Toll rate cut will increase fund requirement for national highway development

Contents Sections Policy change 1 Impact 2 Tables National highways toll policy 1 Revenue shortfall from lower toll collection 2

Summary The Ministry of Road Transport and Highways has proposed a reduction in base toll rate of 3-axle commercial vehicles from Rs 3.45 per km to Rs 2.40 per km. As a result of the move, CRISIL Research expects the toll collection revenues of the government on national highways to decline by Rs 10 billion over 2011-12 to 2015-16. Over the next 5 years, the total requirement for viability gap funding is expected to increase by Rs 60 billion for all BOT-toll projects.

Roads & highways IMPACT ANALYSIS

December 2010

About CRISIL Limited CRISIL is India's leading Ratings, Research, Risk and Policy Advisory Company. CRISIL offers domestic and international customers a unique combination of local insights and global perspectives, delivering independent information, opinions and solutions that help them make better informed business and investment decisions, improve the efficiency of markets and market participants, and help shape infrastructure policy and projects. Its integrated range of capabilities includes credit ratings and risk assessment; research on India's economy, industries and companies; global equity research; fund services; risk management and infrastructure advisory services. About CRISIL Research CRISIL Research is India's largest independent, integrated research house. We leverage our unique, integrated research platform and capabilities spanning the entire economy-industry-company spectrum to deliver superior perspectives and insights to over 750 domestic and global clients, through a range of subscription products and customised solutions. Disclaimer CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions which may be based on the views expressed in this Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division, which may, in its regular operations, obtain information of a confidential nature which is not available to CRISIL Research. No part of this Report may be published/reproduced in any form without CRISIL’s prior written approval.

CRISIL RESEARCH ROADS AND HIGHWAYS IMPACT ANALYSIS, DECEMBER 2010 1

Toll rate cut will increase fund requirement for national highway development

CRISIL Research expects the proposed toll rate cut for 3-axle commercial vehicles to increase the government's funding requirement for national highway projects by Rs 70 billion over 2011-12 to 2015-16. The toll rate cut will reduce toll collection for government-funded projects, and increase viability gap funding for private-funded BOT-toll projects that are awarded in the future. This would lead to a shortfall in government's viability gap funding for national highway projects. If the shortfall is not bridged, we expect the government to reduce its targeted BOT-toll projects by 2,000 km over the next five years. The government would therefore have to diversify its sources of funding in order to award 10,000 km of BOT-toll projects during the period. Policy change The Ministry of Road Transport and Highways has proposed a change in classification status and base toll rate applicable on national highways for 3-axle commercial vehicles. At present, under the toll policy of 2008, 3-axle commercial vehicles are categorised under multi-axle vehicles, on which a base toll rate of Rs 3.45 per km is applicable. The ministry has proposed to classify 3-axle commercial vehicles as a distinct category, and apply a new base rate on this category that would not be more than 10 per cent of the base rate applicable on a 2-axle bus and trucks. The base toll rate for 3-axle commercial vehicles would therefore decline to about Rs 2.4 per km, estimates CRISIL Research. The government of India awards three types of project contracts - i) cash contract projects that are entirely funded by the government, ii) build-operate-transfer (BOT) annuity contracts, which are, again, entirely funded by the government, and iii) BOT toll contracts, which are funded by road developers from the private sector. BOT toll projects have access to government funding by way of viability gap funding that assures a private developer 16-18 per cent return (IRR) on its equity investment. The government has set an upper limit for viability gap funding, at 40 per cent of total project cost. Among road project contracts already awarded, the proposed revision in the toll base rates would apply only to government-funded toll road projects. For road project contracts that are awarded after the revised policy comes into force, the new rates will apply to government-funded and private-funded BOT-toll road projects. National highways toll policy

Existing toll policy (2008)

Vehicle category Rs/ km

car,jeep,van, Light motor vehicle 0.65

Light commercial vehicle 1.05

Bus or truck 2.20Heavy construction machinery, multi axle vehicle (MAV) 3 to 6 axles 3.45

Oversized vehicles 7 or more axles 4.20Source: NHAI, CRISIL Research

Proposed toll policy (2010) Vehicle category Rs/ km

car,jeep,van, Light motor vehicle 0.65

Light commercial vehicle 1.05

Bus or truck 2.20

3 - axle 2.40Heavy construction machinery, multi axle vehicle (MAV) 4 to 6 axles 3.45

Oversized vehicles 7 or more axles 4.20

Source: PIB, CRISIL Research

2 CRISIL RESEARCH ROADS AND HIGHWAYS IMPACT ANALYSIS, DECEMBER 2010

Impact Government revenues likely to decline by Rs 10 billion over the next five years Owing to the decline in toll rates, CRISIL Research expects the toll collection revenues of the government on national highways to decline by Rs 10 billion over 2011-12 to 2015-16. We have derived this by estimating the government's likely toll revenues from 3-axle commercial vehicles over the forecast period, and then adjusting the revenues for the decrease in the proposed base toll rate for the vehicle category. To estimate the government's toll collection revenues from 3-axle vehicles in each year, we have used the following data sets - i) the average share of 3-axle commercial vehicles in the government's total toll collection revenues, and ii) the government's projected toll collection revenue for each year in the forecast period, as projected by CRISIL Research. Revenue shortfall from lower toll collection Year Estimated drop in toll revenue (Rs billion)

2010-11P 1.2

2011-12P 1.5

2012-13P 1.8

2013-14P 2.2

2014-15P 2.8

Total 9.6

Source: CRISIL Research Increased viability gap funding required for maintaining project economics The change in base toll rate for 3-axle commercial vehicles will affect the viability of BOT-toll road development projects. CRISIL Research estimates project IRRs to drop by 220 basis points and equity IRRs by a sharper 370 basis points, accounting for the decline in project revenues due to the revised toll rates. We have assumed the stage length of a highway project at 100 km, and that it would be funded with a debt-equity ratio of 4:1. To assure equity IRR of 16-18 per cent to road developers after the change in the toll policy, the government will have to incur an additional Rs 600 million as viability gap funding for each national highway BOT-toll project. Based on our estimate that the government would award 10,000 km of BOT-toll projects over the next five years, the total requirement for viability gap funding will increase by Rs 60 billion, for all BOT-toll projects over the next five years. CRISIL Research does not expect the change in toll policy to affect the private BOT-toll road developers, as the government is likely to reimburse the decline in their returns through an increase in viability gap funding.

CRISIL RESEARCH ROADS AND HIGHWAYS IMPACT ANALYSIS, DECEMBER 2010 3

Shortfall in viability funding could reduce the number of toll road projects awarded We expect the government to face a shortfall of about Rs 70 billion, owing to reduced toll collection revenues and increased viability gap funding. The shortfall would correspond to 20 per cent of the government’s estimated viability gap funding for the projected 10,000 km of BOT-toll projects to be awarded over the next five years. If we assume that the government reduces only its viability gap funding for the new BOT-toll projects on account of this shortfall, it may not be able to award 2,000 km of BOT-toll projects. The government would then have to consider market borrowing, budgetary support or external aid such as World Bank loans to fund the shortfall for BOT-toll project contracts.

Chennai Mezzanine Floor, Thappar House 43 / 44, Montieth Road Egmore Chennai - 600 008, India. Phone +91 (44) 2854 6205/06, 2854 6093 Fax +91 (44) 2854 7531 Kolkata ‘Horizon’, Block ‘B’, 4th floor 57 Chowringhee Road Kolkata - 700 071, India. Phone +91 (33) 2283 0595 Fax +91 (33) 2283 0597 www.crisilresearch.com

Mumbai CRISIL House Central Avenue Hiranandani Business Park Powai, Mumbai - 400 076, India. Phone +91 (22) 3342 8026/35 Fax +91 (22) 3342 8088 New Delhi The Mira G-1 (FF),1st Floor, Plot No. 1&2 Ishwar Nagar, Near Okhla Crossing New Delhi -110 065, India. Phone +91 (11) 4250 5100, 2693 0117-21 Fax +91 (11) 2684 2212/ 13 Bengaluru W-101, Sunrise Chambers 22, Ulsoor Road Bengaluru - 560 042, India. Phone +91 (80) 4117 0622 Fax +91 (80) 2559 4801 E-mail: research@crisil.com