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Focus on BOT projects being awarded under PPP mode Industry Highlights India has about 4.2 million km of road network, which is the second largest in the world. About 70 per cent of freight and 85 per cent passenger traffic is carried by the roads. NHAI has awarded nearly 5,100 km in YTD FY12 NHAI targets to award 7,300 300 km in FY12 Around 21,000 km likely to be awarded till FY14 NHAI has identified 9 mega projects OMT awards for 3,000 000 km in FY13, for which 32 bidders have qualified Construct pace at 12-14 14 km/ day versus target of 20 km/ day MoRTH planning to set-up up new Expressway Authority NHAI raising resources (Rs. 100 bn of bonds (u/s 54 EC) in YTD FY12) Aggressive bidding leading to record premiums Project IRRs of 15-18% 18% on recently awarded projects GMR, L&T and IRB Infra top 3 bidders and garner highest highe market share in YTD FY12 Book-to-bill ratio of major players at more than 3 times although order inflows have slowed down in FY12 vs FY11 TCL Portfolio Summary in Roads & Highways (as on Feb 29, 2012) Total exposure: Rs. 282 cr 10% % of Project Finance loan book Secured exposure : Rs. 154 cr Delinquency level: Nil S. No 1 2 3 4 5 6 7 8 Borrower Name Essel Infraprojects Ltd IVRCL Assets & Holdings Ltd Madhucon Infra Ltd BSCPL Infrastructure Ltd Valecha Infrastructure Ltd SEW Transportation Network Ltd J. Kumar Infraprojects Ltd Brahmaputra Infrastructure Ltd TOTAL POS (Rs Cr) 75 56 48 30 23 20 15 15 282
Table of Contents
State of infrastructure in India: Ranked 86th world-wide................................................................ ................................................................... 3 Road network in India: Brief Overview ................................................................................................ ................................ ............................................................. 8 Public Private Partnership (PPP) in Highway Development ................................................................ ............................................................. 11 Improved Policy Framework................................ ................................................................................................ ........................................................................... 16 Dispute Resolution ................................................................ ................................................................................................ ......................................................... 20 Revenue Risks & Mitigation................................ ................................................................................................ ............................................................................ 23 Recent Sector Trends ................................................................................................................................ ................................ ..................................................... 24 Key Risk Factors while assessing a PF proposal ................................................................................................ ............................................... 26 References ................................................................ ................................................................................................ ..................................................................... 28 ANNEXURE................................................................ ................................................................................................ ..................................................................... 29 A) Player profiles in Road construction ................................................................................................ ....................................................... 29 B) Global Perspective: Drawing lessons from other countries ................................................................ ..................................................... 31 C) Highlights of Recommendations of Shri B K Chaturvedi Committee ........................................................................ ................................ 35
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Source: RBI
World Economic Forum (WEF) in its recent report, Global Competitiveness Report - 2010 has ranked Indias basic infrastructure at 86th position out of total 139 countries, a fall of 10 places compared to last year, largely attributed to poor quality of roads, ports and electricity supply. The report ranks countries like Latvia, Rwanda, El Salvador, Trinidad & Tobago etc. highlighting the poor quality of infrastructure. The lack of basic infrastructure facilities f has been identified as one of the major drawbacks which mars economic growth and also affects business growth. The need for infrastructure, particularly in the power and transport sector assumes greater importance given that the present infrastru infrastructure is already inadequate and is facing huge pressures due to rapid domestic growth. Upgrading and creating infrastructure will require a considerable step-up up in private and public investment.
Infrastructure investment: Growth driver for the economy Creation of world class infrastructure has been recognized as a key priority and necessary condition for sustaining the growth momentum of the economy. Investment in infrastructure has been identified as a key priority in the Eleventh five year plan (2007-12), ), both with a view to addressing the deficit of the past years and for keeping pace with the needs of a rapidly growing economy. With economic and industrial activities on the cusp of widespread expansion, the poor quality of infrastructure can severely handicap andicap a nations ability to realize its growth potential. Thus, the Eleventh plan sought to increase the the investment in power, transport and urban infrastructure to increase over 9% of GDP by the end of the plan period as compared to 5% in the Tenth plan. p This was estimated to require an investment of Rs. 20, 562 bn (USD 514 bn) during the Eleventh plan period as compared to an investment of Rs. 9,061 bn ( (USD 201 bn) during the Tenth plan. Further, it was estimated that the contribution of the private sector in this investment would rise from 24.9% in the Tenth plan to about 30% in the Eleventh plan.
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As a part of the Mid-Term Term Appraisal of the Eleventh five year Plan (2007-12), (2007 12), the Planning Commission has assessed the investment vestment in infrastructure during the first two years of the Plan and has revised projections of infrastructure investment for the Eleventh Plan to be Rs. 20, 542 bn, which is almost equal to the initial target. This is largely due to increase in investment t in telecom and oil & gas pipelines during the first two years of the plan period. Although, some sectors like roads, railways, ports, water supply and sanitation have witnessed significant investment shortfall when compared to the initial plan. The revised ed projections in power, telecom and oil & gas has seen increase in allocation as compared to initial target largely driven by the heightened private sector investment into these sectors. Sectors Sector like roads, railways, ports, water supply and sanitation saw saw reduced allocations due to various problems faced in awarding as well as securing various clearances and acquisition issues.
The Twelfth five year Plan (2013-17) 17) is projected to double the investment nt in infrastructure to Rs. 40,992 bn (USD 1,025 bn) as compared to Rs. 20,542 bn (USD USD 514 bn) investment made during the previous plan period. The Twelfth Plan will also increase the infrastructure investment from 7.55% of GDP (11th Plan) to 9.95% of the GDP.
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Private sector investment has been instrumental not only in bridging the funding gap but for infrastructure investment but also has helped to meet or revise the plan target targets. Private sector contributed to around 25% of the infrastructure investment in the 10th Plan, which is expected to grow to 36% and 50% in the 11th and 12th Plan respectively. It is expected that private sector contribution will be higher than the 30% initially expected, as the first two years of the current Plan period has witnessed 34.3% and 33.7% of private investment. Thus, huge private sector participation will be required to mobilize funds for development of infrastructure in the country.
The Eleventh Plan also articulated various asp aspects ects of the inclusive growth agenda at the same time emphasizing the role of the government in financing the infrastructure investment. The need to tap private investments while highlighting the role of the government is imperative to achieving the overall target investment. Thus, the need for Public Private Partnership (PPP) as the key measure to fund the infrastructure needs of the country as well as channelize the private investment.
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Private Sector Investment rising Given the government initiatives towards favourable private players and limited resources at the government end, the importance of the private sector in infrastructure is on the rise. The share of private sector investment in infrastructure in the XIth Plan is expected to increase to 36% (given the better-than-expected expected private investment in the first three years, private investment share has been revised from 30% to 36% in the Medium Term erm Appraisal of GoI). According to investment banking company Goldman Sachs, India's infrastructure sector will require USD US 1.7 trillion investments in the next 10 years. With a view to streamline and simplify the appraisal and approval process for public private partnership (PPP) projects, a Public Private Partnership Appraisal Co Committee mmittee (PPPAC) has been constituted under the chairmanship of Secretary, Department of Economic Affairs and Secretaries of Planning Commission, Department of Expenditure, Department of Legal Affairs and the concerned Administrative Department as its members. membe The project proposals are appraised by the Planning Commission and approved by the PPPAC.
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The PPP model is at a nascent stage in emerging countries such as India and China in terms of activity and sophistication. Hence, there would be a lot of opportunities on the PPP model in the future in the capital intensive Infrastructure sectors. This would also mean that hat the ability to raise funds will be the key to leverage this opportunity for a private player. With huge amount of capital required to be invested by key players, the possibility of monetisation of existing operational assets and stake sale at the Special Speci Purpose Vehicle (SPV) level is going to increase in future.
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Indias road network continues to be grossly inadequate with road densities of 2.83 km per 1,000 people and 770 km of road length per 1,000 square km, compared to the world average of 6.7 km per 1,000 people and 840 km road length per 1,000 square km. However, easy accessibility, flexibility of operations, door-to-door door door services and reliability have earned road transport an increasingly higher share of both passenger and freight traffic vis--vis vis other transport modes.
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It is estimated that currently more than 70% of freight and 85% of passenger traffic in the country is being handled by roads.
Vehicle density in India is as low as 0.01 with only 10 out of every every 1000 owning a vehicle. With rising disposable incomes, the auto sector is likely to witness significant growth going forward. Also, road traffic has grown by almost 7% during the past few years, while low capacity and poor quality of roads has lead to slower vehicle speeds and increasing difficulties while commuting. Over the past few decades, the growth in road network has not kept pace with the growth of the economy. Rising income has led to huge increase in vehicle traffic leading to overcrowding of the road infrastructure.
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National Highways With a total length of 70,548 548 km, National Highways are the arterial road network for inter-state inter as well as a movement of goods and passengers. It connects the National and State capitals, major ports and rail junctions and links up with border roads and foreign highways. National highways, which account for 2.1% of the total road network in India, handle almost 40% of the road traffic. The development of national highways is done by the government governmen which has undertaken various programs to build and improve the quality of highways.
National Highways Development Program (NHDP) NHDP is the largest highway project ever undertaken by the country, was initiated in 19 1999 in a phased manner with the National Highways Authority of India (NHAI) as its implementing agency. It involves widening, upgradation and rehabilitation of of about 55,000 km, entailing an estimated investment of Rs. 3,000 bn ( (USD 60 bn) and is expected to be completed by 2015-16.
During the 2007-2009, only 3,616 km of projects were awarded by NHAI. In FY11, NHAI awarded 5,059 km of projects, the highest award during a single year, although it missed its targeted award d length by a significant margin. NHAI is expected to award 7,300 km during FY12 and 9,000 km in FY13, which does not include the LWE and SARDP-NE SARDP road programmes. However for FY12, for first nine months till December 2011, NHAI has awarded nearly 5,100 km length of
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project, which appears to be in line with the target of 7,300 7, km to be awarded in FY12. Almost 80% of the projects under Phase III are being awarded on BOT basis. Within the NHDP, the maximum potential of the award and construction activity lies in Phase IV, V and VI.
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NHAI has identified eight highway sections which are to be awarded on OMT contracts. The concession agreements for two highway sections have been signed and the pre-qualification pre qualification of bidders for the remaining six sections is under process.
Traditionally, y, construction and maintenance of Government funded roads has been executed by private contractors on EPC or item rate contract basis. Due to relatively low capital requirement in the construction business, many players both in the organised and unorganised ed sectors have been engaged in this business, resulting in high competitive intensity. However, many large construction players have stayed away from road construction because of the relatively low margins involved, and smaller project size in the sector.
Efficiency of PPP contracts Several contractual clauses create a system of incentives and sanctions that is conducive for economic efficiency. Price and other regulations built in the contracts have desired attributes. att The following features are notable: Reduced Adverse Selection: There are provisions of fines and penalties for both the parties. These fines can be invoked by a party if the other party reneges on its commitment under the contract. Provisions for suspension and termination of the contract induce the concessionaires to choose a project carefully as well as to avoid subsequent breach. The requirements of concession fee and performance security help in screening of fraudulent and nonserious bidders. Avoiding Time overruns: The time period of construction (generally assumed to be 30 months) is included in a concession period. This along with the provisions of the above mentioned penalties encourages the concessionaire to complete the project sooner and nd avoid time overrun. An earlier completion of project enables the concessionaire to increase the total toll revenue from the project. In case of annuity contract, the concessionaire receives a bonus for an earlier completion. If there is any delay in the completion of the project, he is penalized in the form of reduced annuity payments. Technology: The above provision also induces the concessionaire to use better technology in order to complete the project ahead of the agreed time. In addition, technological technological capabilities of the bidders are taken into account while selecting the concessionaire. Flexibility: The contract has provisions like cure period for delay in meeting deadlines. The contract also allows changes in the scope of the contract under certain certain circumstances. There are provisions for modification/renegotiation of the original contract. Contract modification can be resorted to in cases of changes in law or force majeure. These provisions help in increasing the flexibility of the contract. Better Demand management: Concessionaire has the sole and exclusive right to demand, collect and appropriate toll from users. Though toll rates are fixed by NHAI, annual revision of toll takes place. The concessionaire is fully compensated for inflation, which is measured by the Wholesale W Price Index ndex (WPI). (WPI) The contract also allows the
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concessionaire at its discretion to levy, determine and collect a higher and discounted fee for the use of the facility during peak and off-peak peak hours, respectively. Efficient Risk Sharing: Contract allocates risks to a party who is in a better position to bear it. For example, the government is in a better position to bear the risk associated with land acquisition and getting forest and other environment related clearances. These risks are assigned to the government. Other construction related and financial risks are assigned to the concessionaire who can bear these risks more efficiently. The provisions regarding changes in scope and law have also helped to mitigate risks arising out of uncertainties beyond the control of the respective parties.
In addition, the contract allows for regular monitoring by the government of the progress on the project. In order to enable the government to monitor the progress in terms of material s standards tandards and meeting of deadlines, the contract provides for the following: Submission of monthly progress report of the project by an independent engineer. The concessionaire has to submit a concession fee which is on the basis of an ascending revenue revenueshare. Concessionaire is also required to pay performance security which is seized by the Authority in case of default. default International Competitive Bidding Process General procedure for selection of concessionaires adopted by NHAI is a two-stage stage bidding process. pr Projects are awarded as per the model documentsdocuments Request for Qualification (RFQ), Request for Proposal (RFP) and Concession Agreement - provided by the Ministry of Finance. NHAI amends the model documents based on project specific requirements. The processes involved in both stages are set out as follows: Stage 1: Pre-qualification qualification on the basis of Technical and Financial expertise of the firm and its track record in similar projects which meets the threshold technical and financial criteria set out in the RFQ Document. Notice inviting tenders is posted on the web site and published in leading newspapers. Stage 2: Commercial bids from pre-qualified qualified bidders are invited through issue of RFP. Generally, the duration between Stage 1 and 2 is about 30-45 days. Wide publicity is given to NHAI tenders so as to attract attention of leading contractors/ developers/consultants. The Government has put in place appropriate policy, institutional and regulatory mechanisms including a set of fiscal and financial incentives to encourage increased private sector participation in road sector. Policy in project development & award process 1. All applicants meeting the threshold technical and financial experience criteria set out in the RFQ shall be eligible to participate in the RFP stage. Earlier only the top 5 5-6 6 applicants shortlisted based on qualification criteria were eligible to submit financial bids for projects. 2. NHAI is empowered to accept single bids based on assessment of reasonableness of the bids. 3. Overall cap on Viability Gap Funding (VGF) increased from 5% to 10% for the entire six-laning six programme (5080 km). 4. For individual projects with low traffic in the Golden Quadrilateral (GQ) corridors, VGF cap has been increased upto 20% of the project cost with an over overall all cap of 500 km of roads in the project network. 5. Equity Support under VGF has been increased to 40% of project cost. Earlier, 20% of project cost was provided as equity support in construction phase and 20% as Operations &Maintenance Support 6. Modifications s in Standard RFQ, RFP and Concession Agreement structures for National Highway Projects :: a. Termination provisions under capacity augmentation situations modified to give more comfort to investors and lenders. The concession period can be extended upto 5 years y to yield a post tax equity IRR of 16%, in the event of capacity augmentation option exercised by the concessionaire. b. Exit option allowed for principal promoters of road SPVs after two years from commercial operations date (COD). Promoters were earlier required to hold a minimum of 26% of the SPVs shareholding at all times during the tenure of the Concession. c. Threshold limit for common control (shareholding) of entities in competing Applicants and/ or their Associates for the purposes of determining Conflict Conflict of interest is raised from 5% to 25%. Any such conflict of interest arising
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at the prequalification stage shall be deemed to subsist at the bidding stage only if such applicants attracting the conflict of interest provisions submit their bids. d. Threshold hold technical capability for claiming eligible project experience has been reduced to a range between 55 10% of estimated project cost of the subject project in lieu of 10 10-20% 20% of estimated project cost of the subject project earlier. e. The threshold technical l experience score for the purpose of prequalification will be equal to the estimated project cost of the earlier subject project. This was, earlier equal to twice the estimated project cost of the subject project. f. Where the projects are bid out on a revenue revenue share basis, the base premium (revenue share proposed by the successful bidder) will be increased at the rate of 5 per cent year on year with respect to the immediately preceding year for the entire tenure of the concession.
Model Concession Agreement (MCA) for PPP Projects The highways sector in India has witnessed significant investment in recent years. For sustaining the interest of private participants, a clear risk-sharing and regulatory framework framework has been spelt out in the MCA. MCA The MCA has been developed to facilitate speedy award of contracts. This framework has been successfully used for award of BOT concessions. The MCA has been revised recently and current projects are being awarded under the revised MCA. This framework addresses the issues, which ich are typically important for PPP, such as unbundling of risks and rewards, symmetry of obligations between the principal parties, equitable sharing of costs and obligations, and risk mitigation options under various scenarios including force majeure and termination, under transparent and fair procedures. With the introduction of the MCA, the risks involved in project and contractual issues, hitherto, have been assuaged, and the entire process from invitation to bid to implementation of the project is tra transparent. MCA's risk framework is briefly discussed below : Key Concessionaire Risk/Obligations Construction Risk: The concessionaire is required to commence construction works when the financial close is achieved or earlier date that the parties may determine determine by mutual consent. The concessionaire shall not be entitled to seek compensation for any prior commencement and shall do it solely at his own risk. O&M Risk: Concessionaire to operate and maintain the project facility (includes road and road infrastructure infrastr as specified in the concession agreement). Failure to repair and rectify any defect or deficiency within specified period shall be considered as breach of responsibility. Financial Risk: The concessionaire shall at its cost, expenses and risk make s such uch financing arrangement as would be necessary to finance the cost of the project and to meet project requirements and other obligations under the agreement, in a timely manner. Traffic Risk: The MCA provides for increase or decrease of the concession period period in the event the actual traffic falls short or exceeds the target traffic. NHAI stipulates the target traffic during the year specified in project specific concession agreement, which is usually around the 10th year from the date of signing of the agre agreement. The target traffic is determined based on 5% Compounded Annual Growth Rate (CAGR) over the base year traffic for the project. MCA also provides for termination of the agreement if the average daily traffic in any accounting year exceeds the design capacity apacity and continues to exceed for three subsequent accounting years. Termination payments under this scenario will be commensurate to those applicable under an Indirect Political Event Event.
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Key NHAI Risk/Obligations Land Acquisition Risk: NHAI is responsible responsible for acquiring the requisite land for the project highway Approvals: NHAI will provide all reasonable support and assistance to the concessionaire in procuring applicable permits required from any Government Instrumentality. Key Common Risk Force Majeure Risk: Force Majeure shall mean occurrence in India of any or all of Non-Political Non Event(s), Indirect Political Event(s) and Political Event(s), which include the following: Non-Political Event: a. act of God, epidemic, extremely adverse weather conditions or r radioactive contamination or ionising radiation, fire or explosion; b. strikes or boycotts c. the discovery of geological conditions, toxic contamination or archaeological remains on the Site; or d. any event or circumstances of a nature analogous to any of the foregoing. Indirect Political Event a. an act of war, invasion, armed conflict or act of foreign enemy, blockade, embargo, riot, insurrection, terrorist or military action, b. civil commotion or politically motivated sabotage which prevents collection of toll/ fe fees, c. industry-wide or state-wide wide or India-wide India wide strikes or industrial action which prevent collection of toll/ fees, d. any public agitation which prevents collection of toll/ fees Political Event a. Change in Law, b. compulsory acquisition by any governmental agency of any project assets or rights of concessionaire or of the Contractors; or c. unlawful or unauthorised or without jurisdiction revocation of or refusal to renew or grant without valid cause any consent or approval required by developer
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Another problem in n financing road projects is that the lenders cannot create a charge over roads, as the ownership of roads vests with the Government rather than the developer. Therefore, loans for road projects are classified as unsecured loans in the lenders books, whic which h require higher provisioning. This makes lending for road projects less attractive for banks and also raises the interest costs for the developer. To tackle this issue, iss the Chaturvedi Committee had proposed that the lenders to road projects be allowed to create a charge on the escrow account having toll receivables to the extent permissible in accordance with their priority in the waterfall. This would provide a tangible security to the lenders and help in classifying the loans as secured loans in the books book of banks. Acting on the recommendation, the Reserve Bank of India has proposed to treat annuities under the BOT model (in the case of road/highway projects ojects and toll collection rights) as tangible securities, subject to the condition that the banks right to receive annuities and the toll collection rights are legally enforceable and irrevocable. The waterfall mechanism specifies the order in which toll receipt have to be appropriated. As per the MCA, senior lenders are paid after payment of taxes, constr construction uction related payments, operation and maintenance expenses and concession fee payable to NHAI.
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According to the new policy, NHAI is required to acquire 80% of the project land even before awarding the Letter of Award (LoA) to the developer. Further, the MCA includes clauses that protect the interests of the concessionaire in case there are problems over land acquisition. Generally, NHAI is liable to pay damages if there is any delay in handing over the right-of-way way to the concessionaire; the concessionaire concessionaire also enters into a State Support Agreement to smoothen the process of land acquisition. However, while there are clauses that protect the concessionaire against land acquisition acquisitionrelated damages, the relief provided by such clauses is limited. Delays in obtaining obtaining the right-of-way right often lead to time overruns in the overall commissioning of the road project. This in turn delays toll collection by the concessionaire, thereby affecting its cash flows and debt servicing capability. Moreover, time overruns often result in the overall project cost escalating. While the MCA states that NHAI shall pay damages at the rate of Rs. 50 per day for every 1,000 square metres commencing from the 91st day of the Appointed Date until such right-of-way right way is procured, the damages work out to be far less than the actual cost overruns and revenue loss to the concessionaire in case land acquisition gets delayed. Besides acquiring land, NHAI is also responsible for clearance of right-of-way right way like relocation of utility services, felling fellin of trees and resettlement and rehabilitation of existing establishments. It has to coordinate with several entities to obtain the requisite approvals. For instance, NHAI may have to liaise with the State Electricity Boards concerned (for shifting electrical cal and transmission lines), the forest and other departments (for environmental clearances), and the Indian Railways (for construction of railway over over-bridges) bridges) to get the necessary clearances. Thus, the process is cumbersome because of the involvement of several parties. Further, the developer too has to obtain several approvals and clearances from Government authorities, like clearance from the Pollution Control Board concerned, permission from the State Government to operate a quarry, and approvals for t the he installation of crushers, which can hinder project implementation. The problems associated with land acquisition and liaising with multiple authorities for the requisite approvals often cause delays in the commencement of tolling, thereby affecting proj project ect viability. This along with the absence of an efficient arbitration mechanism to compensate developers for such delays increases the risks for developers. While disputes during project execution require quick and effective settlement, in most cases, the they end up in courts and usually remain unresolved for long periods.
Investment Policy Updates According to the newer policy updates from Deptt D of Industrial Policy & Promotion romotion (DIPP), (DIPP) 100 per cent FDI under the automatic route is allowed for: Support services rvices to land transport like operation of highway bridges, toll roads, and vehicular tunnels Services incidental to transport like cargo handling incidental to land transport Construction and maintenance of roads, bridges Construction and maintenance of roads and highways offered on build-on-transfer build transfer (BOT) basis, including collection of toll
Fiscal Incentives Highway widening projects qualify for the 10-year 10 year tax break under Section 80 IA of the Income Income-Tax Act. The Central Board of Direct Taxes (CBDT) T) has clarified that widening of existing roads by constructing additional lanes as a part of a highway project, by an undertaking, will be regarded as a new infrastructure facility. This clarification will help highway developers receive tax deduction for fo a 10-year period under Section 80 IA of the Income-Tax Income Act. Deduction upto 40 per cent of the income from financing of the infrastructure projects is available provided the amount is kept in a special reserve Subscription to equity shares or debentures i issued ssued by a public company wholly and exclusively for the purpose of developing, operating and maintaining an infrastructure facility is eligible for deduction equal to 20 per cent of the amount subscribed On certain identified high quality construction pla plants nts and equipments, import duty has been completely exempted for public funded needs Import of bitumen is now permitted under Open General Licence
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External Commercial Borwinngs (ECBs) are allowed upto 35% of the project cost
Salient features of the MCA Substantial bstantial part of the project site free from encumbrances would be handed over to the concessionaire till the Appointed Date. Additional land in case of change of scope will need to be acquired by concessionaire on behalf of the Authority. Additional tollway ay will not be commissioned within a specified year, depending upon the concession period. Minimum user fee for additional tollway will be at least 25% higher than thanthe the toll fee on project. Any alternate road, exceeding 20% of the length of the project highw highway, ay, shall not be considered as an additional tollway. The concessionaire will be entitled to nullify any change of scope order if it causes the cumulative cost relating to all change of scope orders to exceed 5% of the Total Project Cost (TPC) in any conti continuous nuous period of 3 years immediately preceding the date of such Change of Scope order, or if such cumulative cost exceeds 20% of the TPC at any time during the concession period. Financial close is to be achieved within 180 days from date of agreement. NHAI may allow additional period for financial close on a project specific basis. Grant (upto 40% of TPC) to the concessionaire by way of equity support and operations & maintenance support in quarterly installments. (B. K. Chaturvedi Committee has recommended that the entire grant [up to 40% of TPC] can be provided as equity support) Concessionaire to pay nominal fee of INR 1 (USD 0.02) per annum throughout the concession period. There is an optional provision for capacity augmentation of existing 4 4-laning to 6-laning. laning. If capacity augmentation is not done within the specified period, the concession period gets reduced to the number of years specified in the project specific agreement. The option to excuse from 6-laning 6 laning of the Project Highway is available with both b the concessionaire and the Authority before the pre-specified pre 6-laning laning date in the concession agreement.
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Clauses in the MCA and the Changes (after the B.K. Chaturvedi Committee report)
Source: ICRA Research, esearch, B.K. Chaturvedi Committee report Prepared by Project Finance Risk: Mar 2012 (For internal circulation) Page 19 of 35
Dispute Resolution
Any dispute arising out of or in relation to the concession agreement, between the parties is required to be resolved as per the Dispute Resolution Procedure (see below) prescribed in the Agreement. It specifies that the parties should attempt t to resolve the dispute amicably and for this purpose, the mandate has been given to an Independent Engineer to mediate and assist the parties to arrive at a settlement. The procedure has been laid out in sufficient detail therein. However, upon the failure re of such conciliatory measure, the parties shall resort to Arbitration, which shall be held in accordance with Arbitration and Conciliation Act, 1996 (based on United Nations Commission on International Trade Laws UNCITRAL model). The seat of arbitration arbitration for all concession agreements pertaining to National Highways shall ordinarily be at Delhi, however, the place may be changed by mutual consent of the parties. Each party is free to nominate its arbitrator who in turn, will appoint a presiding arbitrator. arbitrator. The Arbitration Tribunal so constituted can adjudicate any dispute referred to it, and any other question of law arising out of such dispute, including its own jurisdiction. The award passed by such Tribunal, has the sanctity of a 'Decree' under Indian Law and can be challenged on very limited counts. Dispute Resolution Procedure for BOT projects Mediation by the Independent Engineer: If any dispute arises between the parties, it is in the first place resolved by the mediation of the Independent Enginee Engineer. r. Any dispute, which is not resolved by mediation of the Independent Engineer, is resolved by amicable resolution. Amicable Resolution: Any dispute, difference or controversy of whatever nature between the parties, arising under, out of or in relation to the project concession agreement (PCA) is attempted to be resolved amicably in accordance with the procedure set forth in the dispute resolution mechanism. Either party may require such dispute to be referred to the Chairman, NHAI and the Chief Executive Officer of the concessionaire in the interim, for amicable settlement. Upon such reference, the two shall meet at the earliest mutual convenience and in any event not later than 15 days of such reference to discuss and attempt to amicably resolve the dispute. dispu If the dispute is not amicably settled within 15 (fifteen) days of such meeting between the two, either party may refer the dispute to arbitration in accordance with the provisions of the PCA. Arbitration: Any dispute, which is not resolved amicably, shall shall be finally settled by binding arbitration under The Arbitration Act. The arbitration shall be carried out by a panel of three arbitrators, one to be appointed by each party and the third to be appointed by the two arbitrators appointed by the parties. The party requiring arbitration shall appoint an arbitrator in writing, inform the other party about such appointment and call upon the other party to appoint its arbitrator. If within 15 days of receipt of such intimation the other party fails to appoint its arbitrator, the party seeking appointment of arbitrator may take further steps in accordance with the Arbitration Act. The Dispute Resolution Procedure for EPC Projects does not involve amicable settlement. The disputes are referred to the Dispute Review Board. Dispute Review Board: The Board shall comprise of three members, experienced with the type of construction involved in road works, and with the interpretation of contractual documents. If, during the contract period, either of the parties is of the opinion that the Dispute Review Board is not performing its functions properly, they may together disband the Board and reconstitute it. Dispute involving Foreign Contractor(s): In the case of a dispute with a foreign contractor, the dispute shall be settled ettled in accordance with the provisions of the UNCITRAL Arbitration Rules. The arbitral tribunal shall consist of three arbitrators, one each to be appointed by the employer and the contractor and the third arbitrator chosen by the two arbitrators so appointed inted by the parties, who shall further act as the Presiding Arbitrator. A Foreign Contractor means a contractor who is not registered in India and is not a juridical person under Indian Law. General Trends in Dispute Resolution The Courts in India have been very neutral in construing the documents, in the cases arising out of tender processes and rely upon terms and conditions agreed between the parties under the tender documents. The provisions of the Contract Act and other legal provisions, covering the t intricate commercial aspects of the dispute are looked into very minutely before passing any order. The Courts have, however, been very cautious in passing any injunctive relief in disputes arising out of tender process and pays due regard to the fairness fairne in the process of issuing tender and selection of
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bidders, stage of infrastructure development and stakes (public money) involved. Where complex financial issues are involved, the Courts also seek advice of an expert committee and consider various factors facto like price index, quality of work, past performance of parties, market reputation, etc. The decision in each case may however differ, depending upon facts of each case. Early Termination of Concession The concession may be terminated before project completion pletion in the event of the following: NHAI Event of Default: In the event of any of the defaults specified in the concession agreement which the Authority has failed to cure within 90 days or such longer period as has been specified in the agreement, the Authority shall be deemed to be in default and concessionaire shall have the right to terminate the agreement Concessionaire Event of Default: In the event of any of the defaults specified in the concession agreement which the concessionaire has failed to cure within the specified cure period, and where no such cure period has been specified, then within the cure period of 60 days, the concessionaire shall be deemed to be in default and NHAI shall have the right to terminate the agreement. agreement Force Majeure Event: A force majeure event which lasts for less than 180 days will lead to a proportionate change in the concession period to compensate the concessionaire for losses during such period. The concession is eligible to be terminated (by either party) if the force majeure event subsists for at least 180 days within a continuous period of 365 Days Termination payments are made by NHAI to the concessionaire in the event of termination due to above mentioned reasons.
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Source: MoRTH
Source: MoRTH Prepared by Project Finance Risk: Mar 2012 (For internal circulation) Page 22 of 35
Source: MoRTH
The concession agreement provides for extension or reduction of the concession period in the event the actual traffic falls short or exceeds the target traffic, as estimated on the target date. MCA also provides for f termination of the agreement if the average daily traffic in any accounting year exceeds the design capacity and continues to exceed for three subsequent accounting years. Termination in such scenario will be deemed to happen on account of an Indirect Political Event. Variation in Toll rates (Linked to WPI) The notification of the New National Highways Fee Rules (2008) has provided for a revision of toll rates and hence realisable toll revenues for all vehicle categories. The new toll rules (issued in 2010) are applicable for all new road projects. The salient features of the new toll rules are: Increase in base toll rates by 3% every year Increase in toll charges to the extent of 40% of the increase in WPI. Toll charges for new structures (bridges, tunnels)/alignments nels)/alignments (bypass, alternate section) determined based on construction cost. Rounding off fee to the nearest five rupees (earlier rounded off to nearest 1 Rupee) While the earlier tolling rules prescribed a standard base toll rate on a per passenger passenge car unit (pcu)/km basis for a highway project, the new rules prescribe base toll rates also for high-cost cost structures (such as bridges, bypass or tunnels) separately. The base toll rates for such high-cost high cost structures are indexed to the estimated project cost (on INR/vehicle/trip basis). As per new tolling rules, toll rate (TR) revision is determined by the formula below: TR1 = TR0 (1+3%) + TR0 ((1+3%)*%Variation in WPI*40%) The rate of fee for use of a section of national highway of four or more lanes sha shall, ll, for the base year 2007-08, be the product of the length of such section multiplied by the following rates, namely:
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Sponsor Risk: Despite the non-recourse recourse nature of such projects, the financial strength of the sponsor is an important key credit determinant, given that apart from contributing equity capital and subordinated debt, the sponsor is also directly or indirectly responsible for ensuring financial closure of these projects. Completion Risks: A key component of the completion risk is the permitting risk which refers to a projects ability to attain all statutory clearances prior to the commencement of construction activity. Typically, for a road project, this would include right-of-way way acquisition, rehabilitation and resettlement, clearances from the Ministry of Environment and Forest, Pollution Control Board and Railways, and clearances for shifting all utilities that lie on the way. The permitting risks are usually low where the project involves an upgradation of an existing operating stretch, however such risks usually manifest themselves where projects involve bypasses or involve construction of entirely new stretches. The he vulnerability of the project to cost and time overruns, and the arrangements made for funding these overover runs also assumes significance, given that in i such BOT projects, cost escalations need to be funded by the project company, which could affect the projects leverage and also the returns to the investors. Road construction projects are often confronted with challenges related to the mobilisation of labour and the required construction equipment. Further, factors such as difficult terrain, use of inappropriate technology, inadequacy of construction equipment, weather and labour problems also contribute to construction delays and cost escalations. These Thes risks are partially mitigated through strong fixed-price, price, date certain EPC contracts with strong counterparties with adequate liquidated damage provisions for non-performance performance. Another issue, is the quality of the construction and the robustness of the de design. Project owners usually lay down the design and quality parameters in the concession agreement. These parameters would need to be adhered to by the concessionaire, and certified by the independent engineer before the stretch can be opened to traffic.
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Commercial and Traffic Risks: Post completion of construction activity, the debt investors in toll road projects are primarily exposed to the risks associated with the ability of the stretch to attract the necessary amount of traffic, and to collect tolls as per the prescribed rates. The he traffic risks associated with such facilities are primarily dependent on the following factors; The economic utility of the stretch - projects, which serve a captive demand, for instance stretches, which connect to ports or city bypasses, which relieve congestion levels carry relatively lower levels of traffic risks. The availability of alternate freeways and other competing modes of transport, to which traffic diversion could take place. The economic and demographic conditions condi within the catchment area of the road. The composition of traffic along the stretch and the sensitivity of various user segments towards payment of tolls. The economic value provided by the road in relation to the tolls levied. Measuring the market risks associated with such projects can be quite challenging, given the absence of reliable and sufficiently long historical traffic data in most parts of the country, which can be used for forecasting future traffic levels. Traffic projections for improvements ments to existing roads have moderate predictability, while for new roads predicting traffic levels can be quite difficult, since subjective judgements need to be made about the ability of the stretch to generate new traffic by drawing away traffic from ex existing isting alternatives. Further, another issue, which is evaluated while assessing the projects vulnerability to market risks is the projects access to alternate sources of revenue revenue- primarily in the form of land development rights along the corridor under m management. Operating Risks: Operating risk is the risk that the project will not conform to the required performance parameters over the period of the concession agreement. Typically, the performance parameters specified in the concession agreement are driving riving quality of the carriageway, safety standards, adherence to maintenance schedule, and availability standards as mentioned in the concession agreement. Non-compliance Non compliance with the performance parameters can be an event of default and may impinge on the th developers ability to collect tolls. Furthermore, in the event of poor maintenance, attractiveness of the road may diminish making commuters shift to the alternate freeway (if any). Thus the concessionaires ability to fairly assess operating expenses and nd lay down proper schedule for maintenance programme is important to protect future revenue streams for debt servicing. Operations and maintenance (O&M) expenses for road projects are primarily of two types: Periodic maintenance, which involves the relaying relay of the asphalt-concrete concrete (top layer) once every five to seven years. Routine maintenance, which involves repairing of cracks, replacement of safety girders along the highway, clearance of debris following accidents, ensuring of functionality of sign pos posts, ts, maintenance of a security set-up, and such other activities. O&M outflows are likely to peak in the 5th and 10th years, when the periodic maintenance involving the relaying of the top surface would need to be carried out. Thus the project structure should uld provide for an O&M reserve that would get built up gradually, either from the toll revenues themselves or through an external liquidity support mechanism (standby LCs, etc), so that adequate funds are available for these peak outflows. Lastly, the t O&M estimates would be highly sensitive to inflation, and would therefore be difficult to budget over a 15 15-year year period. Most of these projects are likely to enter into fixed cost O&M contracts possibly with the sponsors themselves. Funding and Financial Risks: As with most other infrastructure projects, road sector projects are also characterised by fairly high levels of capital intensity. The capital intensity of such projects is however dependent on a number of variables, which include the nature of the surface surface (bituminous tar versus concrete), the terrain over which the road traverses, and the number of structures (bridges, culverts, rail over bridges), which need to be constructed. These projects are usually funded with a considerable reliance on external debt, although in most cases liberal grants from the project owners serve to keep leverage at moderate levels. The financing structure is also reviewed for the exposure to interest rate and refinancing risks, given the limited appetite of the Indian capital l markets for fixed interest rate long duration (in excess of 10 years) project finance debt. A floating interest rate structure could potentially affect debt servicing, particularly during periods of rising interest rates.
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A key element of the analysis is s an assessment of the sufficiency of the revenue stream for meeting operating expenses and debt service obligations. The key sensitivity scenarios that should be drawn up include variability in traffic volumes and toll rates, time and cost overruns during the construction phase and variability in operations and maintenance expenses post completion. Stress or sensitivity tests are all the more important if it emerges that significant traffic and revenue growth is necessary to support the project. Structure Risk: As discussed earlier, most of these projects are likely to funded in SPVs, without direct recourse to the sponsors for debt servicing. Toll revenues, and in some case income from development rights on land along the corridor comprise the only sources es of revenue available to the project SPV, for servicing debt. Thus, apart from looking at the economic viability of the project, structural aspects of these projects include the process by which these revenue streams are aggregated in collection accounts and subsequently transferred to the debt service reserve accounts after funding the O&M reserves. The he presence of an experienced trustee, would help to effectively control the project cash flows and regularly monitor the progress of the project on behalf of the debt investors.
References
Revised strategy for implementation of National Highways Development Program (NHDP) Framework & Financing: MoRTH report dated Aug 2009 Second report of the B.K. Chaturvedi Committee on Faster implementation of NHDP dated Feb 2010 The Working Report on Road Transport for 11th Five Year Plan: report by Planning Commission, Commission GoI The Working Report on Road Transport for 12th Five Year Plan: report by Planning Commission, GoI Guidelines for investment in road sector : KPMG report Financing of the NHDP: Core Group of Committee on Infrastructure : report by Planning Commission, GoI Review of Toll Policy for National Highways: report of the Committee of Secretaries, Planning Commission, GoI dated May 2009 Annual Report of NHAI for Financial Year ended March 31, 2011 India Financing Highways: World Bank report dated Oct 2004 Facilitating Public Private Partnership (PPP) for Accelerated Infrastructure Development in India: report by Asian Development Bank (ADB) dated December 200 2006 Indian Road Construction Industry - Capacity Issues, Constraints and Recommendations: World Bank report dated June 2009 National Highways Overcoming Challenges & Opportunities Ahead : presentation by Mr Brahm Bhatt (Secretary, MoRTH) dated March 2010 NHAI: HAI: Accelerated pace of project awards; competition intense : report by Motilal Oswal Research dated Aug 2011 Roads segment continues to enjoy high visibility: report by Motilal Oswal Research dated Dec 2011 Roads & Highways - Ample Work for All : report by SBICap Securities dated June 2011 Indian Road Sector: Quarterly Review: report by ICRA Research dated Feb 2012 Construction Sector update report report by ICICI Securities dated July 2011 Construction Dusk before dawn: report by Edelweiss Research dated Jan Ja 2009 Rating Criteria for Toll Road Projects: CRISIL Ratings Roads & Highways: report by CRISIL Research dated Feb 2011 Road Financing in China: www.unescap.org Various issues published by India Infrastructure Various s articles from The Economic Times: www.economictimes.indiatimes.com Various articles from The Hindu Business Line: www.thehindubusinessline.com
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ANNEXURE
3.5 8.1 8.8 NM 0.8 1.1 1.6 3.5 1.2 1.9 1.5 1.8 1.0 1.6 1.4 1.9 1.2 1.3 1.4 1.8 2.1 2.3 3.2 NM 0.6 (0.9) (0.9) (1.1) (4.5) (7.3) (1.9) (8.1) 1.4 1.3 1.5 10.3 NM
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3.5 3.9 4.5 NM 1.7 4.0 10.9 8.5 0.7 1.7 1.6 1.6 1.9 2.7 2.6 2.4 1.2 1.7 0.4 0.4 0.2 0.2 3.5 NM NM 7.6 (8.0) (3.9) NM 1.5 6.6 5.0 10.7 13.4 NM 0.6 1.3 1.3 0.5
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household registration, which restricted an individuals individual ability to move to the cities, was effectively diluted (although not entirely removed) due to the collapse of the commune system. This resulted in a floating population of rural workers moving to the cities to look for work and these provided the core of of those employed in the construction industry. At the end of 2002, 76% of the total employment in the construction industry was from the rural labor force. The need for reform in China was highlighted by the problems with the State Owned Enterprises (SOEs). ( In 1984 it had been recognized that the policy of using SOEs as a social framework for employment was leading to major inefficiencies and debt due to bloated pay rolls, redundant construction, and incompetent management. Accordingly a responsibility system stem was introduced by the CCP for enterprise managers to separate economic management of the enterprise from CCPs political presence within these organizations. This provided the managers with much greater flexibility and control over who they could hire and fire. This in turn has led to SOE employees, who once had a job-for-life job situation, now facing job insecurity and working on temporary contracts. The government now believed that construction could be a profit making industry and they agreed on a series seri of reform programs which are detailed in the regulation section of this report. In 1993 the CCP decided that due to the inefficient operation of SOEs, large and medium-sized medium sized SOEs should in future be run on a corporate basis. Accordingly the State Economic omic and Trade Commission (SETC) was set up in May 1993 to formulate sectoral programs for SOE reform and to ensure that enterprise administration was separated from enterprise management. In 1998 the SETC was reshuffled to provide specific responsibilitie responsibilities of regulating and overseeing the need for policy changes. As one of these policies SETC promoted the setting up of a credit guarantee system for small- and medium-sized medium enterprises (SMEs) to help them obtain financing. While 99% of Chinas 10 million reg registered istered firms in all sectors are SMEs, which employ 75% of urban workers, the financing system favors large SOEs, because SMEs are a bigger credit risk with their limited assets. The commission raised funds through credit guarantee organizations and special special industrial and technological bonding companies to encourage banks to grant loans to SMEs, especially those SMEs that depend on high technology or that produce high-tech tech products. The SETC also promoted venture capital and encouraged domestic entrepreneurs entrepreneur to invest in SMEs. The speed of SOE reform substantially accelerated after Chinas accession to the WTO in December 2001. An example of a successful business enterprise is the China State Construction Engineering Corporation, originally owned by the Ministry of Construction (MOC) but now completely autonomous. History of Highway Development According to the China Highway Construction Association (CHCA) the expansion of the road networks in China has dramatically increased over the six year period from 2000 to 2006.
From 1990 to 2006 during the period of the Eighth, Ninth and Tenth Five-Year Five Year Plans, China completed nearly 45,000 km of high-grade toll expressways through the investment of upwards of USD 40 billion per year. This unprecedented expansion in the expressway network was accompanied by continuing development of intermediate Class I and II roads under the coordinated efforts of the National Government and the governments of Chinas 31 provinces and municipalities. No other country has been able to create such a major enhancement to its national road asset base in such a short period. The first major step in the development of Chinas highway program occurred in 1988 with the construction of a short 17 km expressway from Shangh Shanghai ai to Jiading. It was the Shanghai highway that was recognized as the "beginning" of the expressway program. The development of expressways occurred in two stages: the first from 1988 to 1997, which was called the kick off, since expansion was gentle. The The second stage was from 1998 to the present, which was known as the rapid development period. There was no real middle stage because of the Asian
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financial crisis in the late 1990s, 90s, during which the Chinese used road construction as a vehicle for stimulating the economy. How was it achieved? Before the adoption of reform and opening of China to the outside world, the financing of road construction was controlled through the provincial governments. They were the sole investment body and decided on the scale and structure of every project. The investment in roads was limited, since it depended on government appropriation and all funds, equipment, materials and labor were allocated by the provincial governments. At the beginning of the expressway planning in n the 1980s China began to source road construction from loans provided by local banks with interest payments, instead of appropriating funds without interest payments. In 1983 the country established The Construction Fund of Energy and Transport and in 1984 the State Council issued major policies to provide sources of funding for the construction of highways. These included: An increase in the standard maintenance fee, a generic charge to vehicle owners collected by the provincial transport authorities to be used for road maintenance, improvement of technology, management and new road construction. A levy or fee on the purchase of all cars, which was collected by central government and placed into a fund ready for disbursement to the provincial governments governments as part of their overall financing needs for the expressways. The right to charge a toll fee. This was implemented by the provincial governments who could charge tolls after they had constructed the expressway. The central government assisted the roa road d program in the remote, poor provinces by supplying specific commodities to the road construction workers to complement their wages, such as cotton and cloth. Toll rights could be transferred. This permitted the provincial governments to sell a section of road to a concessionaire, often international, who in turn could issue bonds and trade on international and local stock exchanges to raise money. From the early 1990s China continued with a combined investment system which included investment by central government, local government, social (i.e. non non-government) government) capital and foreign capital and using the principle of build with a loan and repay through charging tolls. In 1998 the Government created a fresh source of funding by establishing a special fund for infrastructure construction by issuing state bonds. Currently approximately 60% of the expressway toll roads are built and managed by the provincial governments. The remaining 40% of expressways tolls have either been developed under BOT conditions by a concessionaire or the provincial governments have initially coordinated the construction of the highway and then sold a section to a concessionaire to operate and maintain. These investment concessionaires companies are normally funded and managed by overseas erseas entities who issue their company shares on international stock exchanges. BOT contracts have been used in China, but there is no legal structure to support the BOT concessionaires. There has been anecdotal information provided that indicates that in in one case a concessionaire had a contract to build the road and then operate it, but after completion of the road the provincial government allocated the management to another company with no legal recourse for the initial company. In another case a concessionaire ssionaire built a road with a certain projected traffic flow and revenue, but after the road was completed the provincial government built another road parallel to the concessionaires, which seriously reduced his revenue and again with no legal recourse for f his losses. This lack of legal protection has resulted in the view by some investors and construction organizations, that BOT arrangements are risky and they are not supported. Lessons Learned Develop a good effective master plan for an integrated high highway way network and link it through regular economic plans, such as the five-year year programs used in China. By creating a reliable plan stakeholders in the industry will have a better understanding of their potential revenue and what level of investment is required. red. It also provides substance for creating business plans for entrepreneurial ventures that require capital investment.
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Ensure that the plan is formulated mainly by the provincial governments, since they will be responsible for administering the construction process. The central administration should be responsible to ensure that the local plans are integrated fully with the national plan and that at provincial boundaries the alignments are coordinated to the satisfaction of both provinces. If possible attempt tempt to have simultaneous implementation of expressway construction by all relevant provinces. China succeeded through all 31 provinces and municipalities and experienced the opportunity of rapid expansion and completion of the network with immediate economic economic benefits that helped to provide funding for further expansion. Greenfield development is the fastest and most productive method of constructing a new national network due to the lack of interference from existing networks. Apparently land acquisition in China for the expressways has not proved too great an obstacle, since the land is considered to be nationally owned and providing adequate and timely relocation is assured, the required land is made available. Implement appropriate regulations and legis legislation lation to support and enable the overall policies to be implemented. Also ensure that the appropriate agencies are established to administer the new policies and ensure that this is a dynamic process, allowing for adjustments as the reforms progress. Support rt and encourage the growth of trade associations who can help self self-regulate regulate the industry and share information within and between stakeholders in the industry. This is particularly important for creating databases of contractors, subcontractors, specialized specializ subcontractors, material suppliers and plant/equipment rental companies. When large prime contractors, either international contractors or large SOEs, tender for a project they should be able to depend on a strong and reasonably regulated infrastructure within the construction industry of subcontractors and suppliers, since most of the primes depend on the ability to perform as management contractors rather then importing all their own people. A database of industry performers provides others with the ability ability to find suitable associates and partners with whom to link to bid a project and then complete the work successfully. Establish one organization that may be an amalgam of a series of trade associations as spokesman for the industry. Be open to different erent types of contractual arrangements such as turnkey and BOT, but ensure that the correct legal protection is established. BOTs in China have not been generally successful and both the MOC and the contractors recognize that the reason is the lack of an adequate legal framework. This may be amended as China continues to recognize issues that restrict its expansion plans. Private concessionaire operation and maintenance only arrangements are valuable for distributing financial burdens and risks. The trucking king industry complains that toll rates are too high and it is inconvenient to have to stop to pay every few kilometers. In response the Government is reviewing options to lower the rates and simplify the payment process. Consideration is even being given to buying back concessionaire agreements prior to the completion of the contractual maintenance period, so that some toll booths may be removed. Rapid and effective completion of projects is essential to ensure that the road asset base provides economic benefits as quickly as possible. Central and provincial governments ensure that the projects are managed on a team basis with all participants committed to the completion of a quality product on time and to budget. Appropriate staff is allocated to the project project to ensure that timely design and contractual decisions can be made. Project staff is authorized to issue directions and instructions without second guessing from other management levels. understands the need to resolve disputes quickly due to China does not believe in confrontational management and understands the negative impact that it has on the progress of the project and its acceptance into the national asset base. They do, however, recognize that it is vital to have reliable and respected dispute resolution mechanisms m within the contract. It is generally considered that site personnel have failed in their administrative duties if disputes cannot be resolved at project level. If a dispute needs to be forwarded to higher levels of resolution, the recommendations of the adjudicators/DRB are normally respected. Adjudication provisions are included in the conditions of contract but on road construction there is seldom cause for their use, due to the overwhelming desire by all parties to negotiate an agreement to avoid av delays. DRBs have been used successfully in different forms of construction in China, particularly hydro schemes.
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Ensure that there are clear and transparent legislative and regulatory systems established for the industry. These should not be overly complex mplex and the industry should be provided with the responsibility to exercise self-regulation where possible though its trade associations. Ensure there is open dialogue between government and industry concerning regulations, particularly during major poli policy or institutional reform.
3. Financial Issues Take out financing scheme to be operationalized at the earliest Ministry of Finance (MoF) to take up issue of relaxation in minimum rating and dividend payment history with IRDA
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