growth (based on
Traffic
traffic
forgrowth
year 2009based on:

Kigamboni master plan)

Expected population
Estimated
baseline
growth
(based on
Estimated
baseline
Expected
growth
in2009
trip
traffic
for year
Kigamboni
master
plan)

traffic
for year
2009
intensity
(as per
JICA
traffic master plan)

Expected growth in trip

Traffic growth based on:
intensity (as per JICA
traffic master plan)
Expected population
Adjustment in
growth (based on
traffic
Kigamboni
master
plan) based on:
composition to
Traffic
growth
mach
Estimated baseline
Traffic growth based on:
composition
Expected
population
for year
2009 on
Expected growth
in trip traffic
growth
on typical urban
intensity (aspopulation
per
JICA (based
Expected
Projected
roadstraffic
Kigamboni
master
plan)
traffic master
plan) on
growth
(based

Adjustment i
traffic
composition
Adjustmentmach
in
traffic
composition o
composition
to urban
typical
mach roads

composition on
typical urban
roads

Adjustment in
traffic
in
for Adjustment
composition
to
traffic
Kigamboni Bridge
mach
Projected
traffic
for
Kigamboni master plan)
composition to
composition
on
Kigamboni
Expected growth
in trip Bridge
mach
typical urban
intensity (as per JICA
composition on

Contracting in case of non-tolled projects

examination of alternative models

Large opportunity in non-tolled road projects

Several instances where roads would not be developed on BOT-toll
basis
Low traffic levels and therefore toll based concession not viable

Low willingness to pay / or developers suspect so

Low willingness to charge?

Close to two-thirds investment in roads development between 201213 and 2016-17 to come from public funds
37%
63%

Public funds
Private funds

While NHs would see majority of investments by private players, over 80%
investments in SHs expected to come from public funds

Contracting alternatives on the table

Main contracting
alternatives

Views

Counter-views / remarks

BOT - Annuity

Allows efficiencies from pvt. players

BUT, has been expensive (potentially
due to private sector premium / cost
differential for financing)
Creates liability for the govt. akin to
debt, this needs to be acknowledged

Expensiveness exaggerated since

construction cost assessments by
pvt. players anyway ~ +25% of CA
Pvt, companies would take benefit
of tax provisions and therefore
would have a relative cost advantage

Traditional item
rates contract

Have always experienced huge cost

and time overruns, therefore should be
avoided

No counterview, dont do it!

EPC fixed cost

contracts

Appropriately shifts construction risks

to EPC player
BUT, does not make the developer
responsible for long term maintenance

Concern of not creating long term

commercial inventive for superior
construction valid; EPC can be
bundled with medium / long term
maintenance contracts

AND
Variations with modifications or
hybrids of the above structures

17

Key motivations of the govt. and emerging

contracting modes
Key preferences / consideration of contracting authority (CA):
Good quality and timely construction
Contracting framework to have imbedded provision for long term
maintenance
Value for money

[Example] Hybrid annuity model caters to motivations of CA while

mostly wishing away issues
Here, a bulk of construction cost is paid to the project developer during
construction, thereby reducing the burden of financing on pvt. sector (and
consequently, financing cost)
At the same time substantial payments are allocated to future annuity
payments and developer remains responsible for long term O&M
Framework ensures long term O&M
Ongoing annuity payments creates commercial incentive for good quality
construction and maintenance

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THANK YOU

saurabh.suneja@crisil.com
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