Group 7

Soumyajit Sengupta12P171

Aneesha Chandra12P186

Akshay Balooni12P004

Akshat Sardana12P003

Financing & Managing Infrastructure Development

IS IT THE MODEL PROJECT FOR ALL STAKEHOLDERS?

PPP in Delhi Gurgaon Expressway

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

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

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

Concession AgreementIssues

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

Construction PhaseIssues

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

Concession AgreementNew 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

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

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

Questions

Financial Implications of the Project on Various Stakeholders

Is the Model Concession Agreement viable enough to mitigate project risks?

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

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

Thank You!