Crisil Road Project

Highway Projects in India FINANCING | PROFITABILITY & BIDDING INTEREST | CONTRACTING STRUCTURES

SAURABH SUNEJA

[email protected]

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Introductions

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and deep domain knowledge.

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the bid process and provide bid advisory services.

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Introductions

Infrastructure Advisory

This presentation

Suitable financing avenues vs. worthy projects: weighing

constraints

Contract arrangements in a PPP – risk management

An snapshot of PPP developers’ profitability

Discussion on modes of contracting beyond BOT – Toll

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Financing constraints vs. Bankability

…Not one or the other

In the news…

Liquidity crunch hits road sector | September 03, 2012

The Ministry of Finance recently suggested that all public sector banks

disburse loan for road projects only after ensuring that 100 percent ‘right-of-

way’ has been acquired by the National Highways Authority of India or state

governments.

Points of View…

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View: Article in The Economist, “Infra

Red”

Counterview: (letter published) 2

weeks after the article

•Ambitious infra development targets –

investment requirements

•Large proportion to come in as private

investments

•Pace of infrastructure development has

been slow – one reason is low pvt.

Investment

•There is a need to increase avenues of

debt financing available for pvt infra

investments

•Reduce risk factors that can derail or

slow down projects (land acq, govt

approvals etc.)

•It’s a myth that infra investments in India

have been hampered by dearth of

sufficient funds

•No observed example of a ‘bankable’

project that has not been taken up mainly

due to lack of equity or debt funds

•Fundamental issue with most projects is

lack of dependable revenue model

•Poor investment climate / governance

issues have hampered investments –

states with best infra are the ones with

efficient govts.

Points of view…

Large Commercial Bank:

“We are looking forward to evaluating toll road projects, but there

are few projects in the market right now”

“in the past 1 year we have assessed and turned down financing

for several road projects because of aggressive bidding /

viability issues”

Large NBCF:

“We keenly consider projects that would pass our risk

assessment criteria”

“We constantly watch out for potential risks – so we won’t

finance a power project without a robust fuel supply

arrangement, or a road project with land or environmental

issues”

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Risk management through contracts

a quick overview

Contracts reflect allocation & mitigation of risks -

Roads

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EPC Contract

NHAI

SPV

JV Partners

Lenders

Escrow Bank State

Government

Co

nce

ssio

n

Ag

ree

me

nt

EPC Contractor O&M Contractor

O&M Contract

Concession Agreement

• Risk Allocation b/w Govt.

& Concessionaire

• Mitigation for risks

transferred

SGSA

• Major implementation

risks that State Govts can

address

• Design Risks

• Construction Risks

• Traffic & Toll rate Risks

• Service Quality Risks

• Pre-construction risks

• Clearances

• Competing Facility Risk

• New taxation Risk

Escrow Agreement

• Risk of

misappropriation of

accruals

• Risk of debt not

being serviced

• O&M exp.not paid

• Under reporting of

revenues

Substitution Agreement

• Mitigating lender’s

risk

• Risk to lenders of

concessionaire

not performing

View on profitability of PPP developers

and a closer look at traffic forecasts

Developer profitability on a downturn…

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Downturn in profitability:

- Aggressive bidding

- Economic slowdown, further

dampening commercial prospects

- Financing more expensive than

anticipated

Present low bidding interest:

- High volume of projects at hand, high

debt: this limits capacity to take up

further projects; many developers

looking to exit assets to raise funds

Key faults in traffic estimates

WHY

High toll tariffs and

miscalculation regarding

willingness to pay

Recession / economic

downturn

Some expected

developments not

materializing

Time savings were lower

than expected

Improvements on

competing toll-free routes

Considerably lower usage

by trucks than expected

Lower off-peak / weekend

traffic

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WHAT -Study: Analysis of 32 toll road projects worldwide. In only 4 cases actual traffic > forecast traffic; at an average actual traffic volumes were around 73% of projections -points to general optimism in forecast exercises (including studies commissioned by banks)

Key Metric: Actual / Forecast Traffic

Traffic growth estimates | toll bridge in Tanzania

Estimated baseline

traffic for year 2009

Expected population

growth (based on

Kigamboni master plan)

Traffic growth based on:

Expected growth in trip

intensity (as per JICA

traffic master plan)

Adjustment in

traffic

composition to

mach

composition on

typical urban

roads

Projected traffic for

Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

Estimated baseline


Expected population

growth (based on






Adjustment in

traffic

composition to

mach

composition on

typical urban

roads


Kigamboni Bridge

TAZARA Railway

Bridge

Bridge on Nelson

Mandela Road

TAZARA Railway

Line

Proposed

Kigamboni Bridge

Contracting in case of non-tolled projects

examination of alternative models

Large opportunity in non-tolled road projects

Several instances where roads would not be developed on BOT-toll

basis

– Low traffic levels and therefore toll based concession not viable

– Low willingness to pay / or developers suspect so

– Low willingness to charge?

Close to two-thirds investment in roads development between 2012-

13 and 2016-17 to come from public funds

– While NHs would see majority of investments by private players, over 80%

investments in SHs expected to come from public funds

63%

37%

Public funds

Private funds

Contracting alternatives on the table

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Main contracting

alternatives Views Counter-views / remarks

BOT - Annuity

Allows efficiencies from pvt. players BUT, has been expensive (potentially due to private sector premium / cost differential for financing) Creates liability for the govt. akin to debt, this needs to be acknowledged

Expensiveness exaggerated since construction cost assessments by pvt. players anyway ~ +25% of CA Pvt, companies would take benefit of tax provisions and therefore would have a relative cost advantage

Traditional item

rates contract

Have always experienced huge cost and time overruns, therefore should be avoided

No counterview, don’t do it!

EPC – fixed cost

contracts

Appropriately shifts construction risks to EPC player BUT, does not make the developer responsible for long term maintenance

Concern of not creating long term commercial inventive for superior construction valid; EPC can be bundled with medium / long term maintenance contracts

AND

Variations with modifications or

hybrids of the above structures

Key motivations of the govt. and emerging

contracting modes

Key preferences / consideration of contracting authority (CA):

– Good quality and timely construction

– Contracting framework to have imbedded provision for long term

maintenance

– Value for money

[Example] Hybrid annuity model caters to motivations of CA while

mostly wishing away issues

– Here, a bulk of construction cost is paid to the project developer during

construction, thereby reducing the burden of financing on pvt. sector (and

consequently, financing cost)

– At the same time – substantial payments are allocated to future annuity

payments and developer remains responsible for long term O&M

• Framework ensures long term O&M

• Ongoing annuity payments creates commercial incentive for good quality

construction and maintenance

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THANK YOU

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[email protected]

Crisil Road Project

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