Finance - 05 Toll Road Financing - 29 Jan 07

Cross-Border Infrastructure: A Toolkit
Toll Road Financing
Session on Finance
Sidharth Sinha
Indian Institute of Management, Ahmedabad
The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
Forms of Government Support for Road Concessions
• Land acquisition
 Expropriation of right of way for toll road construction. Cost
of land acquired maybe borne either by the government or
the concessionaire.
• Provision of development rights and third-party revenue

 This measure involves the transfer of right of commercial
development along the toll road to supplement project
economics. The advantage is that this enhances project
economics but excessive dependence on this measure
may reduce incentive to make the road a success.
Government Support for Road Concessions (continued)
• Construction of related facilities

 The government commonly provide for the construction

of connecting roads, access ramp, etc. This contributes
significantly to the project since connecting roads and
other facilities are critical elements for commencement
of operation. However, construction delays may critically
impair the commencement of operation.
• Revenue support
 Revenue support is usually done with a minimum
threshold for compensation paid by the governments
 During construction
 During operation
Grant Supported BOTs
Grant During
Grant During Construction
Operations
Lower, as the grant amount Higher as the entire
Extent of
in capital structure reduces initial project investment
funds
the amount of equity & debt is raised through debt &
leveraging
raised in the project equity
Lower Higher part of lender
Lender dues entirely met dues assured through
Lender through toll revenues grant disbursement
protection during operations
regardless of project
revenues
Grant amount to be Grant amount to be
Cash flow
disbursed by road agency disbursed by road
impact from
within a short span of time, agency over a longer
road agency’s
and during actual asset period of time, after
perspective
(road) creation creation of asset
• Revenue sharing with existing facilities

 Concession agreements which combine the
construction of new stretches with the rehabilitation and
upgrading of an existing stretch
 This would address the problem that the new stretches
have low traffic densities making them commercially not
viable.
 Existing stretches could generate enough toll revenue to
improve the cash flows of the concessionaire, especially
during the construction stage.
• Shadow toll
 Government pays toll to the concessionaires according
to the vehicle - kilometers of the traffic counted
automatically. This provides for a means of introducing
private financing without stimulating resistance to tolling.
 Possible financial burden/ fiscal inflexibility in later years
may hinder transition to real tolling.
• Shadow toll (continued)

 A modification to the conventional shadow toll model is
suggested, through payment of shadow tolls to the
Concessionaire by the road agency in two tiers:
 A base payment which is assured regardless of
actual traffic on the road;
 An additional payment per vehicle that actually uses
the road
 This provides the concessionaire incentive to
improve the road condition and usage.
Fixed IRR or Assured Return
• Guaranteed level of net return on equity/project, taking the

time value of money into account.
 If the actual traffic is lower than the projected level, the
concession period will get extended
 Although this results in improved project economics, its
effect on current cash flow is negligible.
• Since the fixed IRR model guarantees a return over and

above the costs of the toll road operator, there is less
incentive for cost efficiencies.
 Standard problem with rate of return regulation
Least Present Value of Revenue
(LPVR) Based Bidding
• The bidding variable is the present value of revenue

throughout the life of the concession that firms are
willing to accept to undertake the project.
• The duration of the concession is then flexible and
depends on the effective traffic levels encountered.
• Encourages operating and capital cost efficiencies as
opposed to fixed IRR mode
Implications of LPVR
• Tolls can be adjusted without negotiation with the

concessionaire
• They transfer political and demand-related risks to the
user in the form of an endogenous concession period
• Calculation of compensation payments on concession
termination is straightforward at any point in time during
the concession period.
Road Funds
• Ring-fenced government sponsored special purpose

entities
 limits amount of liabilities arising from public support to
public-private partnerships projects
 assists to improve governance and transparency of the
allocation of government contribution.
• Funded by government’s contribution (tax payers), fuel

cess, user charges & donors-multilateral interventions.
Maintenance Road Funds (ADB Report)
• Capital bias
 Even when the road budget is adequate for proper

maintenance, maintenance can still be inadequate,
because of capital bias. Politicians want to build new
roads.
 ‘The public mistakenly thinks the remedy for bad roads is
renewal, not maintenance.’
• Unless a culture of (preventive) maintenance can

become entrenched in a country, road maintenance and
new roads, should not be funded from the same pot.
Second Generation Road Funds
• The concept of the second generation road fund and

board is that of an autonomous agency
 controlling the funding of road maintenance,
 directed predominantly by road users,
 having power to raise revenue and control funding
allocations,
 having a strong incentive to insist on commercially
and professionally efficient management.
Evaluation of Road Funds
Road Funds Revisited:
A Preliminary Appraisal of the Effectiveness

of the “Second Generation” Road Funds, World Bank, 2002
• The paper is based on detailed reviews of experience in seven

African countries in which the World Bank has had some
involvement in the establishment of second generation road
funds
 Most countries are still not able to fully fund their desired
levels of road maintenance because of residual controls of
the Ministry of Finance over the level of the fuel tax levy
 Many countries are unable to disburse even those funds
that are allocated because of the low absorptive capacity
of the maintenance contracting sector.
Evaluation of Road Funds (continued)
 Despite this limitation on overall funding, there is already

evidence of increased efficiency in implementation
associated with greater security of funding and extended
private sector contracting.
 There is no strong and systematic link between the form of

the fund (user majority on boards, private sector chair, etc)
and their performance (reduction in costs, improvement in
road condition). Even continued reliance on the budget for
a substantial part of funding has not been a particular
impediment.
Evaluation of Road Funds (continued)
• “The elements which link and reconcile these conclusions

in our sample of countries is a commitment of
government to
 facilitate a more businesslike approach to road
maintenance, and
 ensure that road maintenance receive high priority in
budget allocation.”
• The importance of the creation of the funds has been as

much an indicator of the willingness of the country and a
focus for change of process as an essential mechanism
for efficient maintenance policy.
Toll Roads - Case Study:

Noida Toll Bridge Company Limited (NTBCL)
Background
• The river Yamuna that runs north-south forms a natural

barrier that restrains expansion of Delhi to the east.
• The New Okhla Industrial Development Authority

(NOIDA) in the neighbouring state of Uttar Pradesh
established a new integrated industrial township in close
proximity to Delhi.
• Noida located east of Yamuna is a township that is under

development since 1976. Today it has become one of the
satellite towns of Delhi.
Background (continued)
• The traffic that is generated by this satellite town is

substantial and the interaction with Delhi is also
substantial.
• The traffic between the east of river Yamuna including

Noida and Delhi was of the order of 3,70,000 PCUs
daily in 2002 and was serviced by three existing toll
free bridges.
Project Alignment
Background (continued)
• 30% of Delhi’s population lives across the river Yamuna

• NOIDA is inhabited by 700,000 people - 50% of whom
commute to Delhi for work
• Population of Noida/Greater Noida will increase manifold

over next few years
Project Development
• Infrastructure leasing and financial services (IL&FS),

NOIDA & the Delhi Administration (DA) reached an in-
principle agreement for the implementation of a fourth
bridge across the Yamuna, the Delhi Noida Toll Bridge,
on build, own, operate & transfer (BOOT) basis.
• A tripartite memorandum of understanding (MoU) was

signed between IL&FS, NOIDA, & DA on April 7, 1992
for establishing the new bridge and defining the scope
and mutual obligation of the various partners.
Formation of Project Company
• A steering committee consisting of representatives of

 Government of Uttar Pradesh (GoUP),
 Delhi Government (DG),
 Ministry
of Urban Affairs and Employment,
Government of India,
 Delhi Development Authority (DDA),
 NOIDA and
 IL&FS
Formation of Project Company (continued)
• Noida Toll Bridge Company limited (NTBCL) was

incorporated on April 8, 1996.
• NTBCL, is a special purpose company promoted by

Infrastructure Leasing & Financial Services Ltd (IL&FS)
for the purpose of development, construction, operation
and maintenance of a bridge across the river Yamuna
connecting Delhi and Noida on a build-own-operate-
transfer (BOOT) basis.
The Project
• Bridge specifications
 An 8 lane link across the river Yamuna
 A 552 meter long main bridge, 3 minor bridges
 8 lane approach roads on embankments
 A 27 lane automated toll plaza
• Time saving: Travel time from south Delhi to Noida

reduced to 5 minutes as against 30/45 minutes via
alternative routes
The Project (continued)
• Distance saving: 6-7 kilometers which implies petrol

saving much in excess of toll rate (presently Rs 17/ trip
for cars)
• Least polluted route

• Reduction in pollution/congestion in alternate routes
due to traffic diversion
Stakeholders
• Government of India
• Governments of Uttar Pradesh (UP) and NCT Delhi

(entered into a support agreement to the concession
agreement)
• NOIDA - concession grantor
• IL&FS - sponsor
• The World Bank - line of credit to IL&FS
• Kampsax International, Denmark - project consultants
• Mitsui Marubeni Corporation, Japan - EPC contractor
• Intertoll, South Africa - O&M operator
• Users of the bridge
Support
Govt. of NCT Agreement Govt. of Uttar
of Delhi Pradesh
NOIDA
Indpt. Engineer
Concession Agreement
Indpt. Auditor
Shareholders
NTBCL
Agreement
Loan Agreement
O&M Contract
Banks/FIs EPC Contract Investors
Mitsui Marubeni Intertoll

Corp. Japan South Africa
Milestones
• Apr 1992: Signing of MOU
• Jun 1993: Appointment of Kampsax

• Jan 1996: World Bank review & approval
• Dec 1996: Delhi Development Authority Technical
Committee approval
• Nov 1997: Concession agreement signed
• Nov 1997: Delhi Urban Arts Commission approval
• Jan 1998: Support agreement
• Jan 1998: EPC contract awarded to MMC
Milestones (continued)
• May 1998: Land acquisition completed

• Aug 1998: Regulation authorising toll collection
• Dec 1998: Appointment of O&M contractor
• Dec 1998: Financial close
• Dec 1998: Commencement of construction
• Feb 2001: Commencement of commercial operations
• Oct 2001: Completion of connecting flyover
Principal Challenges
• The Delhi Noida Bridge Project was the first large private
sector initiative in the surface transport sector.
• NTBCL had to contend with several governments,
multiple departments, and ever changing political and
bureaucratic interfaces.
• As the first project of its kind, it did not have the
advantage of precedence, either in documentation or with
respect to financing.
• The project was also implemented during a fragile
political and economic environment in the country and
state/s.
Concession Agreement - Toll Determination
• Recovery of costs through fees/tolls:
 Right of NTBCL to recover the project costs and

operation and maintenance costs through the levy of
fees over the concession period.
• Fee review mechanism:

 One representative each of NOIDA, the concessionaire
and a duly qualified person appointed by the
representatives of NOIDA and concessionaire who shall
be the Chairman of the committee.
 The fees shall be determined by the FRC based on the
CPI for urban non-manual employees.
 The fees will be revised on February 1 of each year.
Assured Returns
• The concession agreement allows NTBCL to earn an

assured return of 20% net of taxes, calculated on the
total capital employed in rupee terms.
• The capital employed, calculated by the independent

project engineer and independent auditor, includes
 project costs
 cost of major repairs
 shortfall in recovery of assured returns in the preceding
year.
Assured Returns (continued)
• The Concession could also be extended by two years

at a time beyond the 30-year stipulated period, in case
the assured returns are not achieved.
• NOIDA has the discretion of granting land development

rights to support any shortfall in revenues required to
earn the assured returns of 20%.
• Once the targeted return has been achieved, the

project facilities would revert to NOIDA for a nominal
value of Re.1.
Current Toll Rates (valid till 31 Jan 2007)
The toll rates were arrived at Vehicle category Toll Rate

using: (Rs./Trip)
• willingness to pay surveys 2 Wheelers 8

• user benefits & VOC
savings
Cars/3-Wheelers 17
• user acceptability
• achievement of contracted
LCVs 35
returns over concession
period
Buses/Trucks 40 to 75
Support Agreement
• “Support agreement” was signed between the

Government of Uttar Pradesh (GoUP) and the
Government of NCT Delhi (DG) on 14 January 1998.
The salient features of the Support Agreement are:
 Leasing of the lands pertaining to the project site
and adjacent areas.
 Obtainall necessary clearances from the Municipal
Corporation of Delhi.
Support Agreement (continued)
 Not to allow construction of any other passage

across the Yamuna which is toll free or charges
lower toll than the Noida Bridge within a radius of 5
kms from the Delhi Noida Bridge site for a period of
10 years or till the Noida Bridge achieves full rated
capacity, whichever is later, without the written
consent of NTBCL.
• In the event of any breach of the support agreement

GoUP and/or DG shall compensate NTBCL and/or
NOIDA for any costs incurred by them and the lenders
pertaining to the project.
O&M Agreement
• O&M contract awarded to M/s Intertoll, South Africa on the

basis of competitive bidding. Key contract features:
 US$ 2.3 million equity participation
 US$ 2.2 million performance guarantee
 Intertoll shares traffic risk with NTBCL – the O&M fee for
first 10 year is directly related to the revenue generation
 Revenue leakage capped at 0.1% with strong penalties
• After 10 years the O&M fee will comprise of :

 Variable fee @ Rs 0.725 (US$ 0.015) per vehicle
 Fixed fee @ Rs 31.9 million (US$ 750,000) per annum
Allocation of Risks
• Commercial and revenue risks -

 NTBCL
• Sovereign and political risks -
 Governments of UP and Delhi
• Time overruns -
 EPC contractor
• Operation & maintenance -
 O&M contractor
• Natural force majeure -
 Insurance
Risk Mitigation Framework - 1
Risk Mitigation
Delay in • Robust project scheduling

completion • Liquidated damages/Incentives on contractor
Increase in • Detailed engineering prior to start of work
costs • Value engineering during construction phase
Revenue • Alternative sources of revenue - development rights
risks • Extension of concession period if assured rate of return not
achieved
Technology • Selection of state-of-art tolling technology designed to
risks cater for at least 8-10 years
• Periodic upgradation
Interest rate • All debt contracted are based on fixed rate of interest
Risk Mitigation
Revenue • Internationally reputed toll management company

leakage • Self auditable toll management system with automatic
vehicle classification (AVC)
• Revenue of operator linked to toll collection
• Operator to make good any loss of revenue
Regulatory • Pre-determined formula for revision in tolls

risk (delay in • Independent fee review committee
toll revision) • Revisions do not require approval of NOIDA/Gov’t.
Natural force • Insurance policy

majuere risks
Risk Mitigation
Political risks • Concession agreement provides compensation formula

for various types of direct and indirect political risks
• NOIDA to pay lender’s dues as well as cumulative
equity returns in case of termination due to political
risks
Competing • Delhi Government has undertaken not to build an toll

routes free facility until project achieves full capacity for a
continuous period of 6 months
Inflation • Toll rates linked to consumer price index

Financing Plan
Equity Amount (Rs Million)
IL&FS 360.0
NOIDA 100.0
IFCI 50.0
FCD Issue 207.8
International Funds 400.0
Intertoll (O&M Operator) 106.2
Total Equity 1224.0
Debt
Deep Discount Bond issue 500.0
IL&FS (World Bank L/C) 600.0
RTL from FIs/Banks 1758.0
Total Debt 2858.0
Public Issue
• First green-field infrastructure project to raise equity

and debt from capital markets through
 Secured deep discount bonds (DDBs) aggregating
Rs. 500 million
 Secured fully convertible debentures (FCDs)
aggregating to Rs. 207.8 million
• This was also the first initial public offering with take out
financing arrangement
Take-Out Financing
• Take-out financing facility offered by IDFC and IL&FS in

the 5th and 9th years at the following rates :
Event Amount Yield
End of 5th Year Rs. 9,500/- 13.70%

End of 9th Year Rs. 16,500/- 14.19%
Class-Wise Traffic Performance No. of Vehicles Per Day
Year ended 31 March 2001* 2002 2003 2004 2005 2006**

Cars 12,050 15,318 26,645 33,483 37,058 42,056
Two wheelers 4,833 6,684 10,969 12,935 14,590 16,828
Commercial vehicles 278 632 860 1128 1213 1299
Total traffic 17,161 22,634 38,474 47,547 52,860 60,184
Growth rate 32% 70% 24% 11% 14%
Projected traffic 97,452 103,836 110,274
Average revenue (Rs.)
Per vehicle 12.85 11.66 11.68 12.92 13.94 14.62
Per day 220,461 262,495 449,340 614,279 736,722 879,942
Growth rate 19% 71% 37% 20% 19%
* with effect from 7 February 2001 ** April 2005 to December 2005

Financial Performance
Rs. Million
Year ended 31 March 2001 2002 2003 2004 2005 30.9. 2005
Total income 13 118 187 259 317 189
Total expenses 8 65 82 82 91 51
Operating profit 5 53 105 176 226 138
Interest/Finance charges 50 426 337 346 374 193
Depreciation 9 62 63 2 2 1
Miscellaneous expenditure
written off 2 15 15 15 15 8
Net profit before tax (56) (450) (311) (186) (165) (63)
Less provision for tax / FBT 0
Adjusted net profit after tax
and extraordinary items (56) (450) (311) (186) (165) (63)
12
/6 Closing Price
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NTBCL Share Price History
9/
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5
Debt Restructuring
• Original project debt was contracted at an average cost of
15% pa.
• In view of the downward interest rate trends and revised
cash flow projections, the effective cost of term loans was
reduced to 8.5% pa.
• DDBs were restructured w.e.f. Nov 2004 with revised
interest yield of 8.5% pa and are proposed be refinanced in
the current financial year.
• The debt restructuring exercise has been fully completed
and the current carrying cost of debt is 8.5% pa with
complete repayment by 2017.
Valuation of Company
• Market capitalization
 =Rs. 35*122.4 million= Rs.4,284 million
• Debt book value = Rs.3,700 million

• Approximate enterprise value
 Rs.8,000 million
• Discounted cash flow value

 15 year cash flows Rs.7,000 million
 Terminal value Rs.9,426 million
Learnings
• Problem of long-term funding to realize value.
• The back-ended revenue profile coupled with high

interest rates lead to restructuring of NTBCL’s debts.
• The concession extension approach assumes that

investors are indifferent about the time period over
which they earn their return.
Learnings (continued)
• Financial markets may not offer funds with uncertain

debt service and maturity. In that case, sponsors may
be unwilling to participate in a concession in which the
concession term is uncertain because they would be
unable finance the project.
• This approach is akin to a rate of return regulation and

does not provide incentives for cost minimization.

Finance - 05 Toll Road Financing - 29 Jan 07

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Cross-Border Infrastructure: A Toolkit

Toll Road Financing

• Provision of development rights and third-party revenue

• Construction of related facilities

 The government commonly provide for the construction

• Revenue sharing with existing facilities

• Shadow toll (continued)

• Guaranteed level of net return on equity/project, taking the

• Since the fixed IRR model guarantees a return over and

• The bidding variable is the present value of revenue

• Tolls can be adjusted without negotiation with the

• Ring-fenced government sponsored special purpose

• Funded by government’s contribution (tax payers), fuel

 Even when the road budget is adequate for proper

• Unless a culture of (preventive) maintenance can

• The concept of the second generation road fund and

A Preliminary Appraisal of the Effectiveness

• The paper is based on detailed reviews of experience in seven

 Despite this limitation on overall funding, there is already

 There is no strong and systematic link between the form of

• “The elements which link and reconcile these conclusions

• The importance of the creation of the funds has been as

Toll Roads - Case Study:

• The river Yamuna that runs north-south forms a natural

• The New Okhla Industrial Development Authority

• Noida located east of Yamuna is a township that is under

• The traffic that is generated by this satellite town is

• The traffic between the east of river Yamuna including

• 30% of Delhi’s population lives across the river Yamuna

• Population of Noida/Greater Noida will increase manifold

• Infrastructure leasing and financial services (IL&FS),

• A tripartite memorandum of understanding (MoU) was

• A steering committee consisting of representatives of

• Noida Toll Bridge Company limited (NTBCL) was

• NTBCL, is a special purpose company promoted by

• Time saving: Travel time from south Delhi to Noida

• Distance saving: 6-7 kilometers which implies petrol

• Least polluted route

• Governments of Uttar Pradesh (UP) and NCT Delhi

Mitsui Marubeni Intertoll

• Jun 1993: Appointment of Kampsax

• May 1998: Land acquisition completed

 Right of NTBCL to recover the project costs and

• Fee review mechanism:

• The concession agreement allows NTBCL to earn an

• The capital employed, calculated by the independent

• The Concession could also be extended by two years

• NOIDA has the discretion of granting land development

• Once the targeted return has been achieved, the

The toll rates were arrived at Vehicle category Toll Rate

• willingness to pay surveys 2 Wheelers 8

• “Support agreement” was signed between the

 Not to allow construction of any other passage

• In the event of any breach of the support agreement

• O&M contract awarded to M/s Intertoll, South Africa on the

• After 10 years the O&M fee will comprise of :

• Commercial and revenue risks -

Delay in • Robust project scheduling

Revenue • Internationally reputed toll management company

Regulatory • Pre-determined formula for revision in tolls

Natural force • Insurance policy

Political risks • Concession agreement provides compensation formula

Competing • Delhi Government has undertaken not to build an toll