Financing & Managing Infrastructure Development in India, Risk Mitigation in Model Concession Agreement & Financial Implications on different Shareholders

1. Group 7
Soumyajit Sengupta 12P171
Aneesha Chandra 12P186
Akshay Balooni 12P004
Akshat Sardana 12P003
Financing & Managing Infrastructure Development
IS IT THE MODEL PROJECT FOR ALL STAKEHOLDERS?
PPP in Delhi Gurgaon Expressway

2. Background
 Stakeholders
 Public Institution: National Highway Authority of India (NHAI)
 Private Institution: DS Constructions
 Independent Consultants: RITES Corporation
 Governments: Haryana State Government || Delhi State Government
 Users: Patrons
 Salient Features
 Cost: INR 10 Billion
 Length of Expressway: 27.7 kms
 No of Flyovers & Overpasses: 11
 Toll Lane: 32 Lane State of the Art Plaza (Asia’s Biggest, World’s 3rd Biggest)
 CCTV Surveillance till IGI Airport & SOS Telephony every 1.5kms
 Primary Issues
 Traffic Congestion
 Pedestrian Safety

3. Sector Profile: Roadways
 Roads were declared as an industry, enabling greater
fund access
 Provision of Capital Subsidy of up to 40%, to make
projects viable
 100% Tax Exemption for 10 consecutive Years, in the first
20 Years
 Government sponsored Land acquisition & Other Pre-
Con. Activities
 FDI Limit of 100%
 Easier ECB norms
 High concession period of 30 Years
 Private Party had the Right to Collect & Retain Toll

4. Why adopt a PPP Model?
 Limitation of Government Resources & Capacity to meet Infrastructure requirements
 Government Resources are not able to keep up with rising demand for social goods
 Rapid Economic Growth, Growing Urban Population, Increased Rural-Urban Migration & All round Socio-
Economic Development are some causes
 The above have led to increased the Infrastructural Pressures leading to a widened demand-supply gap in
Infrastructure
 Need for new Financing & Institutional Mechanisms
 Political Economy of Infrastructure Shortages
 Constrained Public Resources
 Rising Civilian Pressure
 Greater Efficiency
 Greater Value for Money for Public Procurement (by reducing Lifecycle Costs)
 Better Project Design & Implementation
 Better Access to Project Finance (in light of drying government funding sources)
 Rigorous Risk Appraisal (as benefits are reaped by Private party only if project performs to its optimum
standard)
 Optimal Allocation of Resources leading to Better Cost Estimation & Investment Decisions

5. Concession Agreement
Issues
 No Model Concession Agreement for Reference or Benchmarking Purposes
 Little or No Documentation Existed at the time of Contract for BOT basis (2002)
 No inclusion of possible risks and complexities that could prop up in the project
 Single Independent Consultant for both Design & Construction Phase and Operations & Maintenance
Phase
 High Expertise Consultant for D&C Phase and Low Expertise Consultant for O&M Phase were generally selected. This
practice was not adhered to.
 There was provision of only 1 IC: RITES Corporation
 The bidding process for Consultants was also anti-competitive and probably Unfair
 Highway Capacity Miscalculation & No Provisions for Capacity Augmentation in the next 20 Years
 Service Quality to Users was abysmal
 Parallel Competing Roads were provisioned to be developed but they were of inadequate size
 Traffic levels in 2008 were above the estimated levels for 2012
 Toll Charges fixed without basing it on Road Volume (Also included a Positive Inflationary Tool for Toll
Charges Increase insulated from the Traffic Volume)
 No Provision for decrease in Toll Charges with Increased Traffic Volume
 100% WPI adjusted increase was allowed in Toll Charges in times of High Inflation

6. Construction Phase
Issues
 Land Acquisition
 Responsibility of NHAI with stiff penalties, still to no avail
 Precedent Conditions
 Breach of Conditions Precedent related to Land handover, delays were made by NHAI
 Further claims were made by DS Constructions. The initial cost to NHAI was INR 3 cr.
 Additional claims also made. Excuse used to cover up 4 months delay in FC approval.
 Relocation
 No major residential relocation was envisaged as project was about highway up-gradation
 Majority of time spent on dealing with illegal commercial operations along the highway
 Utility Shifting (Considered as Encumbrances)
 Delay in shifting of cables and power lines which were pre-construction activities
 Insufficient DPR leading to Environmental & Cost Distress
 Outdated DPR made in 1996 which had just the basic alignment drawings
 Lack of a cohesive Community Impact Study
 Multiple Changes of Scope, primarily due to a flawed concession agreement

7. Concession Agreement
New Model
 Capacity Augmentation Issue addressed
 Based on Phased Development instead of High Cost Roads for catering to Projected Growth in the Long Term
 Concession Period determination was based on present and predicted future traffic
 Toll Charges Exemption for Local Traffic
 A monthly paid pass could be charged for local traffic leading to lower toll revenues
 Increased VGF mechanism to make projects viable
 Local Acceptance important to mitigate potential for protests for Project to become a Model Project
 Claims in case of authority’s inability to provide resources were better dealt with
 Safety Issues were clearly tackled
 Tolling prohibited till Land used for Highway was made usable
 Right of Way provision implemented, whereby 80% of the land acquired originally would be all the land needed to
obtain provisional certificate
 DPR preparation given more importance
 Cost of tree-felling and drawing up proper DPRs were made critical points with authorities assisting in the former too
 Responsibility & Cost Bearers clearly outlined
 Changes of Scope orders not mandatory for private party if the costs were more than 20% of the project
cost overall or 5% in any one year over a period of 3 Years

8. Financial Analysis
 Toll Charges were received and not shared by the private party
 If the total traffic count increased to more than 130,000, half the total revenue would be
shared with NHAI
 Upfront Cost: INR 686.4 Cr (Concessionaire: INR 555 Cr)
 Grant: INR (61) Cr.
 NHAI Borne Cost: INR 131.4 Cr
 Corporate Tax Rate: 33.66%, Minimum Alternate Tax: 11.2% ; Tax Holiday for the 1st 10
years {Section 80(1a)}
 Huge Profit Potential for Private Party, as estimated traffic count was 76000 while the
actual was around 96000 passenger vehicles daily
 An increase of 10,000 vehicles would lead to additional income of INR 7.3cr @ Rs 20/car
 No toll charges revision or concession period revisions were envisaged creating huge
possibility of profiteering by the private party for a long time

9. Impact on Stakeholders
 More than desired profits could be skimmed by DS Constructions due to incorrect traffic
projections
 As toll prices could be changed with changes in WPI, DS Constructions could also benefit if
inflation rose, leading to perpetual growth in income while the costs were more one time and
upfront in nature
 Greater Traffic counts could lead to huge gains being made by DS Constructions
 Environmental NGOs protested the use of asbestos during the construction of the
highway and also the huge number of trees that were felled for Right of Way
implementation
 Patrons were happy about the road but were not satisfied about its utility due to peak
hour traffic congestion and drivers inability to familiarize themselves to Tolling Process

10. Questions
 Financial Implications of the Project on Various Stakeholders
 Is the Model Concession Agreement viable enough to mitigate
project risks?

11. Financial Implications of the Project on
Various Stakeholders
 DS Constructions
 More than desired profits could be skimmed due to incorrect traffic projections
 As toll prices could be changed with changes in WPI, DS Constructions could also benefit if
inflation rose, leading to perpetual growth in income while the costs were more one time and
upfront in nature
 Greater Traffic counts could lead to huge gains being made by DS Constructions
 NHAI
 No financial reward directly from Toll Collection till traffic count is below 130,000 leading to
loss of potential income
 RITES Corporation
 No Financial implication on the performance of the highway
 Patrons
 With rise in inflation, toll prices would rise leading to greater outflow of disposable income
 Multiple/Local users of the highway had to fork out a huge amount till the Model
Concession Agreement was put in place

12. Is the Model Concession Agreement
viable enough to mitigate project risks?
 Risks Mitigated in the New Model
Concession Agreement
 Capacity Augmentation Risks (Exposure:
NHAI)
 Traffic based Toll Charges: Financial Risk
(Exposure: DS Constructions/Patrons)
 Resource Handover Delays: Operational
Risk (Exposure: DS Construction)
 Safety Issues: Safety & Usage Risks
(Exposure: DS
Constructions/NHAI/Patrons)
 Inadequate DPRs: Environmental &
Operational Risks (Exposure: DS
Constructions)
 Changes of Scope: Operational &
Financial Risk (Exposure: DS
Constructions)
 Other Potential Risks
 Political Risk: Force Majeure Events with respect to
change in Political scene
 Going Concern Risk: If the operator is unable to
run the project successfully, then the lender’s
financial exposure is at risk (No Right of Substitution
stated)
 Termination Risk: No stipulation stated with
respect to whether authority will buy out the
venture in case developer and lenders don’t get
adequate returns, as the latter cannot use the
highway for recovery of funds
 Monitoring & Supervision Risks: No clear outline
regarding the extent of hands-on or hands-off
approach to be taken for monitoring of the
project
 Traffic Risk: No stipulation outlined for the event
where the traffic count is not high enough to
justify the cost incurred, primarily after the Metro
route is developed in the region

13. Thank You!