NICMAR GOA CAMPUS

A STUDY ON PERFORMANCE, EVALUATION &

RISK INVOLVED IN BOT PROJECT

Guided By
Dr. Prof. Indrasen Singh

Submitted By
Abhijit Jadhav (G03124)
Vijay Kene (G03128)
Rahul Wankhede (G03162)
PGP ACM 3rd Batch
(2009- 2011)

A Project seminar submitted in partial fulfillment of the Academic

requirements of the Post Graduate Programme in Advanced Construction
Management

(PGP ACM)

NATIONAL INSTITUTE OF CONSTRUCTION

MANAGEMENT AND RESEARCH
GOA CAMPUS

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DECLARATION

We declare that the project seminar entitled “Performance, Evaluation &

Risk Involved in BOT Project” is the bonafide work carried out by me/us, under the

guidance of Dr. Prof. Indrasen Singh, further we declare that this has not been previously

formed the basis of award of any degree, diploma, associate-ship or other similar degrees

or diplomas, and has not been submitted anywhere else.

Date: 5th April 2010

 

Submitted By

Abhijit Jadhav (G03124)

Vijay Kene (G03128)

Rahul Wankhede (G03162)
PGP ACM 3rd Batch
(2009- 2011)

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CERTIFICATE

This is to certify that the project seminar entitled “Performance, Evaluation

& Risk Involved in BOT Project” is the bonafide work of Mr.Abhijit Jadhav

(G03124), Mr. Vijay Kene (G03128), Mr.Rahul Wankhede (G03162) in partial

fulfillment of the academic requirements for the award of Post Graduate Programme in

Advanced Construction Management (PGP ACM). This work is carried out by them,

under my guidance and supervision.

Date: 5th April 2010

Guided by:

Prof. Dr. Indrasen Singh

Dean NICMAR Goa Campus

Countersigned by:

Prof. Dr. Indrasen singh

Dean NICMAR Goa Campus

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ACKNOWLEDGEMENT

It gives us a great pleasure to submit our Project Seminar titled “Performance,

Evaluation & Risk Involved in BOT Project” We acknowledge with the assistance
received from our faculty in completion of this work .

Foremost I would like to thank my project Seminar guide Dr. Prof. Indrasen Singh for
his continuous support, encouragement, critical guidance, and suggestions in making
this Mini Thesis Possible.

We would like to take this opportunity to thank Prof. M. G. Korgaonkar, Director

General, NICMAR for giving us an opportunity to undertake this topic.

We also thankful to Librarians of NICMAR, Goa for giving us access to the valuable
facilities.

We would like to thank our family and friends who encouraged us constantly throughout
the research period.

Abhijit Jadhav (G03124)

Vijay Kene (G03128)

Rahul Wankhede (G03162)

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CONTENTS
CHAPTER – 1.0: INTRODUCTION
1.1 Background 1
1.2 Objective of the study 6
1.3 Scope of the study 7
1.4 Need of the study 8
1.5 Methodology 9

CHAPTER – 2.0: LITERATURE REVIEW

2.1 Introduction 10

2.2 Problems in current scenario 11

2.3 Need for private participation 13

in road projects

2.4 Frame work of private sector participation 14

2.5 BOT model 16

2.6 Peculiarities in financing private 16

Participation projects in the road sector

2.7 BOT financing using structure financing 18

- Special purpose vehicle (SPV)

2.8 Current scenario 20

2.9 Support and incentives 27

CHAPTER – 3.0: PERFORMANCE AND EVALUATION

OF BOT PROJECT
3.1 Introduction 28

3.2 Study of various issues to be considered for 28

Making BOT project successful

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CHAPTER – 4.0: RISKS INVOLVED IN BOT PROJECTS

4.1 Introduction 36

4.2 Types of risk 38

4.3 Risk factors 43

4.4 Risk analysis 44

CHAPTER – 5.0: CASE STUDY

5.1 Coimbatore bypass project 47

5.2 Mumbai-Pune expressway 51

5.3 Noida toll bridge 55

CHAPTER – 6.0: CONCLUSIONS 62

REFERENCES

CHAPTER 1

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INTRODUCTION

1.1 BACKGROUND

India has more than 3.30 million km of road network, making it one of the largest

in the world. However, the quality of the roads is inappropriate and cannot meet the needs

efficient and fast moving transportation. National Highways that are the prime arterial

route span about 57,737 km throughout the country and cater to about 45 per cent of total

road transport demand. NH percentage is about 2.5% of total length. It's important give

important to construction procedure as well as maintenance during service life. Now the

government realizes that good roads are intrinsic to rapid progress. Funding problem is

solving by the Private Sector Participation (PSP) with the help of Build-Opera Transfer

(BOT), BOOT Contracts.

The main idea of BOT concept itself is funding, and all the construction and operation

time-cost overrun and associated risk is taken care of by the entrepreneur. It is hence

necessary that the entrepreneur and his associated builder has to accountant for many

risks as under, some can be foreseen and some cannot be foreseen and reasonably

accounted for. India has one of the largest road networks in the world (over 3 million km

at present). For the purpose of management and administration, roads in India are divided

into the following five cate.gories:

1. National Highways (NH)

2. State Highways

3. Major District Roads (MDR)

4. Other District Roads (ODR)

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Table 1.1 Road Lengths

CATE.GORIES LENGTH

(KM)
Primary road system covering National Highways 38,445
Secondary road system covering State Highways (SH) 1,33,000
Other roads including major district roads (MDR) other district roads | 28,46,400

ODR) & village roads (VR)

Source:

The details of various roads & its length are shown in Table 1.1 above.

Total road length in India is more than 2.25 million kilometers today, of which

half is paved. This compares favorably with the U.S. that has 6.24 million km

of total mad length (3.63 million km paved). Compared to this, China has a

total road length «f 1.03 million km out of which only 170,000 km is paved. In

terms of road length per square km, the connectivity in India (68.4 km per sq.

km) is hence much higher than china (10.7) and comparable to the U.S. (66.5).

However, most roads were built with the primary aim of moving passenger

traffic. With demand outstripping the supply and due to changes in nature of

goods moved, the modal share of road transportation has increased

substantially. This has led to introduction of new, larger capacity, rocks. Most

highways do not have the adequate bearing capacity for multi-axle and tandem

trucks. This has led to rapid deterioration of road surface quality in many

areas. A look at the levels of road traffic indicates that there is a great potential

for increase in this area, which is similar to the case of rail-based freight

transportation.

There is a considerable progress in the roads sector. The Central Road Fund

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Ordinance, 2000 was promulgated on November 1, 2000 to give statutory

effect to the creation of Central Road Fund. The bill to replace the said ordinance

has been passed by the two houses of the Parliament. Assured user charges in

terms of additional cess are being levied on petrol and H:gh Speed Diesel. An

additional cess of Re. 1 per litre was levied on petrol with effect from June 2, 1998

and similar additional duty of Re. 1 per litre on imported and domestic High Speed

Diesel Oil was levied with effect from March 1, 1999

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Levis are to accrue to a dedicated Central Road Fund. 50 per cent of the cess on

High Speed Diesel Oil will be allocated for the development of Rural Roads. The balance

of amount of 50 per cent on High Speed Diesel Oil and entire cess collected on petrol will

be allocated for the development and maintenance of National Highways (57.5 per cent),

for construction of road over/under bridges and other safety works at unmanned rail road

crossing (12.5 Per cent) and development and maintenance of State Roads including roads

of economic importance (30 per cent). The fund will be non-lapsable and will be used to

fund the development of the total hierarchy of roads, right from National Highways

through State Highways to Rural Roads. It has been assessed that an amount of about Rs.

6,000 crore would have been generated from the cess on petrol for the period from June 3,

1998 to March 31, 2000 and cess from diesel for the period from March 1, 1999 to March

31, 2000. During 2000- 2001, an amount of Rs. 2,010 crore has been allocated for

development of National Highways. Out of this Rs. 1,800 crore has been given to NHAI

for NHDP. Further an amount of Rs. 990 crore has been earmarked for development of

State Roads through the Central Road Fund.

1.1.1 Current Status of Transport

The current status of rail-road transportation is mentioned below in the table 1.2.

Table 1.2 Current Status of Rail-Road Transportation

Road Railways
Passenger 80% 20%
Freight 60% 40%
Source: NHAI Report 2007

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However, road development has been ignored in most of the development plans of India.

National & State highways comprise around 5.9% of the total 3.1mn kms of road

network. National highways, which carry 40% of the total traffic, comprise just 2% of the

total road network of the total 182,000 km of state and national highways only 1%) is four

lanes, 34% is two lanes. Around two thirds is still one lane. The poor state of road

infrastructure has badly affected the transportation in our country. Our commercial

vehicles are able to make only 250-300 km in single day against 500-600 kms in

developed countries. This shows the poor state of road infrastructure, one of the most vital

elements in for economic growth.

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1.2 OBJECTIVE OF THE STUDY

The Objective of the study is:

1) To study and evaluate the critical factors on which the success and performance

of a BOT project largely depends

2) To identify risk at each stage of a BOT project

3) To Study how these risk factors hamper the progress of a BOT project & suggest

some remedial measures for efficient execution of the project.

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1.3 SCOPE OF THE STUDY

1) The scope of the project is limited to the study of BOT projects involved in

highway sector

2) Studying BOT basis highway projects to understand on what factors the success of

these projects depend and also the risk involved in executing such projects on the

part of the contractor by evaluating the milestones these BOT projects have to

face.

3) To have a better preview of these performance factors and risk involved in BOT

projects by carrying out a case study on Mumbai-Pune Expressway which has

been executed under BOT basis.

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1.4 NEED OF THE STUDY

The main reason for unsatisfactory state of our road/highway network has been the

inadequate flow of funds for this sector. The public sector plan expenditure on the road

sector has been on a declining proportion of the National Public Sector Plan expenditure.

The road sector expenditure as proportion of the country's national income has also shown

declining of funds. The financially constrained situation of the road sector has a risen

largely because of the difficult financial position of the central and state governments.

The gap between existing infrastructure support and the minimum expected infrastructure

required for the vibrant economy causes the participation of private entrepreneurs.

To knowledge: As the BOT is An important concept to the Construction Industry. This

study will help in attaining the knowledge of conceiving and executing of a BOT project

to study its performance and risks involved

To practice: This study will form a base for analyzing any BOT project's performance.

To People: This study will help various public & private organization in understanding

the basic concepts of BOT and then in adopting a new strategy to make a BOT project

successful

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1.5 METHODOLOGY

PROBLEM IDENTIFICATION

Analyzing the various factors affecting performance of

BOT Projects & risk involved in executing the projects.

LITERATURE REVIEW

Studying the various remedies to minimize the risk

involved in BOT projects & factors to improve the
performance of BOT Project.

CASE STUDY

ANALYSIS & DATA INTERPRETATION

Finding out an approach for increasing performance &

reducing risks

CONCLUSIONS

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CHAPTER 2

LITERATURE REVIEW

2.1 HISTORY BEHIND BOT

The principle of procurement and operation of infrastructure through private financing is not

new and could be traced back to the year 1820 when Erie Canal in new York was successfully

built. As a result of this there was boom for canal building on this concept across the mid-Atlantic

and New England coast during 19th century. Canal, railroad, and power plants were procured and

got operated in most countries of Europe and North America by mobilizing money through capital

markets.

The French experience is also very old as in the mid 19th century also public infrastructure

was built and operated by private companies. However, the private companies in France accepted

this concept for taking up such projects if there were sufficient guarantees of return from the user

fees together with an appropriate contractual and other related schemes where public service

activities came to be managed by private or semi private companies. The concession schemes were

widely used in France for many public infrastructures involving the payment of user fee such as

ports, airports, highways, toll bridges and urban services. It would therefore be worth sharing some

of the benefits and pitfalls of France and other countries.

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2.2 PROBLEMS IN CURRENT SCENARIO

Despite the publicity of the economic reforms introduced by our government, the inflow of

foreign investment in India was about US$ 1 billion in 1994, though the reform was introduced in

1991. In 1997, the investment has been around US$ 3 billion which is also negligible. In order to

meet infra structural requirements and improve the growth of our economy to an 8% level we need

to attract foreign investment to the level of US$ 10 billion from foreign investors and more than this

amount from domestic investors for the period of next 10 years

The main reason for limited success may be attributed to the following

i. High abortive bidding/tendering cost.

ii. Hesitation on the part of government to agree for balance sharing of risks.

iii. Complexity of negotiation and documentation, the lack of skilled and experienced

negotiators in public sector and inadequacy in co-coordinating the efforts of different

parties.

iv. Bureaucratic attitude and time taken in government decision making.

v. Higher amount of equity inputs insisted upon from the sponsors/promoters.

vi. Construction cost and time over run and refinancing at a later stage.

vii. Lack of sufficient safe guards in guaranteeing the rate of return and maintenance of

revenue value due to inflation.

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viii. A number of clearances from government departments/agencies are involved and one-

window clearance system not yet established.

Other risks — Technological/obsolescence risks, accuracy of revenue projection, political

risks, foreign currency exchange risk.

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2.3 THE NEED FOR PRIVATE PARTICIPATION IN ROAD PROJECTS

India's road network has not kept pace with the growing needs of its economy. Through

the 2 million Km road network in India makes it the third largest in world, the population

supported by it burdens. From 1954 to 1998 passenger and freight traffic has increased 65 times

and the numbers of vehicles have increased 90 times. In contrast the road network has increased

only 5 times during the above period. Today the National Highway constitute '.% of the entire

"cad network (of which only 5% is four lane) and it carries approximately 40% of entire traffic

volume. Apart from the inadequate capacity of roads, the quality of the existing network is poor

due to deterioration from lack of timely maintenance.

The inadequacy of road network has contributed to low bearing capacity, longer time

required for travel (commercial vehicles in India run half the average distance/day vis-a-vis

developed countries) and increased vehicles operation costs. These results in huge economic

losses estimated to be in order of Rs. 200-300 billion per year. Air pollution and increasing

numbers of accidents are other social losses due to the poor condition of roads.

Until recently, the responsibility of creating proper infrastructure services had been entrusted to

public sector, which has faced many problems like inefficiency, lack of accountability, poor

management, over employment etc. The immediate solution is involving the private sector to

pool resources to meet the demand. Various privatization schemes are being floated, but it is

necessary to realize that no private entrepreneur would venture into such untreated path unless

such projects are made financially viable, profitable & bankable. A number of loose end ends

are yet to be tied up to make these projects attractive and successful

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2.4 FRAMEWORK OF PRIVATE SECTOR PARTICIPATION

Participation by the private sector in infrastructure projects is being increasingly adopted in

many countries through what is called as "concessionaire' approach. In this approach the government

and private sector enters into an agreement for design, construction, financing, operation &

maintenance of the infrastructure facility. For the success of these projects it is necessary to define

such issues like responsibilities, liabilities, ownership and allocation of risks clearly to all parties

involved. Though these allocation varies from project to project according to nature of project. These

frameworks for private participation are applicable to most infrastructure projects, including bridge

projects.

Some of the more common and accepted framework for private participation:

1. Build-Operate-Transfer (BOT)

An infrastructure project is said to be a “build-operate-transfer " when the host

government assigns the financing and construction of the infrastructure facility to a private

entity. The entity is given the right to commercially operate the facility for a certain period

(know as concession period) at the end; facility is transferred to host government. During the

concession period investor can recover the costs of construction, debt servicing, maintaining

and operating the facility by collecting toll from the users. Usually the host government holds

the title to the facility and the land on which it is built. This scheme is the most widely used

technique to develop country’s highway/bridge network and has been the most popular mode

for Private participation in the road projects in India.

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2. Build-Own-Operate-Transfer (BOOT)

This scheme is similar to the BOT model in all aspect except that the ownership of the

facility until it is transferred to the government rest with the private entity.

3. Build-Own-Operate (BOO)

Build-own-operate is same as BOOT model ian all aspect, except the private entity

permanently owns the facility and its assets and is not under an obligation to transfer it back to the

host government.

4. Build-Operate-Lease-transfer (BOLT)

It is similar to BOT model, except the private entity leases the physical assets on which the

facility is located to the government for the duration of the agreement.

5. Design-Build-Finance-Operate (DBFO)

Like BOT, DBFO does not entail ownership of the infrastructure facility by the private

sector. In the DBFO scheme the private sector is given the additional responsibility of

designing the facility apart from its financing, construction, operation and maintenance.

BOOT, BOO, BOLT, DBFO etc are not common in India.

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2.5 BOT MODEL

Amongst the above models describe above the BOT model is the most commonly used

framework for private participation in infrastructure projects. As mentioned earlier BOT

projects involve a private company (also known as concessionaire ) usually a joint venture

company or a consortium which finances, build and operates an infrastructure system for a

fixed time during which the government has a regulatory and oversight role.

The responsibility of financing the project will remain the obligation of the consortium.

The BOT projects are designed to generate enough revenues to cover the project company's

investment and operating costs plus an acceptable return on capital. At the end of the project,

which is usually in 15 to 30 years, the system is transferred back to the government. BOT

projects were originally received to transfer commercial risks to the private sector and free

government lures for other uses.

2.6 PECULIARITIES IN FINANCING PRIVATE PARTICIPATION PROJECTS IN

THE ROAD SECTOR

The difficulties in financing of any BOT project varies from project to project but the

main and common reasons for such peculiarities are as following

i. Finances for road projects are characterized by large capital outlays & long gestation

periods.

ii. After the completion of a BOT bridge/road projects the inflow of revenue starts.

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iii. High capital costs coupled with long gestation period's lead to long payback periods

leading to higher debt maturities.

iv. Also by virtue of the intrinsic nature of the projects, the investment is invariably

location specific. And the government is the owner of main underlying asset

(bridge/road).

v. As a result financing for bridges/roads projects is restricted to limited recourse/non-

recourse financing with no significant underlying asset cover.

vi. Road projects are susceptible to demand risks since the Indian user is not accustomed

to paying tolls and the facility being a non-marketable facility the decision of using

the facility is entirely dependent on the user.

vii. Inadequacy of traditional financing approaches

The traditional approach to financing, which involves term loans from financial

institutes and equity offerings in the capital market, would be inadequate to match the risk-

return profile and payback periods of infrastructure (road) investments. The first hurdle here

would be the size of investments required for highway/ bridge projects.

With the absence of a track record, the scope of equity financing in such investments

would be limited. The next consideration would be the long payback periods for road projects.

The term lending institutions in India (which extend loans for5-7 years) would find extremely

difficult to visualize lending horizons of 15-25 years.

More importantly, none of these traditional sources of finances contribute as a risk-

mitigating measure for infrastructure projects. These inadequacies in the traditional

financing perspective draw attention to structured financing" options as a means for meeting

the capital requirements of the infrastructure sector.

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2.7 BOT FINANCING USING STRUCTURE FINANCING : SPECIAL

PURPOSE VEHICLE (SPV)

The essential element in a structured financing option is that the investment in a project

is directly linked to the revenue generating capability of the project i.e. it is seen that the

project cash-flows are adequate to meet the debt obligations. in addition, the projects assets are

extended as recourse security to the lender. This implies that in case of default, the debt

holder's recourse would be limited to the underlying assets. In case the bridges/roads, the asset

itself has no intrinsic value and this lead to additional problems.

Usually a SPV is created, which brings together the private sponsors and the concern

government agencies for setting up the project. The equity Component is brought by the private

sponsor and government agencies. The debt component, consisting of instruments floated by

SPV which is serviced by the revenue generated from that facility.

In road projects lender considers the cash flow and other recourse able security, which

inadequate to meet the comfort level. Financial market have now a days a growing experience

of non - recourse financing, Where the focus is not to tie down the balance sheet of promoters

or investors. So in case of bridge/road projects, Credit enhancement measures like

guarantees/counter guarantees and rights for development of facilities to supplement incomer

cash-flow to improve the overall credit quality of the project and gain the confidence if the

lenders.

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Credit enhancement can be done by

i. Government equity-e.g.: 30% equity of government in Moradabad road

toll Ltd.

ii. Land credit - e.g.: Taj express highway where 2,500 acres of land is

given to lender to develop.

iii. Annuity- e.g.: Palsit - Panagesh highway (west Bengal)

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2.8. CURRENT SCENARIO

2.8.1 INCENTIVES FOR PRIVATE INVESTORS IN ROAD PROJECTS ANNOUNCED

The Union Government announced major concessions for private investors in road

projects including permission to collect toll tax on all vehicles plying on newly widened four-

lane highways, expressways, major bridges new bypasses and tunnels. The private investors will

also be allowed to undertake housing and other development projects along the roads and will

enjoy further tax concessions extending over a period of 20 years. The fresh incentives package

has now opened the way for the development of new roadside townships by private

entrepreneurs willing to invest in the construction of - highways.

The Government had approved the maximum fee to be charged from various vehicles on

existing roads which are widened from two-lane to four-lane. The maximum toll rate for cars,

jeeps and vans has been fixed at Rs.0.40 pa se per km, for light commercial vehicles at Rs.0.70

paisa per km, trucks and busses will be charged at Rs.1.40 paise per km while heavy construction

machinery will attract an import of Rs.3 per km. As part of the further tax concession for

highway projects the income-tax exemption of 100 per cent in the first five years and 30 per cent

concession in the next five years can now be availed of in 20 years instead of the earlier period of

12 years.

Under the new incentive package the National Highways Authority of lire a has been

permitted to provide capital grants of BOT projects for national highways up to 40 per cent of

the project cost to enable leveraging of private investment in the highway sector. Earlier this

limit had been fixed at 30 percent.

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TABLE 2.1 List of BOT Project Awarded as on 01/03/2009

PROJECT N STATE KM CRORES ACTUAL LIKELY STATUS

NAME H SIGNING COMPLETIO
N
Thane- 3 Maharashtra 24 103 12/9/95 31/12/2001 In Progress
&
Bhiwandi 4

byepass
chalthan 8 Gujarat 1 10 10/09/96 15/07/1998 Completed
Road over -4Lane
Bridge
Udaipur 8 Rajasthan 11 24 July-1996 22/04/1998 Completed
Constructio 5 Andhra 6 Nos. 50 9/04/199 08.06.2001 In Progress
n of six Pradesh Bridge 7
Bridges s
Coimbatore 47 Tamil Nadu 33 90 3.10.97 03.12.99 In Progress
byass
Durg 6 Madhya 18.4 68 5.11.97 5.05.2000 In Progress
Byepass Pradesh
Narmada 8 Gujarat 6 113 21.11.97 21.12.2000 In Progress
Nardhana 3 Maharashtra 13 34 25.11.97 25.11.2000 In Progress
ROB
Patalganga 17 Maharashtra 1 ROB 33 29.11.97 29.08.2001 In Progress
bridge
Hubli 4 Karnataka 30.35 68 5.2.98 5.11.2001 In Progress
Dharwar
bypass
Nellore by 5 Andhra 18 73 17.2.98 17.02.2001 Concession
pass Pradesh Agreement
signed.
Constructio
n commence
Koratalaiyar 5 Tamil nadu NA 30 28.10.98 Oct, 2000 In Progress
Bridge
Khambatki 4 Maharashtr 8 37.8 16.11.98 Nov.,2000 In Progress
Ghat tunnel a
& road
Nasirabad 6 Maharashtra 30m 10.45 16.11.98 Nov.,1999 In Progress
ROB
Wainganga 6 Maharashtra 530m 32.6 16.11.98 May,2001 In Progress
Bridge
Mahi 8 Gujarat NA 42 16.11.98 July, 2000 In Progress
Bridge
ROB at 8 Rajasthan NA 16.66 27.11.98 25.04.2000 Concession
Kishangarh Agreement
bypass signed.
Constructio

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n yet to

Bridge 8 Gujarat NA 48.2 01.03.99 31.12.2009 Concession

across river Agreement
Watrak signed.
Constructio
n yet to

TOTAL 888.71K
m
Original work since completed and opened for traffic. Widening to four lanes is in progress.

completed and opened to traffic.

source: MOST ,www.nic.in/indiainfra/CHAP6.ht

The projects taken up for BOT in the state highway, Expressway, Road over Bridges

are shown in Table 2.2, 2.3 , 2.4 consecutively.

TABLE 2.2 PROJECTS TO BE TAKEN UP UNDER B.O.T.LIST OF STATE

HIGHWAYS

Sr. Name of the Corridor Name of Leng Approxim Cost

the th (in ate Traffic
No District Kms) (PCU) (Rs. In
Million)
1 Bypass to Madanapalli Chittoor 7 2500 CVD 27.6
Town on Ananthapur-
Paiamaneru

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TABLE 2.3: EXPRESSES WAYS

Name of the Corridor Length (in Cost (Rs. In

Kms) millions)

Hyderabad - Vijayawada 335 26800

Machilipatnam

- Chennai-Visakhapatnam 765 61200

P Hyderabad -Tirupati-Chennai 905 72400
Hyderabad-Bombay-Road upto 121 9680
State Border

Hyderabad-Bangalore road upto 445 35600

State Border

Hyderabad Bye pass 220 17600

Vijayawada Bye pass 180 14400
Total 2971 237680

TABLE 2.4 ROAD OVER BRIDGES

Package No. Name of the Name of the Traffic (PCU)

Road Over District
Bridge Approximate
(ROBs)/Bridge Cost(Rs.Millions)

1 ROB at Visakhapatnam 1998 54

North Cabin
of Duwada
Railway in lieu
of L-C at Km.
2/666 of road
Leading to
Export
processing
zone railway
km. 762/1
2 ROB at Vizianagaram 2370 39
Parvathipuram
at km 112/6
of
Kalingapatnam-

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Srikakkulam-
Parvathipuram
Road - Railway
km 387/398-405
of
Rayagada-
Vizianagaram
Section
3 ROB at Guntur 4069 75
Narasaraopet
near Lai
Bahadur Market
at Km.246/8 on
Kurnool -
Guntur Road
Railway km
630/6-7
between
Narasaraopet
Sattulur road
4 ROB at Chirala Prakasam 5351 48
at Km. 7/0 on
Odaveru -
Narasaraopet
Road -
Raiway km.
340/12-14
between Chirala
- Jandrapadu
5 ROB at Kovur Neilore 10931 84
at Km.0/2 on
Neilore -
Bellary -
Bombay Road
Railway Km.
176/13-15
between
Neilore
Padugupadu
railway stations
6 ROB at Ananthapur 2209 36
Tadipatri on
Tadipatr
Ananthapur
Road
7 Km.0/0 in lieu 119 911 48
of L.C.No.129/2
Railway Km.
528/32 o

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8 ROB at Mahaboobnagar 1191 24

Vengoda village
Km. 0/2-4 of
Mahaboobnaga
r road
9 ROB at Gadwal Mahaboobnagar 5416 24
at Km. 0/2-4 of
Gadwal -
Rangapur road
10 ROB along Warangal 15006 96
with approach
roads
connecting
Warangal and
Khammam
Road crossing
Kazipet Railway
Junction.
11 ROB at Warangal 15439 78
Warangal at
Railway
km.374/4 on
Road
Connecting
Hunter road
km 3/4-6 and
joining at
km. 10/9 of
Hanumakonda
-Khammam
road
12 Puligadda Krishna 8000 480
Bridge Across
River Krishna
Bridge across East Godavari 17987 690
Godavari River
i
(a) Kotipally
(b) Bodaskurru East Godavari 11255 275
- Vainatheyam

branch of
Godavari

Bridge Across Nalgonda 5362 170

River Krishna at

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N.S.D/s

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Source: Andhra Pradesh Road & Buildings Department , 1999-2001

Other Real Estate Development Options Include

i. Loading and unloading terminals for cargo

ii. Warehouses

iii. Vehicle repair facilities

iv. Vehicle component shops

v. Restaurants

vi. Hotels, motels

vii. Insurance and medical facilities

The developers are required to bear the cost of the land needed for these

facilities, but the IA will assist in have to be approved by the IA as per parameter stated

in the bidding documents. The IA may opt to undertake this type of real estate

development itself as part of the project and use the income generated to subsidize toll

charges that may otherwise seem unsustainable. It can also assign real estate

development to a third agency on the basis of competitive bidding. Acquiring the land.

The layouts for the facilities prepared by the developers.

In addition to the toll, the developer will be permitted to allow advertisement

displays/ billboards within the right-of-way and outside

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2.9 Support and incentives

i. The roads sector .has been declared an industry to facilitate commercial

borrowings.

ii. The Government will provide financial support to help the developer overcome problems of

short-term repayment and debt servicing.

iii. To encourage private sector participation, the NHAI has been empowered to pick up

equity in the projects.

iv. The NHAI will also consider providing traffic support to projects by way of revenue shortfall

loans.

The foreign exchange risk sharing pattern is in the process of being evolved.

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CHAPTER 3

PERFORMANCE & EVALUATION OF BUILD-OPERATE-

TRANSFER (BOT) PROJECT

3.1 INTRODUCTION

Discussing about the various factors involved for the successful existence of a BOT

project. This chapter, therefore provides a summary list of le.gal aspects such as guarantees

agreement etc. the risks involved in the project and the financial structure of the BOT project.

the significance of BOT project related to the both the private investor and the promoter/

government.

3.2 STUDY OF VARIOUS ISSUES TO BE CONSIDERED FOR MAKING BOT

PROJECT SUCCESSFUL

3.2.1. The project must be financially sound, feasible and affordable.

The project must be financially and economically sound. Secondly, it must be feasible

from a practical standpoint. Thirdly, the costs of the service or the fees charged must be

affordable for the users. A feasibility study must therefore conclusively demonstrate the

financial and economic viability of the project under different scenarios.1 Assumptions used

in the feasibility study, including demand estimates, inflation rates and interest rate

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projections, must be realistic and, where possible, supported by detailed historical or

comparative data,

ii. There must be strong government support

Government support is essential to any BOT project. The private sector's interest in

financing such a project will be considerably strengthened if the host government has

announced that it wishes to promote public-private partnerships and that it will allow certain

infrastructure sectors to be privately implemented under BOT schemes. Since moving public

functions into public-private ventures can be difficult politically, the host government's

commitment to a BOT policy is critical.

3.2.2 Criteria for selection of BOT projects

It is necessary to understand that BOT concept is not suitable to all types of projects.

BOT projects should be those which will make a fundamental contribution to economic

growth and which will ensure a reasonable return to the promoters and backers and which will

have a substantial retaining life at the end of the concession period. Facilities which are time-

expired at the end of the concession period, for example, a project with a high proportion of

mechanical and engineering component may not have desired residual value and substantial

amount may have to be spent to update such mechanical/electrical installation. Similarly, the

projects which are mainly required from social consideration and there is very little hope in

realizing the money invested, will not be suitable for BOT approach of development. Such

infrastructure requirement should be met with from public funds by government.

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3.2.3 Adoption of a win-win approach for every participant

A win-win approach is where an entrepreneur can finance, provide, operate and

maintain some facility for the use of which he can charge fee. Upon expiry of concession, the

government acquires a substantial infrastructure asset free of charge, the customer receives the

use of facility that the government cannot otherwise afford to provide and the promoters and

backers receive fair return on the capital invested.

3.2.4 Rate of Return and Concession Period

Investors are increasingly seeking ways to safeguard their returns. One way is to

evolve the mechanism for increasing toll during the period of concession. On the other hand

government may like to fix the toll levels and also to keep it low to protect public interests and

safeguard itself from public criticism, in this situation, the sponsor who finances and operates

the project may have considerable difficulty in maintaining the value of their revenue in the

face of high inflation.

The rate of return depends upon the growth of economy and political stability and on

various risk factors. Normally the return on BOT investment is between 14-18% on road

projects in developed countries, but in developing countries it is between 20-25%. The

concession period shall depend upon the amount invested, the rate of return and the level of

toll taxes proposed to be charged for the services provided. The concession period on BOT

projects, generally vary between 10-30 years and even longer. The recovery of the money

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invested can be in the form of toll collection during the concession period or there can be

shadow tolling mechanism on the basis of actual measured traffic flow and an agreed schedule

of charges set out in the contractual arrangement. In the latter case the government recovers

the cost through general taxation. So far as our country is concerned, it would be more

appropriate that instead of increasing taxes which will help the government to escape political

criticism from public, it will be better if the realization period is kept as large as possible so

that the charges which a consumer has to pay are kept at a reasonable level.

3.2.5 Sponsor's Role

BOT involve the stages of pre-investment, implementation, construction, operation and

transfer. The sponsor has the following role at different stages:

a. As a consultant to carry out the feasibility study during the Pre-investment stage and

engineering design during the Implementation phase.

b. As project sponsor to negotiate agreement with the Government and as a project

promoter to raise equity and borrow loans.

c. As a contractor to execute the project usually at fixed price on turnkey basis during the

construction phase.

d. As an operator and owner of the facility using the project revenue to realise the

investment during the operation phase.

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In short, the role of a sponsor can be described as that of a design and build contractor and that

of the provider of services.

3.2.6. Government Role

The role of government in BOT infrastructure is both complex and multifaceted.

Sound understanding of government role is therefore essential. The government's role may be

involved as regulator/investor/facilitator/protector of public interest/guarantor/promoter/agent

of economic change. The importance of each role depends mainly upon the social and

economic factors and political will. Some of the roles may conflict with each other, for

example: government role as an agent of economic change may conflict with its role as

protector of public interest, such as environmental protection and control Such potential

conflicts must be resolved and government must be prepared to be a willing and active partner

if BOT process is to be made successful.

The legal framework must be stable,An appropriate and stable le.gal framework that clearly

sets forth which government agencies are authorized to develop BOT projects and

the laws and regulations that will apply to sponsors and lenders in such areas as foreign

investment, corporate law, security legislation, taxation, intellectual property rights etc. is

widely recognized as essential for a successful BOT policy. That some developing countries

have enacted special legislation to address BOT matters reflects the importance and urgency

of this requirement.

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3.2.7 The administrative framework must be efficient

Complicated bureaucratic procedures are often citied as a serious obstacle to BOT

projects. Seeking approvals from many different ministries and local authorities is very time-

consuming and creates uncertainties for private sponsors. The host government should

therefore offer an efficient administrative process or entity for dealing with the various

authorities who grant approvals, permits and licenses throughout the construction and

operating period such approvals permits and licenses must be granted in a fair and objective

manner, based on laws and regulations ascertainable at the outset of the project development.

3.2.8The bidding procedure must be fair and transparent.

The bidding procedure is a very important part of a country's BOT policy. Private

sponsors cannot be expected to invest time and resources in the developing of bids if the

process for awarding a BOT project is not reasonably orderly, fair and transparent so that the

chances for success are predictable. The bid evaluation criteria must be clearly defined and the

bids must be evaluated in a public and objective manner.

Although some early BOT projects were awarded after direct negotiations with a

chosen sponsor, experience with competitive bidding systems shows that the latter usually

lead to terms and conditions more favorable to the national interest. An orderly and

transparent bidding procedure should also win public support for private sector participation in

infrastructure projects.

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3.2.9 THE SPONSORS MUST BE EXPERIENCED, HAVE SUFFICIENT FINANCIAL

STRENGTH AND RELIABLE.

The technical ability, experience and financial strength of the private sponsors is of

paramount importance and must be clearly established. Lenders to a BOT project place great

weight on the choice of sponsors and their ability to manage and support and BOT project,

BOT projects must be structured so that the sponsors have the capacity to absorb financial

risks and the incentives to do everything reasonably possible to make the project a success. A

BOT project should therefore not be awarded to the lowest bidder unless that bidder also

satisfies the other essential criteria.

3.2.10 THE CONSTRUCTION CONTRACTOR MUST HAVE SUFFICIENT

EXPERIENCE AND RESOURCES

The lenders will insist that the prime contractor, preferably selected on a competitive

basis, has the technical and managerial competence, staffing and financial strength to fulfill its

contractual responsibilities. Although ultimate responsibility for the performance of the

contractor rests with the sponsor group, the failure of a prime contractor can be a serious

setback for any BOT project. A similar scheme providing for liquidated damages, a

performance bond and construction and equipment warranties,

xiii. The project risks must be allocated rationally among the parties.

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The rational allocation and management of project risks is another factor critical to a

successful BOT project. Simply stated, this means that

(a) all major risks are identified,

(b) the identified risks are allocated to the parties most able to bear them in terms of

cost and control

(c) the allocated risks are managed in a rational way, usually by a combination of

contractual arrangements and financial commitments.

It is advisable to address the risk problem at an early stage of BOT development. All

too often the private sector is so concerned about reducing its exposure and the host

government so concerned about trying to transfer all risks to the private sector that the parties

lose sight of how much the project is actually paying for a particular risk allocation. Every

transfer of risk has a price associated with it and is only as meaningful as the assets that

underwrite it.

xiv. The financial structure must provide the lenders adequate security.

The ultimate success or failure of a BOT project revolves around the sponsors' ability

to arrange financing. Lenders require that the project will pay off the loans as they become due

and that adequate security is provided in case of default. Various techniques to protect the

lenders against non-payment of their loans must therefore be built into a BOT arrangement.

Such techniques will normally include safe.guards such as a real estate mortgage, completion

and equipment guarantees, take-or-pay contracts, stand-by credit arrangements, reserve

accounts to cover future debt service, assignments of the benefits of all project contracts,

insurance, and a power of attorney or trust arrangements that allow lenders to take over and

exercise the rights of the sponsors well in advance of a default under the loan agreements.

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CHAPTER 4

RISKS INVOLED IN BOT PROJECTS

4.1 Introduction

A risk is defined as any unintended or unexpected failure or outcome of a decision or

course of action13l. The writer defines a risk in BOT project as any unintended or unexpected

changes or events which:

1) Delays the schedule of the project or stops the project completely;

2) Causes a cost overrun or revenue shortage of the project;

3) Deteriorates the quality or reduces the quantity of the final output of the project.

Various risks are existing throughout the each phase of BOT project development from

the construction until transferring to the host government with the expiration of the

concession period. For a BOT project to be successfully achieved, these risks must be properly

considered and reduced and sometimes avoided in its feasibility stage. After the

commencement of the construction, these risks must be carefully monitored and managed.

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Figure 4.1Hierarchical Structure of Risks in BOT projects

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4.2 TYPES OF RISK

(1) ECONOMIC RISK

Economic risk is defined as a risk caused by the unexpected changes of external market

conditions in certain country or re.gion where the project is located. Three factors for the

economic risk have been identified.

1) severe pricing war with both domestic and international competitors;

2) decrease of consumption due to the economic re.gression;

3) decrease in the number of users due to the migration or population reduction.

(2) FINANCIAL RISK

Financial risk is defined as a risk caused by the unexpected change of the financial

conditions which can affect the cash flow adversely in direct. Four factors for the financial risk

have been identified.

1) higher inflation rate than forecasted one;

2) exchange rate (currency rate) variation;

3) interest rate fluctuation 4) tax rate variation.

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(3) POLITICAL RISK

Political risk is defined as a risk which is caused by the unexpected change of the

political system or the foreign policy of the host country. Sovereign risk is included in the

political risk. Five factors for the political risk have been identified.

1) War, revolution, political takeover or coup d'etat;

2) Expropriation or confiscation;

3) Embargo or restriction on exports/imports;

4) Breaking the contract or agreement by the government authority or sovereign power;

5) Difficulties in land acquisition for the project.

(4) LE.GAL RISK

Legal risk is defined as a risk which is caused by the unexpected change of the le.gal

system or unnecessary requirements of the le.gal procedure in the host country or pertinent

jurisdiction. Three factors for the le.gal risk have been identified.

1) Availability of numerous permits and licenses;

2) Change of law, standard or regulation;

3) Requirement of the public hearing or dispute.

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(5) SOCIAL RISK

Social risk is defined as a risk caused by the unexpected social, cultural behavior, habit

or customs of the host country or local community. Five factors for the social risk have been

identified.

1) Strikes of work force or union;

2) Public discrimination;

3) Ethical or religious strife;

4) Different working condition such as language, climate or weather;

5) Dishonesty, bribe or fraud.

(6) ENVIRONMENTAL RISK

Environmental risk is defined as a risk caused by the potential or perceived ne.gative

influence on the surroundings or ecosystems. Three factors for the environmental risk have

been identified.

1) Ecological damage;

2) Pollution including air, water pollution and dirt or noise;

3) Nuisance.

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(7) TECHNICAL RISK

Technical risk is defined as a risk which involves the issues associated with design,

engineering, construction and operation of the project. Four factors for the technical risk have

been identified.

1) Defects in design;

2) Unsuitable construction method;

3) Different site condition;

4) Unproven or too difficult technology in operation.

(8) MANAGERIAL RISK

Managerial risk is defined as a risk caused by the lack of business technique or

inadequate management by the promoting companies or joint venturing companies. Three

factors for the managerial risk have been identified.

1) Incapability to raise the funds to finance the project;

2) Inadequate communication or ne.gotiation skill;

3) Incapability to supply the inputs for the project such as labor, material, equipment and

energy.

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(9) PHYSICAL RISK

Physical risk is divided into two factors.

1) Natural disaster;

2) Man-made disaster. Natural disaster includes floods, earthquake, landslides, etc. Man made

disaster includes fire, safety accidents, system breakdown by the human error.

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4.3 RISK FACTORS

The main idea of BOT concept itself is funding, and all the construction and operation

time-cost overrun and associated risk is taken care of by the entrepreneur. It is hence

necessary that the entrepreneur and his associated builder has to accountant for many risks as

under, some can be foreseen and some cannot be foreseen and reasonably accounted for.

Various types of risk are:

i. Availability of land devoid of encumbrances,

ii. Rehabilitation measures in time,

iii. Removal or realignment of utilities by various agencies such as electricity,

telephone, sewers, water supply, drainage etc.

iv. Permission of forest department,

v. Environment Clearances.

vi. Permission from railways for underpass/ over bridge,

vii. Permission from Mining department for quarrying,

viii. Permission from pollution control board. \

x. Delay in decision or approval of design at various stages.

x. Periodical cost escalation of labor/material,

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xi. Escalation due to additional taxes during the process of execution by various tax

imposing authorities,

xii. Soil changes/ parameters needing, increased or changed foundation and cost thereof.

xiii. Time over run cause cost over ran for the work, overheads and plants/machinery.

xiv. Time over run, invites damages/penalty from employer besides lessening of revenue

recovery period.

4.4 RISK ANALYSIS

4.4.1 OPERATIONAL RISK

i. Traffic not materializing as projected,

ii. Traffic using the alternate but longer route available.

iii. Mind set of people not to pay toll or periodical increase in

toll.

iv. Increased cost, lower revenue, making the profit unviable.

4.4.2 RISK INVOLVE IN STAGES

i. Political risk

ii. Policy Risk

iii. Disputes not solved quickly, causing heavy costs.

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iv. Non-coordination and co-operation among various operators such as Employer.

Entrepreneur, Consultant, financer, road user.

v. National clematises causing heavy damages without full compensation

4.4.3 THE RISK PERCEPTIONS DURING OPERATION OF BOT PROJECT

4.4.3.1 SPREAD OUT SERVICES

A transport project creates services all along its route in various forms, which

are to be used at that place only. Therefore, the disturbance caused by the transport

project should not exceed the minimum acceptable level of interference to public life in

terms of pollution and safety. It should also be hazard free at all times, meaning

consistently high standards of operation and maintenance.

4.4.3.2 DISTRIBUTED CLIENT

In a transport project, every user is directly a client of the operator. Therefore,

achieving customer satisfaction becomes a tiresome and difficult affair given the diversity of

perception and the exceptions of the customers of various social strata.

4.4.3.3 OPERATING COSTS

In a transportation project, the capital cost is veiy high as compared to the maintenance

and /or operation coat per unit of throughout. Thus the fare structure formulation will have

clear linkage with this aspect of cost. A built in feature for periodic /requirement based

revision is also an added necessity.

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4.4.3.4 FINANCIAL RETURNS

The operator acts as public interface, and therefore, the accuracy of cash flow

projection and revenue generation is largely dependent on the performance of the operator. In

effect return on investment becomes an implicit function of the operator's efficiency.

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CHAPTER 5

CASE STUDY

5.1 CASE 1: COIMBATORE BYPASS PROJECT, INDIA

Project Brief:

The project consists of:

• A road 27.67 kms in length and 40-45 m wide

• A bridge over the Attupalam Bridge on NH47 with in the City outskirts

• A road over bridge (ROB) on NH-209

• A bridge across Noyal River

Public Party:

Ministry of Surface Transport (MoST)

Government of TamilNadu (GoTN)

Private party: L&T Transport Infrastructure

PPP scheme: BOT basis

Project cost: The cost of the project including the bridge was estimated to be Rs.90

crores.

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Concession period:

• 21 years for the bridge and

• 32 years in the case of the bypass to collect toll.

Toll structure:

The following Toll structure was fixed initially in the concession agreement.

Cate.gory of Vehicle Toll on the bridge Toll on bypass for Toll on bypass for

for Old and New part use Rs/trip full use Rs/trip

Car/Van/Jeep 5.00 7.00 19.00

LCV 15.00 10.00 28.00

Bus/Truck 15.00 20.00 56.00

MAV/Heavy Trucks 23.00 30.00 84.00

Auto rickshaws, two wheelers and slow moving vehicles were exempt from paying tolls.

The work on the project was commenced on December 1997 and Attupalam Bridge was

opened for transport in December 1998 and the bypass was opened to traffic on 2000.

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What Went Wrong in Coimbatore bypass project?

L&T started collecting tolls from the day of commissioning (tolls were collected both

on the new as well as old bridge). The major problems which led to the failure of

successful completion of project are as follows:

Private Participant Interests taken care

• Only L&T bidded for the project with the condition that the Attupalam Bridge

should also be bundled with the project though the bridge is geometrically not a

part of the bypass to make it financially feasible.

Uncertainty about Toll collection system

• The state transport corporations together with the local truck and taxi owners have

expressed their unwillingness to pay toll on the bridge.

• They were demanding concession rates for frequent users and opposing the tolling

of old bridge.

• L&T made several representations to the government re.garding their loss due to

poor compliance.

• The state government in an attempt to resolve this issue proposed introduction of

concessional rates Rs.50 per day for government and private buses and Rs.300 per

month for all non-commercial vehicles in January 1999.

• The suggestions were not accepted by L&T and it insisted on retaining the old

rates as agreed in the original agreement.

• agreed to the subsidized toll rate of Rs 50 per day per bus of TN Transport

Corporation irrespective of the number of trips the buses will do provided the state

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government compensated the revenue losses sustained by the company

• The company is said to have made a loss of Rs 20000 per day on government

buses alone during 1999.

• Financial losses turned out to be 9 crores per year including interest charges.

• Financial institutions which had lent 60 crore to L&T started putting pressure on

L&T

• L&T expressed its inability to enforce toll collection and on request the State

police was deployed.

• This didn't improve the toll collection in any significant way and L&T reported a

loss of Rs.7.4 crores in June 2000 and requested for compensation.

Issues:

• Public consultation: No study for demand or willingness to pay was carried out

before deciding to include the bridge also in the project. Nor were there any public

consultation or discussion with opinion makers were carried out.

• Delays due to toll collection: The tolling has increased traffic delays and public

look upon this as a hindrance rather than any improvement of service.

• Local Traffic: Since the bridge is within the city limits there is huge local traffic

and therefore repeat trips are high. This has made the toll collection difficult

because the agreement provides for toll collection on every trip and the public is

not willing to pay on each and every trip.

• Toll on existing bridge: The agreement provides for toll collection on the old

two-lane bridge also. After the completion of the new bridge, each bridge is now

being used uni-directionally. This has resulted in public objection for tolling the

old bridge for which L&T has not made any investment.

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5.2 CASE 2: MUMBAI-PUNE EXPRESSWAY INDIA

Project Brief:

• An 85 km dual three-lane expressway taking off from Kon near Panvel and ending

on the westerly bypass outside Pune at Dehu Road.

• 10 km panvel bypass road

Project required 646 ha of land for Rights of Way, and 455 ha for quarrying and dumping

area.

Property development on 1338 ha land in the vicinity of the expressway is a possible

source of subsidy for the project.

Public Party:

Ministry of Surface Transport (MoST)

Government of Maharashtra (GoM)

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• Maharashtra State Road development Corporation (MSRDC)

Private party:

The following table shows the final section wise details of the PMC's and Contractors

(Table No

TABLE NO. List of PMC & Consultants

Section Description Technical Consultants Contractor

Section 'A' Stup Consultants with IJM/SCL Joint Venture
(KontoChowk) Hyder Consulting Ltd.
13.232 km. U.K.
Section 'B' Intercontinental Hindustan Construction Co.
(Chowk to Adoshi) Consultants & Technocrats Mumbai
16.629 km. Pvt. Ltd. India
Section 'C Frishmann Prabhu (India) Larsen and Toubro Ltd.
(Kusgaon to Ozarde) Pvt. Ltd. Mumbai
22.995 km.
Section 'D' Sir Owen V.M. Jog Engineering
(Ozarde to Dehu Road) Williams Ltd. Pune
16.150 km. Innovestment
Ghat Section Package -1 Consulting Engg. Shapoorji Pallonj & Co.
Adoshi to long tunnel 7.13 Service (India) with Lighten Asai Jt.
Ltd. Venture Larson &
Toubro Ltd. Chennai
Ghat Section Package - Consulting Engg. Shapoorji Pallonj & Co.
II Service (India) Ltd. with Lighten Asai Jt.
Long tunnel to Lonavala Venture Larson &
bypass 8.28 km. Toubro Ltd. Chennai
Panvel Bypass Technogem PBA - PCEC
Package -1 Consultants Thane (JV) M. Venkat
0 0 to 8/200, 8.20 km. Rao
Visakhapatnam
Panvel Bypass Technogem PBA - PCEC (JV)
Package - II Consultants Thane M. Venkat Rao
* 200 to 9/750, 1.550 km Visakhapatnam
Tunnel Work Kokan Railway Corp. Ltd.
5 Twin Tunnel 5724 m.
Tunnel Length

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Operation & Maintenance: Ideal Road Builders (IRB)

PPP scheme: BOT basis

Project cost: The total cost of the project was Rs 2136 crores.

Concession period: 30 years

Toll structure:

The toll rates proposed were as follows:

Type of Vehicle Toll for full Length Toll for Interchanges Panvel Bypass
Car 80 50 15
LMV 135 80 20
Truck 190 115 40
Bus 270 160 40
2 3 Axle container 450 270 90
Trailer Truck 600 360 120

What went wrong in Mumbai-Pune Expressway Project?

1. Failure in involving full private participant.

The aim of involving a full private participant failed in this case as not even a single

international infrastructure company bid for the project and only one Indian company,

fiance bid for the project inspite of many incentives provided by the government like

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the guaranteed 20% return on investment, a promise of rapid and single window

approval, tax incentives and reduced duties on imported equipment for all investments

in industry, and, allowing up to 40 per cent government support to the project.

Total annual toll collection was not as expected.

~ compliance of the following estimation with the reality resulted into less toll faction

than expected:

• The toll collections were estimated considering that around 40 -50 % of the traffic on

the NH4 would divert to the expressway

• The majority of users were expected to be trucks and Multi axle vehicles and they

would contribute a significant amount of revenue.

• It was widely perceived that in addition to the current users of the roads, there would

be growth on account of extensive containerization at the JNPT and that most MAV's

would use the expressway instead of the existing road.

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5.3 CASE 3: NOIDA TOLL BRIDGE, INDIA

Project Brief

The Delhi Noida Bridge Popularly known as the DND flyway, the bridge is 552.5

meters long and has eight lanes with a capacity of around 222,000 vehicles per day

aimed to reduce time, distance and fuel consumption for travellers between South Delhi

and Noida.

Public Party & Private party

• Concedent: NOIDA

• Concessionaire: NTBCL/DND Flyway Limited

• Sponsor: IL & FS PPP

scheme: BOOT project

Project cost: Initial capital cost of Rs. 408 crore had risen to Rs. 953 crore.

Concession period: 30 years initially contemplated in the agreement, since the contract

provides for the term of the concession to be extended until the concessionaire recovers

the total cost of the project and returns it is now entitled to hold the concession for a

period of 70 years

Toll structure: The concessionaire has been given the power to "determine, demand,

collect, retain and appropriate" the fee for use of the Noida bridge in order to recover

the :otal cost of the project and returns thereon

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What Went Wrong in DND flyway?

The Delhi Noida bridge project has several features that appear to weigh the contract in

favour of the private partner and that, from a public policy viewpoint, depart from best

practice contract design. The major issues were as follows

• Development Rights

• Termination payments

• Multiple roles of the sponsor

• Independent Auditor and Independent Engineer

• Selection of Project Oversight Board

• Fees

• Other issues

Guaranteed returns on total project cost a)

Base upon which the return is calculated

• The project cost is defined ex post - once construction and commissioning have

been completed - and the contract does not put a cap on project cost and total cost

of the project. 11 This means the magnitude of the financial commitment being

made by NOIDA, and whether it is "reasonable," are not known up front.

• The agreement does not provide a tight definition of what items are allowable as

costs (see, for instance, the definition of "Other Costs of Commissioning" in

footnote 10) - so costs are effectively open-ended

• If the toll revenues of a given year do not generate such returns, the deficit is

added to the Total Cost of Project and the enhanced Total Cost of Project forms

the base for calculating the return of 20% in subsequent years. 15 The inclusion

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of shortfalls in the recovery of returns in total cost of project now substantially

removes traffic risk from the concessionaire, but could be expected to result in

very significant increases in the total amount due to the concessionaire.

There is no incentive to minimize costs since costs are completely passed through to

consumers. O&M expenses are taken "off the top" when determining the surplus

available for appropriation to recover project costs and returns

The absence of an incentive to control O&M expenses is again likely to result in a

longer time being taken to recover the requisite returns, pressure from the

concessionaire to adjust tolls upward, and pressure for the grant of Development

Rights.

b) Justification for the level of return awarded

1. The return can be judged to have been justified only if it was the outcome of

competitive bidding for the contract. However, the concession for the Delhi

Noida bridge project was not awarded competitively

2. High returns are also considered a reward for high risk. In this concession

agreement, however, the guarantee of a return means that the concessionaire does

not bear any significant commercial risk.

Development Rights

• Criteria, duration, and value of developments rights to be granted to the

concessionaire is not known

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• The concession agreement should have been transparent about the criteria for

award and the way in which Development Income would be applied towards

reducing total project costs of NTBCL

• The concession agreement provides no information on the principles or rules to

be followed by the Independent Auditor when concluding that Development

Rights should be granted in lieu of an extension of the concession period where a

high transparency and specificity is needed.

• The concession agreement also does not state how the Development Income

generated would be monitored in the absence of an escrow account, by whom it

would be monitored and what role, if any, the Independent Auditor would play in

this.

Conditions in the contract are so drafted that a concessionaire can raise claim for the

conditions like trade union, environmental group challenge which is beyond the control

of either party.

A very open-ended obligation for NOIDA, in order to facilitate the process of achieving

Financial Closure.

The concession agreement does not spell out the penalty payments or sanctions for not

adhering to performance specifications/standards.

The concessionaire has been given the right to mortgage its interest in the project assets,

including the project site.

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Termination payments

• Termination payments are due when there is a transfer of project assets from the

concessionaire to NOIDA because of termination of the concession contract due

to Precedent conditions not fulfilled by any party o Default by either party/

force majeure

• If NOIDA repudiate the agreement, it has to pay the concessionaire an amount

equal to the total project cost and returns thereon outstanding till the termination

date.

• Construction completion risk, which should more appropriately fall to the

concessionaire, is substantially shifted to NOIDA.

• There should be costs to unilateral abrogation of any contract; the size of the

penalty imposed on the public partner in this case seems disproportionate to the

risk of capricious repudiation by the public sector.

Multiple roles of the sponsor

• The involvement of the project sponsor in designing the structure and setting the

technical specifications of the project would be considered a clear conflict of

interest under best practice norms of public sector contracting.

• The potential tie-breaking role of IL&FS in these selection processes could result

in both the Project Oversight Board and the Fee Review Committee being

perceived as weighted in favour of the interests of the private partner.

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Independent Auditor and Independent Engineer

The contract accords substantial discretion and decision-making power to the

Independent Auditor and Independent Engineer

The Delhi Noida bridge contract, the process or principles to be followed in the

selection of the Independent Auditor and Independent Engineer are not specified

and the qualifications for each post are left vague

Selection of Project Oversight Board

• The Project Oversight Board is a single member body whose role is "to resolve

any dispute that may arise in relation to any decision or findings of the

Independent Engineer or the Independent Auditor.

• The fact that the lenders may have the final say in selection of the Board is not

ideal in view of the fact that IL&FS, the project sponsor, is also included among

the lenders. This could result in a perception that the Board is biased towards the

private party.

• In view of the power and discretion provided to the Board, a well-specified and

transparent procedure for selection of the Board would be good practice.

Fees

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Concessionaire has the power to determine the user fee which is in contrast to

the general practice in the case of national and state highways where the power

rests with the government.

Conditions in the contract are so drafted that a concessionaire can raise claim for the

conditions like trade union, environmental group challenge which is beyond the control

of either party.

A very open-ended obligation for NOIDA, in order to facilitate the process of achieving

Financial Closure.

The concession agreement does not spell out the penalty payments or sanctions for not

adhering to performance specifications/standards.

The concessionaire has been given the right to mortgage its interest in the project assets,

including the project site.

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CONCLUSIONS

1. A successful BOT projects needs a large amount of vehicle population, So the project

should be so identified at the high corridor of traffic population.

2. Private sector participation in the development of Highway projects on BOT basis is

fairly logical to the users as they are getting a good quality bridge and can travel in a

reasonable short period and saving operating cost, travel time and accident cost.

3. By adopting far and transparent bidding process and close collaboration between the

various parties involved, the BOT concept should be a grand success in contributing to

the development of Highway sector.

4. The Government alone cannot meet the growing demand of more and better Highway

project and its effects in this re.gard need to be supplemented by theprivate sector. So

there is an urgent need to further promote the private sector participation in Highway

development.

5. If the project is not placed within the frame then the value of the financial cost

and revenue of the project cannot be measured so the project has to be conceive,

planned, implemented and operated within the time frame to measure the success of the

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future of the project.

6. Lot of risks are involved in BOT projects. Hence we shall have to consider the

various risks involved in the whole process of assessing the cost, political interference,

policy change, "delay in commencement of revenue, force majeure, important aspect of

traffic forecast, various le.gal aspect, time and cost overrun, delay in various approvals

etc. for successful implementation.

7 .Participation of private sector in the development of highway project on BOT basis

will increase the efficiency effectiveness, greater levels of innovative ideas, transfer of

effective technology promotion of completion more employment etc. This will certainly

helps in development of highway projects.

8. Success of BOT projects in highway sector needs public awareness, education,

setting up various committees for planning monitoring and review of policy

decision/re.gulation for implementation of the projects

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REFERENCES

1. Dr. Kreydieh Ahmad, Thesis on Risk Management in BOT Project Financing,

MIT, May 1996, Pg.No.15

2. Dr. S. arunchalam, ‘’Progress of Privatization in Highway ’’ Civil Engineering

Review &Construction Review,Dec.2005,Vol.No.12,pp57.

3. Prof S.S Jain, “Performance based Maintenance Contract for road” Civil

Engineering Review & Construction Review,Nov.2005,Vol.No.18,pp 42-51.

4. An article, “Performance Based Maintenance Contracts” Indian Infrastructure,

Aug.2005,Pg No.44-48.

5. http://en.wikipedia.org/wiki/Build-Operate-Transfer

6. http://www.irb.co.in/toll_mp.asp

7. http://circle.ubc.ca/handle/2429/6841

8. http://circle.ubc.ca/search

9. http://www.irb.co.in/toll_operational.asp

10. http://www.projectsmonitor.com/detailnews.asp?newsid=7213

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