Era SIP

SUMMER INTERNSHIP REPORT
ON ANALYSIS OF THE FINANCIAL STRUCTURING OF PUBLIC-
PRIVATE PARTNERSHIP (PPP) FOR ROAD INFRASTRUCTURE PROJECTS IN INDIA

AND
VARIOUS RISK INVOLVED IN HIGHWAY SECTOR FOR DFBOT PROJECT

Submitted in the Partial fulfilment of the requirements for MANAGEMENT OF BUSINESS FINANCE (MBF) By Nikita Johari (4112023015) BATCH of 2012-14 INDIAN INSTITUTE OF FINANCE A-10, Sector 83, Phase II, NOIDA
COMPANY NAME- ERA INFRA ENGINEERING LTD.
Corporate Guide Mr. Lalit Bansal Deputy Manager (Account and Finance)
Under The Guidance Of: Dr. J.D. Agarwal Chairman Indian Institute of Finance
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(INDIAN INSTITUTE OF FINANCE)
ACKNOWLEDGEMENT
I express my sincere gratitude to Mr RAKESH CHANDRA, Divisional head (HR), EIEL Noida for giving me the opportunity to undergo summer training in this esteemed organization.
I feel great pleasure to acknowledge deep regards to my team members for cooperating a lot in the projects and for giving their advice to make my project more useful and impressive.
This report would not have been possiblewithout their help.
I would like to express my sincere thanks to Prof. J.D Agarwal and all the faculty members of Indian Institute of Finance for guiding me with their knowledge and guidance throughout my project and I am also very grateful to all my colleagues for their helpful nature
Last but not the least I also want to thank the entire Management Staff of the Company whom Ifound friendly, courteous and candid while expressing their views.
NIKITA JOHARI (4112023015)
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CONTENTS
Page No.
ERA GROUP...8-10
Key Feature Vision Mission Group Structure Infrastructure Business
Company Profile (ERA INFRA ENGINEERING LTD.)..11 Projects Undertaken12-14 Clients.15 Summary Highlights.16-18
Road infrastructure in INDIA Introduction..19 Key development and investment.20 Policy Initiative.21 Road Ahead...22
PPP - Introduction..23-28 Type Of PPP Models.29-30 Bot Toll Bot Annuity
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OMT Concession Special Purpose Vehicle
Key Drivers of PPP31-32 Misconception about PPP..34 Principles Of PPP..35-36 Road Sector PPP Model Characteristics37-38
Financial Structuring Of PPP For Highway Project39-44 Source of capital45-50 Factors contributing for PPP in Highway sector...51-53 Capital For PPP Project In Highway Sectors54-60 o Equity Capital o Debt Capital o Mezzanine Capital o Grant From Government o Financial Closure o Debt Equity Norms o Debt Services Term o Tenure Of Debt o Interest Rate o Moratorium Period o Debt Service Option Chosen Various kind of risk involved In Highway Sector For BOT Project61-138 Introduction61-66 4|Page
Brief Scope Of Work Work Methodology
Literature Review
Basic Concept of Risk67-68 Type of Risk.69-71
Construction Industry And Risk Management Requirement.72-72 Risks Prevalent In Road Project..75-76 Risk Identification In Various PPP Models77-99 Scope Methodology Risk Characterization Of BOT TOLL Risk Characterization Of BOT Annuity Risk Characterization Of BOT EPC Agreement
Summary Of Risk
The DFBOT Model100-104 DFBOT Scheme DFBOT Project Structure
Risk Management Framework..104=114
Risk Identification
Risk Classification
Risk Analysis
Risk Response
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Risk Attitude
Risk Allocation and Cash Flow Management.115-124 Development Phase Construction Phase Operation Phase On-Going Phase
Project Cash Flow Pattern..125 Preliminary Date Collection126 Result and Conclusion.127-129 Cause of Failure....................130 Respondents Particulars..131-132 Sample Questionnaire..132 Conclusion133-136 Phase & Party Wise Risk Allocation .136 Top 10 Risk and Mitigation Measure.137-138
Bareilly- Sitapur Road Project...139-158 o Project Detail o Background
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o Concession Agreement o Sources Of Revenue
Project Assumption o Calculation Of WACC o Valuation Of Project o Conclusion
Preliminary Questionnaire.157-158 References...159
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ERA GROUP
Building the life line of tomorrow, ERA Group, a billion-dollar diversified has established itself as a name of trust and emerged as an icon in the varied verticals of infrastructure within and outside India.
Armed with over two decades of experience, Group is dedicated to the unwavering pursuit of excellence and innovation. The group undertakes diversified but synergistic activities across some of the fastest- growing verticals of the Indian economy through its companies:
Era Infra Engineering
Era buildsys
Era landmarks
E-Zone
Era business school
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Key Features
Projects: 200+ completed and 100+ on-going
A dedicated workforce of 4500 permanent employees
Pan-India spread and expanding globally
VISION
To provide an integrated network of interlinked services towards global infrastructure development with constant progress and commitment to deliver exceptional value for our investors, customers, personnel and community.
MISSION
To emerge as the most admired innovation business leader and achieve excellence in the infrastructure sector by maintaining the highest standards of technology, customer satisfaction and a spirit of partnership.
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Group Structure
Era Group
Era Landmarks Ltd.
Era Infa Engineering Ltd.
Era Buildsys Ltd.
Verticals Engineering Procurement & Equipment Management
Subsidiaries Era infrastructure(I) Ltd. Era T&D Ltd.
INFRASTRUCTURE BUSINESS
Engineering, Procurement & Construction BOT Projects Annuity/Toll Equipment Management Real Estate Pre Engineered Buildings
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Company Profile
Era Infra Engineering Ltd.
Starting as a small experiment in Public Private Partnership, the visionary company unfolded an opportunity in infrastructure development as Era Infra Engineering Ltd., leading our country to witness a transformation.
Shaping the future of tomorrow, discovering a new lifeline through infrastructural patterns across sectors and segments from Power/T&D to Roads/Highways, from Aviation to Railways/Metro, from Refinery to Industrial, Social and Urban infrastructure, an ISO 9001:2008, ISO 14001:2004 & OHSAS 18001:2007 company Era Infra Engineering marched into an age of infrastructural growth powered by latest in construction technology.
Backed by two distinct Business Divisions Construction and Equipment Management
- Engineering Procurement &
&two 100% Subsidiaries - Era Infrastructure Ltd. and Era T&D Ltd., the company is equipped to offer single-point turnkey solutions for contracts of all sizes and scale
Era Infra Engineering Ltd, the flagship company of Era group, is a fully integrated infrastructure development company. The company is primarily engaged in diversified construction activities of power projects, roads, railways & other infrastructure projects. They are having a strong presence in the construction sector with an impressive track record. Era Infra Engineering Ltd has four strategic business divisions, namely Construction & Contracts, EPC & International, Ready Mix Concrete and Equipment Management. The company is headquartered in New Delhi. Their manufacturing facilities are located at Ghaziabad and Greater Noida in Uttar Pradesh and Faridabad and Manesar in Haryana.
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PROJECTS UNDERTAKEN; OVERVIEW Road/ Highways:

7 Road Projects: Hyderabad Ring Road (HRRPPL), Gwalior Bypass (GBPPL), West Haryana Project (WHHPPL), Haridwar Highway (HHPL), Dehradun Highway (DHPL), Bareilly Highway (BHPL), Rampur Kathgodam Highway (RKHPL)
Power:
Various power projects with NTPC such as Talcher ,Ramagundam, Vindhiyachal, Sipat, Dadri, Jajjhar, Moda etc.
Thermal Power projects:- NTPC, BHEL, LANCO , ADANI
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T&D:
Projects for Transmission and Distribution line setup in Kerala, Madhya Pradesh and Haryana.
Railways:
Railway projects for RVNL of approx. 436 KM in length Focus on dedicated railways freight projects/ expansion of railway across the country
Metros:
Currently working on Jama Masjid Kashmere Gate Section
Aviation:
Complex at Kolkata and runway of Indore airport Four airport modernization and expansion projects at Pune, Raipur, Indore and Jaisalmer
Social Infra:
Urban infrastructure, Hospital Buildings, Commercial & Residential buildings & 4 CWG stadiums CBI headquarter & modernization of Connaught Place with construction of subways Low-cost housing project for DSIIDC, Bawana.
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Industrial:
Executed Industrial work for Birla Tyres, Bajaj Hindustan, Videocon Handling various projects for public and private sectors like SAIL, IOCL, etc.
Refinery:
Expansion project at IOCL, Panipat , Mathura Refinery etc. Various Projects for HPCL
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CLIENTS
Public Sector Client
NHAI BHARAT HEAVY ELECTRICALS NATIONAL THERMAL POWER
Private Sector Clients

ADANI GROUP ALPS INDUSTRIES BAJAJ HINDUSTAN LTD. BIRLA TYRES JINDAL SAW LTD HINDUSTAN NATIONAL GLASS & INDUSTRIES LTD. CADILA PHARMACEUTICALS LTD. CAPARO ENGINEERING INDIA PVT. LTD. SAHARA GROUP VIDEOCON INDUSTRIES LTD. ETC.
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SUMMARY HIGHLIGHT
Road sector in India continues to face multiple challenges in the form of execution impediments, financing constraints, optimistic traffic estimates and stressed financial position of the developers. Several projects have faced delays in execution mainly on account of delayed land acquisition, removal of encroachments, shifting of utilities, receipt of approvals and environment clearances, etc. In addition, the actual traffic in many operational toll road projects has turned out to be significantly lower than the traffic estimates. Consequently, lenders have increased caution while funding fresh projects, especially in those cases where the bidding is perceived to be very aggressive. In addition, overall creditworthiness of road developers have deteriorated due to their leveraged balance sheet and strained profitability. Further, weak capital markets and stressed valuations have made raising equity capital extremely difficult for most developers. As a result, participation in the road projects offered by National Highways Authority of India (NHAI) over the last few months has been muted. While subdued competition is positive for the sector which was not too long ago witnessing irrational bidding, the sharp decline in the private sector participation across the board implies reduced risk appetite of the developers and increasing difficulty in facing financial closures. Over the last few years, NHAI has been awarding projects only under the Public-Private Partnership (PPP) mode, in comparison to item-rate contracts which were awarded earlier. The road contractors which were earlier engaged in executing projects on item rate or Engineering, Procurement and Construction (EPC) contract basis struggled to maintain their order-book and many opted to enter the PPP space by undertaking projects on build-operatetransfer (BOT) mode. Since BOT projects require long term fund infusion, and the capital markets have not been conducive for raising funds, several players had resorted to external borrowings to meet their equity commitments in various Special Purpose Vehicles (SPV) floated to develop the projects thus resulting in double leveraging and increase in overall indebtedness at the group level. Moreover, elongated working capital cycle in core construction businesses of many entities has also strained their liquidity position and further increased their dependence on borrowed funds.
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The operating margins of several road contractors also witnessed pressure because of rising commodity prices (for fixed-price contracts) and idling of capacities as execution could not begin on many new projects. Many projects which were awarded over the last one-two years faced difficulty in achieving financial closure due to aggressive bidding, and uncertainty on land acquisition, approvals etc. The lenders have also become cautious on groups which have over leveraged themselves. Further, the execution on many of the projects remained slow primarily because of delays in land acquisition, clearances, and financial closure. Projects that had the requisite approvals and funding reported healthy execution. In case of many toll-based road projects which commenced operations, the actual tolled traffic during initial period was significantly lower than the initially estimated traffic. This coupled with higher interest burden had resulted in stress on debt servicing capability and project return indicators. However, projects with established traffic continued to perform well as the impact of higher interest burden was compensated by higher revenues in case of inflation-linked toll rates. So under this project I have tried to cover each and every aspect of the Road/highway sector. The project is basically divided in two three major parts, which are as follows:
Financial structuring of PPP for highway project Risk management in highway sector for BOT model Valuation of Bareilly-Sitapurroad project
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In the first part basic PPP model has been discussed along with the financial structure of PPP for highway project and various types of capital involved.
In the second part, a survey was conducted through the questionnaire and on the basis of experts opinion about the various risk associated with the different phases of the project in the BOT model, various result and conclusion are drawn ,presented in form of charts and graphs and top 10 risks are selected and there mitigation measures have been suggested. Also identification of risk has been done in various PPP model.
And in third part, Bareilly- Sitapur road project has been considered; various assumptions have been made for the valuation of the project for the selection criteria of the project.
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ROAD INFRASTRUCTURE IN INDIA

Introduction
Indias road network, spanning across 4.69 million km, is the third-largest road network in the world, next in line only to the US and China. The country relies heavily on its robust road network that carries almost 65 per cent of freight and 80 per cent of passenger traffic. National Highways (NH), under the jurisdiction of National Highways Authority of India (NHAI), constitute for almost 2 per cent of the network but carry about 40 per cent of the total road traffic. The Indian Government is very particular about the development and maintenance of this huge network; more so because number of vehicles in the country has been growing at an average rate of 10.16 per cent per annum over the last five years. Thus a need for efficient and world-class road network becomes inevitable for smooth transitions of goods and services. The administration awarded about 2, 000 km worth of new road construction contracts in FY13.
Key Developments and Investments

FDI received in construction development sector from April 2000 to April 2013 stood at US$ 22.112 million, according to Department of Industrial Policy and Promotion (DIPP).
IL&FS Transportation Networks Ltd, one of India's biggest road builders, has recently signed a US$ 300 million contract to build a six-lane highway. The project will link an eastern industrial zone (having heavy-duty traffic) to mining districts such as Dhanbad, the nation's coal capital.
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Meanwhile, NHAI has agreed to facilitate 50 per cent of the financial assistance to Keralas State Government for developing the proposed bypasses in Kollam, Alappuzha and Kozhikode. The Union ministry will grant Rs 357 crore (US$ 60 million) of financial assistance to the state for developing the five bypass roads. The funds for the same would be disbursed in a phased manner.
The Government of Uttar Pradesh (UP) has also put highway development programme on the highest priority. It has decided to convert busy roads into four lane highways for faster and better transportation of goods and people. The state Public Works Department (PWD) has been asked to identify such roads and later transfer them to the UP State Highways Authority (UPSHA) for up-gradation.
UP has one of the largest road networks in India measuring about 1, 35, 000 km, including national/state highways, district and rural roads.
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Policy Initiatives
The Indian Government also plays a vital role in developing the road network in the country. It provides various incentives for private and foreign sector investment in the roads sector apart from allowing 100 per cent foreign direct investment (FDI) under the automatic route for support services to land transport such as operation of highway bridges, toll roads, and vehicular tunnels. Such services also include services incidental to transport such as cargo handling, construction and maintenance of roads, bridges; and construction and maintenance of roads and highways offered on build-operate-transfer (BOT) basis, including collection of toll. The Government also plans to earmark US$ 1 trillion for the development of infrastructure in India over 2013-18. To attract investments in the sector, it has modified its policies so that developers no longer have to wait for clearance from forest authorities to commence construction. Another supportive policy came from the central bank wherein it reclassified loans to road builders as secured loans rather than unsecured loans, which would give more comfort to banks to lend to projects. Another major relief has been granted to highway widening projects. The Cabinet has recently allowed exemption of environmental clearance requirement for stretches up to 100 km in length. Earlier, this was for stretches up to 30 km, as a result of which most expansion projects required green nod from the environment ministry. This exemption is expected to fasten the road development projects currently undergoing in India. Knowing the significance of expressways, the Government had approved the construction of 1,000 km of expressways under the National Highways Development Project (NHDP) Phase VI. Besides that the ministry released a project report to devise a master plan aiming to construct 15, 600 km by 2022, marking the end of the 13th five year plan. The Government aims to award 9,600 km of road projects in FY14.
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Road Ahead
India is poised to attain the next level in highway development as the authorities and builders are increasingly focusing on transit efficiency. Experts believe that public funding or other alternate financial models, apart from public-private partnerships (PPP), would be instrumental for attaining the required targets. Moreover, the country has 600-700 km of access-controlled expressways and is working continuously to build more high-quality, access-controlled expressways for faster connectivity between cities and towns. The Government is making sure that new roads and routes are well equipped with Intelligent Transportation Systems (ITS) including round-theclock CCTV surveillance for monitoring real-time traffic data and ensuring safety and security of users. A recent study has stated that infrastructure development (for expressway projects alone) would require about Rs. 450,000 crore (US$ 75.65 billion).
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Public Private Partnership

AN INTRODUCTION
. PPPs are a means by which the public and private sectors can work together as theyprovide a contractual and formalized framework needed for easier cooperation between all parties. A typical PPP structure can be quite complex involving contractual agreements between a number of different participants including Financiers, Government, Engineers, Contractors, Operators, and Customers.
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The Special Purpose Vehicle
Unlike traditional private sector concessions, the creation of a separate commercialventure called a Special Project Vehicle (SPV) is a key feature of PPPs. The SPV is usually set up by the private sponsors(s) who, in exchange for shares representing ownership in the SPV, agree to lead the project and contribute the long-term equity capital. The SPV is a legal entity that enables the coming together of many different parties and facilitates the allocation and diversification of risk and financing requirements to more than one party. From a legal perspective, it is the SPV that undertakes the project and therefore all contractual agreements between the various parties will be negotiated between themselves and the SPV.
The Government
As previously mentioned, PPPs are a partnership between the public (government) and the private sector , and thus a strong commitment on the part of the government is key to the success of a PPP. If the government has contributed equity, in exchange for shares in the SPV, they have equal rights and equivalent interests to the assets within the SPV as other shareholders.
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The Financiers
The financing of a project will be made up of different amounts of debt and equity3, the source and structure of which will vary depending on the project. As previously mentioned, the equity financing will generally be provided by the private sponsors, in exchange for ownership in the SPV.
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The balance of the financing is usually, though not always, provided using projectfinancing. Project financing, unlike traditional lending, is based on the financial strength of a project with little or no recourse4 back to the sponsor(s), thus the specific risks of that project remain separate from the existing business of the sponsors. In the case where project financing is being used, the SPV borrows the funds and the debt is paid back using the cash flow generated from the project.
The Experts
The PPP structure helps facilitate the cooperation and allocation of resources and risks among those who are best able to manage it. Thus, depending on the project, the private sector may choose, or be asked, to provide one or more services ranging from the design, building, and/or operating of a project.
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The Customers
There can be numerous benefactors to a project such as the motorists using a toll road, or a community benefiting from a new power plant. Regardless of who the benefactors are, it is important that they be well identified in order to accurately assess who will be paying for the services, how they are to benefit, and what their success criteria are.
The Escrow Account

An escrow account is an account that is set up, usually at the request of financiers, and managed by a third party in order to safeguard project revenues for the purpose of insuring that debt service obligations are met. An escrow account can also be used to hold a deposit in trust until certain specified conditions have been met.
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Due to the widening gap between the financial requirements and the available budget allocations, the governments throughout the world seek to secure the cooperation of the private sector in building the needed road infrastructure through innovative approaches such as the Public-Private Partnerships (PPP).
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Types of Public Private Partnerships:
I.
Build Operate and Transfer/Design Build Finance Operate and Transfer (DBFOT) - Investment by private firm and return through levy and retention of user fee. Build Operate and Transfer (Annuity) BOT (Annuity ) - Investment by privatefirm and
II.
III.
Return through semi-annual payments from NHAI as per bid. Special Purpose Vehicle SPV (with equity participation by NHAI)
IV.
V.
Market Borrowings
BOT (Toll)
Private developers/ operators, who invest in toll able highway projects, are entitled to collect and retain toll revenues for the tenure of the project concession period. The tolls are prescribed by NHAI on a per vehicle per km basis for different types of vehicles.
A Model Concession Agreement (MCA) has been developed to facilitate speedy award of contracts. This framework has been successfully usedfor award of BOT concessions.
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BOT (Annuity)
The concessionaire bids for annuity payments from NHAI that would cover his cost(construct ion, operations and maintenance) and an expected return on the investment. The bidder quoting the lowest annuity is awarded the project. The annuities are paid semiannually by NHAI tothe concessionaire and linked to performance covenants. The concessionaire does not bear the traffic/tolling risk in these contracts.
Operate, Maintain and Transfer (OMT) Concession

NHAI has recently taken up award of select highway projects to private sector playersunder a n O M T C o n c e s s i o n . T i l l r e c e n t l y, t h e t a s k s o f t o l l c o l l e c t i o n a n d h i g h w a y m a i n t e n a n c e w e r e entrusted with agents/operators and subcontractors, respectively. These tasks tolling
have beenintegrated under the OMT concession. Under the concession private operators would be eligible tocollect tolls on these stretches for maintaining highways and providing essential services (such asemergency/ safety services).
Special Purpose Vehicle for Port Connectivity Projects

NHAI has also taken up development of port connectivity projects by setting up Special PurposeVehicles (SPVs) wherein NHAI contributes up to 30% of the project cost as equity. The SPVs also haveequity participation by port trusts, State Governments or their representative entities. The SPVs also raiseloans for financing the projects. SPVs are authorized to collect user fee on the developed stretches tocover repayment of debts and for meeting the costs of operations and maintenance.
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The Key Drivers for PPP

1. Increased public expectations and demand for public services 2. Need for capital investment 3. Innovation in service delivery and 4. Encouragement of on time and within budget competition
Apart from these, the other aspects to drive PPP are:

5. Fiscal reasons - Inadequacy of resources leveraging on lower government funding 6. Optimal transfer of risks to the entity best suited to manage the risks to deliver value for money through synergies such as:
Design
Financing
Construction
Operations and Maintenance
Impact - time overrun, cost overruns, change of scope, defective designs, leakageof revenues, high maintenance costs
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o Project management o Establishing standards through the life cycle of a project
8 . Rigorous enhancement in the bankability of the project and
9 . Enhancement of implementation capacity
Advantages of the PPP structure
Though the working relationships between the public and private sectors are not new, the use of PPP structures is becoming increasingly popular. PPPs enable the participants to transfer the various risks inherent in a project to those who are best equipped to manage it. If a PPP is well structured it should enable all parties to better utilize resources by promoting efficiency and transparency, as well as provide a number of benefits including:
i. Risk Diversification- The creation of an SPV enables the coming together of many different parties and facilitates the allocation and diversification of risk and financing requirements to more than one party. This diversification enables the undertaking of projects where the financial requirements or risks might be too great for any one party by itself.
ii. Risk Mitigation- The SPV facilitates the use of project financing which is intended to keep the specific risks of that project separate from the existing business of the private sponsors. This is beneficial in that the financial integrity of the project sponsors business will not be jeopardized should the project fail.
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iii. Project financing-unlike traditional lending, is based on the financial strengthof a project with little or no recourse back to the sponsor. The SPV borrows the funds and the debt is paid back using the cash flow generated from the project. Since it is the SPV that is borrowing the funds, this will not affect the sponsors credit rating and therefore not affect future borrowing by the projectsponsor. iv. Leverage Leverage is the amount of debt in relation to the amount of equity used to finance a project. Projects financed using project-financing methods are usually highly leveraged in order to increase the equity return. The use oleverage can make projects more financially viable.
v. Credit Ratings- Traditional corporate lending is based on the sponsors credit rating. Project financing facilitates the borrowing for a profitable project and is not restrained by the project sponsors borrowing limitations.
vi. Tax Benefits- Depending on the country, tax benefits and holidays sometime exist for new enterprises. The establishment of an SPV to undertake a PPP can help sponsors take advantage of these tax saving mechanisms.
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Misconceptions about PPP structure

PPPs are often not understood properly by the implementation bodies and the prejudices works against the interests of the project. It is necessary to understand that a PPP is not:
1)
Privatization or disinvestment- where the underlying asset is not an infrastructure

asset that would work for the benefit of the society, but rather a corporation or a venture of Government established years ago where private sector was not developed and now with the maturing of private sector capabilities are not needed to be owned by Government any longer.
2)
About borrowing money from private sector or donations extended by private entity for public good. - Because the partnering in the service delivery is
not there, and in this case the utilization of the resources is still by Government body.
3)
Simple outsourcing where in substantial financial, technical and operational risk is

retained by public entity (Government). PPP without risk transfer would not help Government in expanding coverage or enhancing quality. It is to be clearly understood here that the risk has to be allocated to the party best able to manage it.
4)
Commercialization of a public function by the creation of a state owned

enterprise, ultimately the management and the regulation are both with the Government and there can hardly any improvement in the service quality and coverage
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Principles of PPP
The following key principles will underpin all PPP actions in the highway Sector
Approach
National Highways Authority of India (NHAI) is the apex Government body for implementing the NHDP. All contracts whether for construction or BOT are awarded through competitive bidding.
Private sector participation is increasing, and is through construction contracts and Build-Operate-Transfer (BOT) for some stretches based on either the lowest annuity or the lowest lump sum payment from the Government.
BOT contracts permit tolling on those stretches of the NHDP.
A large component of highways is to be developed through public-private partnerships and several high traffic stretches already awarded to private companies on a BOT basis.
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Policy
100% FDI under the automatic route is permitted for all road development projects
100% income tax exemption for a period of 10 years
Grants / Viability gap Funding for marginal projects by NHAI.
Formulation of Model Concession Agreement
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Road Sector PPP Model Characteristics

PPP Mode ASSET OWNERS HIP BOT TOLL PUBLIC PPP DURATION (YEARS) 15-30 PRIVATE PLAYER REVENUE HIGH Design, finance, TOLL REVENUE construct, manage, maintain and collect tolls BOT ANNUITY PUBLIC 15-30 LOWMEDIUM Design, finance, ANNUITY construct, manage, maintain BOT SHADOW PUBLIC TOLL 15-30 HIGH Design, finance, TOLL construct, manage, maintain MANAGEMEN T CONTRACT PUBLIC 5 LOW Management all aspects of Pre-determined fee, SHADOW REVENUE PRIVATE PLAYER ROLE COMPENSATION
REVENUE
of based on performance and
operation maintenance
The type of PPP mode to be selected for national highway or road project in India is determined by the following major characteristics Private ownership of land for road projects in India is not allowed and the land is owned by the public
The private sector roles can cover a broad spectrum from design and finance through construction, operation, revenue collection and management of the facility.
Roads projects involving only O&M are less capital intensive and hence are awarded as performance-based maintenance contracts
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Capital projects are of two types: new build (Greenfield) or expansion or addition to existing roads (Brownfield)
Capital projects are typically carried out as BOTs and these contracts have long duration to match the lifetime of the assets created
BOT Contracts can have variant revenue type namely user charges (toll), annuity paid by government or an indirect user charge that is paid by the government rather than being collected from users (shadow toll).
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Financial Structuring of PublicPrivate Partnerships
As the demand for infrastructure grows, governments are increasingly looking to public private partnerships as an innovative way of financing infrastructure projects. However, regardless of who provides the financing, projects are financed using a mix of debt and equity instruments.
Debt Equity
Debt
Debt indicates that a corporation has borrowed a certain amount of money and promise to repay it in the future under clearly defined terms. It include all long term borrowing incurred by the firm, including bonds.
Equity capital
Equity capital consists of long term funds provided by the firms owners, the stockholder. Equity capital can be raised internally through retained earnings, or externally by selling common or preferred stock.
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Key Difference between Debt and Equity capital
Characteristics Voice in management Claim on income and assets Maturity Tax treatment
Debt No Senior to equity Stated Interest deduction
Equity Yes Subordinate to debt None No deduction
The capital structure, as it is called, is the mix of debt and equity instruments that are used to finance a project. The capital structure can be made up of three components - equity, debt, and quasi equity/debt; the optimum of each, in theory, existing when the capital structure balances the risk of bankruptcy with the tax savings of debt.
The Target Capital Structure

Firm should first analyse a number of factors, then establish a target capital structure for the project. This target may change over time as condition change, but at any given moment , management should have a specific capital structure in mind . if the actual debt ratio is below the target level, expansion capital will probably raised issuing debt ratio is below the target level , whereas if the debt ratio is above the target, equity will probably be used. Capital structure policy involves a trade- off between risk and return. Using more debt raises the risk borne by stockholders. However, using more debt generally leads to a higher expected rate of return Higher risk tends to lower a stocks price, but a higher expected rate of return raises it. Therefore, the optimal capital structure must strike that balance between risk and return which maximizes the firms stock price.
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However, we can say that the optimum level of debt and equity for a project, as well as the sources of funding, are dependent on a number of factors including the project, stage of development, access to financial markets, and the project sponsors own corporate finance strategy. Under a publicprivate partnership (PPP) forhighway projects, a private partner may participate in some combination of design, construction, financing, operations, and maintenance, including the collection of toll revenues. With a form of highway PPP called a concession or a DesignBuildFinanceOperateTransfer (DBFOT)/BOT contract, a concessionaire invests its own funds (known as equity) and borrows additional funds to pay for the construction of a highway project. The concessionaire maintains and operates the project for a specified period and expects to be repaid for its investment in the project over the period of the concession.
P3s allow public agencies to access private equity capital to finance projects. P3s can accelerate the delivery of projects by helping public agencies raise the upfront capital necessary to construct a major infrastructure project all at once, rather than in stages. In some cases, private capital can mean the difference between developing a project and having no project at all.
Project Financing
Project financing is a specific type of financing used in PPP, through which an expected future revenue stream generated from users of a project or committed by a public agency is the primary means for repaying the upfront investment needed to fund it. Project financing is also known as nonrecourse financing, because the projects lenders have no recourse or only limited recourse on the shareholders of the concessionaire in case the project runs into difficulties and the concessionaire is unable to repay them. Private firms often use project financing for large, high-risk projects because it can help to insulate them from financial risks associated with the project; however, the transaction costs related to implementing project finance structures are high, making the use of this type of financing is inappropriate for smaller scale projects. The capital generated from private 41 | P a g e
finance must be paid back with commitments of a long-term revenue stream to repay lenders and private investors, who typically demand a higher rate of return than investors in tax exempt municipal bonds. Figure 1 depicts a common financing structure for PPP concession projects. Although a single companymay bid on and develop aproject, generally several companies form a consortium to develop the project. In order to make a clear separation between the members of the consortium and the project itself, a project company known as the concessionaire is generally created after the public agency has awarded the project to the consortium. The members of the consortium then become the shareholders and their liability is limited to the amount of shared capital they have invested in the new company. By using project financing, the concessionaire raises funds from investors and lenders based on the projects future revenue stream or cash flows. The projects net cash flows (after deducting operating costs and tax payments) must be sufficient to service and repay debt and provide a return to equity. Public agencies may provide direct funding or financing support, guarantees, or other risk mitigation measures.
Public Sponsor Availability payment or subsidies Shared revenue
Loan
Equity investment Concessionaire
Lenders
Equity Investors
Repayment Toll revenue
Dividend
Facility
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The Cash Flow Waterfall
Revenue from the transportation project or from associated revenue is typically channelled through the concessionaire. The cash flow is structured so that accounts for project costs and reserve funds, as well as accounts to repay lenders and investors, are sequentially funded. This is commonly referred to as a cash flow waterfall (see Figure 2). The cash flow waterfall defines the order of priority for project cash flows as established under the loan and financing documents. In a typical cash flow waterfall, dedicated revenues are used to pay for project costs and debt repayments before surplus revenues are used to pay back investors (or shared with the public sector if the P3 agreement includes revenue-sharing provisions).
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Project revenues
Revenue Fund
O&M Fund
Rehabilitation and Reconstruction Reserve Fund
Senior Debt Service Fund
Subordinate Debt Service Fund
O&M Reserve Fund
General Fund
Figure 2. Typical Cash Flow Waterfall O&M=Operation and Maintenance 44 | P a g e

Sources of Capital
The capital structure of a project is not static and different sources can be used at different times during the project cycle. Furthermore, different sources of capital have different characteristics and a different risk/return profile based on their claim to assets. Debt capital is cheaper than equity as it is less risky than equity due to the fact that debt holders have a prior claim to revenue and assets and debt financing has covenants governing some of managements actions.
(i)
Debt
Debt financing is money borrowed to finance a project and the investment return for debtholders is limited to the interest earned on the principal. Debt capital can come from many sources and be structured in many ways. However, regardless of its source or structure, debt has a number of distinguishing features that differentiate it from equity:
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Maturity
All debt has a maturity date at which time the outstanding amount is paid in full. Long-term debt refers to any debt obligation with a due date of longer than 1 year and short-term debt is defined as any outstanding debt obligations whose due date is less than, or equal to, 1 year.
Repayment Provision
Every debt instrument has a repayment provision which specifies how and when the interest and principal are to be repaid. Depending on the projects cash flow, some lenders may provide a grace period where payments can be delayed until positive cash flow has been achieved.
Seniority
Though the returns for debt holders are limited to the interest, they have a senior claim to income and assets of the company or project. Different rights or claims to cash flow may also exist among different debt holders. Subordinated debt holders are junior to general or senior creditors and will only be paid once they have been satisfied.
Security
When establishing the terms of a debt agreement, the parties must decide if it will be issued on a secured or unsecured basis. A key aspect of project financing is that there is no, or limited, recourse back to the project sponsors and that project loans are secured only by the cash flows and assets of that specific project.
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Floating versus Fixed rates

Interest rates on debt instruments will either be stated as a fixed rate or as a floating rate. For example, floating rates may be stated as being 100 basis points, or 1%, above an indicator rate such as a banks prime rate or LIBOR. The interest rate on a floating rate loan will fluctuate as the indicator rate changes. Fixed rates are set for the term of the loan and are based on prevailing rates for similar term loan
Voting Rights
Unlike equity holders, lenders are not regarded as owners and therefore do not have any voting powers. As previously mentioned, debt financing can come from a number of different sources with commercial loans usually ranked as senior debt and all other debt being subordinated debt. However, the priority to assets will depend on a number of factors and will be dealt with in the loan agreement between the parties involved.
a) Commercial Loans
Commercial loans are funds lent by commercial banks and other financial institutions. Funds are usually securitized by the projects underlying assets and dependent on the financial strength of the borrower, though many commercial banks are now giving greater consideration to a project's expected cash flow. Commercial loans are usually considered senior debt and thus have, in the event of default, first rights to project assets and cash overequity and subordinated debt holders.
b) Bridge Financing
Bridge financing is short-term financing which is generally used until longer term financing can be implemented. Bridge financing can come from a variety of institutions including commercial banks and thus may be considered senior debt depending on the loan agreement. 47 | P a g e
c) Bonds
Bonds are long-term interest bearing debt instruments generally purchased by institutional investors through the public capital markets, though they can also be purchased through private placements. There are many different institutional .investors including pension funds, insurance companies, and fund managers. Due to restrictions on investment mandates, many institutional investors may require a credit rating for the project from an independent credit rating agency.
d) Subordinated Loans
Subordinated loans take priority over equity in repayment priority, but are secondary (subordinated) to commercial loans or other senior debt holders in their claim on assets. As such, the rate of return on subordinated loans is higher than commercial or senior debt as the perceived risk is greater.
ii. Quasi-debt/equity
Some financial instruments are often referred to as quasi or hybrid debt or equity instruments as they have traits that are both debt and equity. Quasi instruments can include subordinated convertible debt, mezzanine, and yield-based preferred shares. They are often structured with warrants or options and have a claim to assets that is between traditional debt and equity instruments.Quasi instruments are an attractive alternative to traditional equity or debt financing for a number of reasons. First, from the sponsors perspective, it does not require them to relinquish any control or voting rights as it would if they were to issue common shares. Second, in exchange for a claim to assets superior to equity, the cost of quasi debt/equity capital is less. Third, this type of financing provides greater flexibility as it does not have the same restrictive covenants as traditional debt financing.
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a) Preferred Shares
Preferred shares are technically an equity security, however, they do possess some characteristics similar to debt and can therefore be labeled quasi debt. Preferred shares have a fixed rate dividend similar to a debt instrument however, unlike debt, payment ultimately rests at the discretion of management and failure to pay dividends will not force a company into default. However, dividends to preferred shareholders must be paid out prior to any distributions to holders of common shares and in most, if not all, preferred share issues there is a stipulation that any missed dividend payments to preferred shareholders be cumulative and must be paid out in full before other payments to shareholders. In case of default,
holders of preferred shares are junior to debt holders, but senior to ordinary equity shareholders.
b) Mezzanine Financing
Mezzanine financing, another quasi source of capital, is placed between equity and debt in the capital structure of a project. Mezzanine financing can range in value from $5 million to $100 million and a maturity of two to five years. Mezzanine debt is subordinated to senior debt and is considered a quasi debt/equity instrument as it may have features that enable it to be converted to equity
iii. Common Equity

Common equity financing is long-term capital provided by an investor in exchange for shares, representing ownership in the company or project. A key characteristic that Equity holders receive distinguishes equity from debt is the holders claim to assets.
dividends and capital gains, which are based on net earnings and distributed only after all debt holders have been paid. In the event of default, equity holders have a claim on the income and assets which is secondary to debt holders. In exchange equity holders have unlimited potential returns compared to debt holders whose investment returns are limited to the interest earned on the debt. Equity capital can come from project sponsors, government, third party private investors or internally generated cash. 49 | P a g e
iv. Other Sources of Capital
a) Grants
Grants are non-returnable sources of funding usually provided by organizations with an interest to seeing a project developed. Grants can be used to reduce risk exposure and therefore can encourage developers to consider projects, which have high risks and uncertain returns. Grant providers do not have any claims to assets should the project default.
b) Short- term financing

Funds available for a period of less than one year are called short-term funds. Shortterm financing is usually not included in the capital structure of a project as it is usually considered working capital and used for the day to day operations and not as a source of capital financing. However, it has been included in this report as it may be an acceptable source of financing for smaller short term projects.
Supplier Credit
Supplier credit, or trade credit as it is sometimes referred to, is a source of financing provided by suppliers for short-term periods usually 10, 30 or 90 days.
Line of Credit
A line of credit is a loan arrangement between a financial institution, usually a bank, and the borrower. It can either be secured or unsecured and allows the borrower to borrow up to a pre-specified amount. The borrower can also borrow and payback the funds as needed, and interest will only be charged on the funds borrowed. A line of credit is only used for day-today operational financial needs rather than capital requirements. 50 | P a g e
Factors Contributing To the Capital Structure
Historically, the responsibility of financing infrastructure projects lay with the government sector. However, with the use of PPPs the responsibility has often been transferred to the private sponsor. Regardless of the government or private sponsors role in the financing of a project, who will finance and how much debt relative to the amount of equity used will depend on a number of factors.
i. Project Cycle and Cash Flow

The capital structure for PPP projects is not static as capital requirements and cash flow vary depending on the stage of the project development. Some sponsors may be required to provide a significant amount of equity capital at the beginning of a project during the construction phase when the risk is high. Once the construction is complete, the construction risks associated with it have been overcome, and the cash flow begins to materialize, the expensive equity or debt capital can berefinanced using cheaper debt capital thus lowering the total cost of capital. Figure given below highlights the relationship between risk and return during the project phase. The highest level of risk exists during the construction phase of a project when construction delays and cost overruns can have serious consequences to a projects success. It is during this phase that investors require the highest return on their capital to compensate for the risk, thus the higher cost of capital. Once construction is over and the cash flow from
operations has begun, project risks drop off substantially and it is possible for sponsors to refinance at a much lower cost.
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ii. Taxes
Project sponsors need to consider tax implications when assessing the debt and equity mix as it can impact the cost of capital, earnings, and the source of capital. Interest on debt, if tax deductible, can substantially reduce the overall cost of capital, and combined with the fact that the cost of debt is less than the cost of equity there is an incentive for sponsors to use debt instead of equity to finance projects.However, should a government be willing to provide tax holidays on earnings, there might be an opposite incentive to reduce debt financing in favour of equity in the short term.
iii. Financial Risk and Flexibility

As previously mentioned, it is argued that the optimum level of debt and equity will exist when the capital structure balances the risk of bankruptcy with the tax savings of debt. The risk with having too much debt is that a project with fluctuating cash flow may be forced into default if the debt covenants are not met, even though the project may still be financial profitable and cash flow positive. Furthermore, project sponsors should maintain some 52 | P a g e
flexibility in case unforeseen situations, such as construction delays and labour unrest, require additional financing.
v. Cost of Capital
The actual cost of capital also factors into the decision making process, as the cost of equity is greater than the cost of debt and therefore there is an incentive by sponsors to maximize the use of debt capital. However, those costs can fluctuate and are dependent on a number of factors.
Risk and recourse For a financier, risk is the chance of an event occurring which would
cause actual project circumstances to differ from those assumed and which would in turn effect a projects ability to generate cash flow. Furthermore, different issuers have different priority and recourse to assets and cash flow. Therefore, the required return on investment or the cost of capital will be dependent on how the investor perceives the risk of a project and their order of priority to any assets or cash flow in the event of default.
Timing Timing is an important factor as it can affect the cost of capital as well as the
availability of funds.
Term of the Loan In theory, the longer the term of a loan the greater the cost as the
longer-term loans are seen to be riskier due to the increased possibility of unforeseeable events.
Credit quality of the project-The credit quality refers to a projects ability to generate
enough revenue to meet its debt obligation. The riskier the project appears to be the lower the credit quality and thus the higher the cost of capital. Depending on the source of capital, some lenders such as insurance companies or pension funds may require an independent credit rating.
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Capital for PPP Projects in Highway sector
The capital mobilized for a PPP project in highway sector essentially consists of Equity and Debt. Some projects may attract Mezzanine capital and Grant from government. Eachcomponent serves a specific role in financing, with its attendant risks andreturns.Timely mobilization of funds is critical for the prompt completion and success of a PPP project. The SPV should have the capability to raise the necessary finance atthe right time, with flexibility to manage possible cost overruns.
Equity Capital
Equity is subscribed by the parent companies sponsoring the SPV and by the shareholders, who view the project as an attractive investment opportunity.Contractors for construction, maintenance, operations and supply of equipmentare also normally persuaded to participate in the equity. Government agencies such as the National Highway Authority of India (NHAI) and state government undertakings may also contribute to equity to a limited extent in some projects. Currently, foreign firms, particularly those from Malaysia, Japan and Indonesia, are evincing interest in taking up BOT projects in India with investment of their funds in equity. Equity is the lowest ranked capital in terms of its claims on the assets of the project. Equity holders get their returns only after all other project obligations are met. Thus the equity holders may gain a profit or lose their expected return, depending on the success or failure of the project. Equity holders carry the highest risk, and it is natural that they expect high returns (about 20%).
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Debt Capital
Debt capital is necessary for most PPP projects as the concessionaire may not be able to provide the entire investment in the form of equity. The sources of debt are the commercial banks, financial institutions and multi-lateral organisations. Commercial banks in the past have been providing debt instruments with short tenure of less than seven years, to be in tune with the normal deposit tenures. In recent years, the banks in India are shedding their reluctance for direct infrastructure lending, and are coming forward with high value loans of a longer duration, thus proving to be less risk averse now than before. Financial institutions are willing to advance funds for longer duration. Multi-lateral agencies, such as the World Bank, the International Finance Corporation and the Asian Development Bank, provide funds for road development on long term (20 to 30 years) basis, but they insist on government guarantees. A promising source of debt funds is the insurance sector, whose appetite for long-term assets matches with the needs of infrastructure projects for long-term debt. Debt from these lenders is termed as "Senior Debt" to denote that, in the case of project default, the lenders of senior debt will have the first right to the cash flow and assets of the project, over the providers of equity and mezzanine capital. Debt can also be mobilized by issue of bonds, including deep discount bonds, with duration to match the debt repayment period for the project. Tax-exempt infrastructure bonds are permitted by government for this purpose. A innovation is the 'take-out' financing scheme pioneered by Infrastructure Development Finance Company (IDFC) with a view to encourage bank lending. Under this plan, commercial banks could lend funds to a PPP project in the initial period on short/medium tenure, and IDFC would 'take-out' these assets from the banks at the end of the agreed duration. This route has been followed in the Delhi- Noida Toll Bridge project. The 'takeout' scheme serves to assure 'comfort' to the banks in their lending to the infrastructure projects.
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Mezzanine Capital
Mezzanine capital is investment with some qualities of debt and equity, and so itcarries a risk profile intermediate between debt and equity. This may take the form of subordinated debt or preference shares with regular interest. Mezzanine capital ranks below the senior debt, and carries a higher rate of interest than senior debt. It is normal to persuade the contractors/suppliers to subscribe to mezzanine capital. The concessionaire may be able to secure a larger senior debt on favourable terms in view of the mobilized mezzanine capital. When the financial viability of an otherwise desirable project is weak, the government may assist the SPV by providing a subordinated debt and/or a guarantee to award a bridge loan for debt servicing in case of a shortfall in revenue in the early part of the operation period.
Grant from Government

With a view to assist the private sector to take up certain identified BOT road projects with inadequate financial viability on their own, the Government of India has initiated enabling legislation to award capital grants up to 40% of the project cost on a case to- case basis.
Financial Closure
When a SPV successfully negotiates a legally binding commitment of the equity holders and the debt financiers to provide or mobilize the required funding on agreed terms, the stage in the progress of the project is referred as the financial closure. This is a critical mile-stone, denoting the preparedness of the project to commence construction. The financial closure will be facilitated if the lenders perceive the project as 'bankable' and view the projected cash flows realistic and adequate to cover the debt service obligations. The lenders derive 'comfort' if the project sponsor contributes significantly to the equity and issues guarantees against traffic risk. The lenders show marked enthusiasm to furnish debt 56 | P a g e
capital to BOT projects which come under the annuity method of private participation, because the concessionaire is insulated from traffic risk, while being assured of half-yearly payment of annuities from the government.
Debt-Equity Ratio Norms

There is no norm for an ideal Debt-Equity (D/E) ratio for the success of a PPP project. The Net Present Value (NPV) and the Return on Equity (ROE) of a BOT project can be quite sensitive to the selected D/E ratio, and these decline rapidly as the concessionaire borrows more than the optimal amount. The optimal D/E ratio is project-specific and country-centric. The amount of equity for new PPP projects are limited and the debt instruments play a far more significant role. Debt-equity ratios for road projects in India tend to be in the range of 50:50 to 80:20, the more usual value being around 70:30. A higher D/E ratio favours the equity holders, by way of reduced exposure and potential increased returns. On the other hand, creditors would prefer lower D/E ratios as this would facilitate better compliance with debt service obligations by the borrowers. A minimum level of equity of about 15% to 20% of the project cost is required to convince the lenders that the project is credit worthy and also to assure the government regarding the commitment of the concessionaire for the long-term success of the project over the concession period, besides serving as a cushion against bankruptcy.
Debt Service Terms

The terms for debt service should be planned with prudence and pragmatism. The terms should be specified clearly in the lender agreement. The main features to be detailed are: (a) Tenure of debt; (b) Interest rate; (c) Moratorium period; and (d) Debt service option chosen. 57 | P a g e
Tenure of Debt
The debt for a PPP project is invariably on a long-term basis, the tenure covering a major part of the concession period. A longer tenure would facilitate easier repayment. On the other hand, a shorter tenure for debt may lead to liquidity crisis in the early part of the operating period. For most of the PPP road projects, the current trend is to secure debt for a period of about 15 -20 years.
Interest Rate
The interest rate for debt differs significantly depending on the source of funds, perceived credit risk, the prime lending rate (PLR) of banks prevailing at the time offinancial closure, and the agreed type of interest rate (fixed or floating). The earlierfinancial closures embodied mainly fixed interest rate for the entire period of the debt. Recent debt agreements adopt a floating rate mechanism, providing for a spread over the London Inter-Bank Offered Rate (LIBOR) for debt denominated in foreign currency or a premium over the PLR for rupee debts. The fixed interest rate has the merit of simplicity and permits easier determination of the interest payable along with periodical instalments of debt repayment. However, the floating rate is more rational in an atmosphere of volatile interest rate regime, and would also obviate the need for renegotiations and debt restructuring, when the interest rate fluctuates significantly during the course of the concession period.
Moratorium and Repayment Period

PPP projects are characterized by heavy outflows in the initial part of the concession period due to construction, operation and maintenance costs besides the interest on debt. The revenue starts only after the commencement of the operation period and picks up gradually. Debt service involves two components:
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(a) Payment of interest on the outstanding debt; and (b) Repayment of the debt in agreed instalments.
The interest during the construction period (IDC) is not paid, but capitalized and included in the outstanding debt. The payment of the interest component normally commences with the operating period. Debt service is usually so designed as to incorporate a grace period called the moratorium period. The repayment of debt starts at the end of the moratorium period. Past practice has been to prescribe the moratorium period to coincide with the construction period, so that payment started with the commencement of the flow of toll revenue.
Effects of Debt Service Options

The effects of debt service options on the cash flow situation are shown conceptually in Fig. 3. The abscissa denotes the time scale covering the concession period AC, composed of the construction period AB and the operating period BC. The toll revenue starts at B and rises gradually at first and steeply later to reach D at the end of the concession period. The operation and maintenance costs follow the path BE. The area bounded by BDEB denotes the net amount of cash available for debt service, taxes and profit. Three options for debt service, indicated as DS-1, DS-2 and DS-3, are considered here. Debt service option DS-1 represents the usual practice of paying equal instalments towards debt repayment obtained as the debt outstanding at the start of the operation period divided by the number of instalments, along with the interest due on the outstanding loan at the start of the concerned interval. The option DS-1 is shown as BGF in the figure. Repayment of debt starts at B. It should be noted that the ordinate from the abscissa to the line BGF at any year represents the sum of O & M costs for the year and the debt service amount. The line BGF intersects the toll revenue line BD at G. The extent to which the segment BG of BGF is above the segment BG of BGD indicates the shortfall in revenue to meet the debt service obligation. BH on the time scale denotes the period of cash flow (liquidity) distress, while BJ indicates the repayment period for this debt service option. The ratio of the amount of cash available to the amount required for debt service at any year is known as the Debt Service Coverage Ratio 59 | P a g e
(DSCR) for that year. For the option DS-1, the value of DSCR is negative at time K, is 1 at time H and is positive from time H to J. The lenders would like to be assured of a DSCR value of 1.5 and above for the debt repayment period while considering the project for supplying debt. They may be willing to accept a DSCR value of about 1.2 in case of reputed promoters. One of the devices to avoid the cash flow distress indicated for DS-1 is to negotiate for a longer moratorium period with or without an extended repayment period. The debt service option, referred as DS-2, is denoted by KL in the figure using a procedure similar to DS-1. This option may involve slightly higher pay outs on account of increased interest payments, but will shield the project from embarrassing liquidity problems. The option, referred here as DS-3 and shown as BP in Fig. 1, completely avoids the liquidity crisis of DS-1. The back-ended repayment method is being adopted increasingly in recent projects. in which the repayment amount is kept low in the initial period and increased in tune with the rise in toll revenue.
FIGURE -3
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VARIOUS RISK INVOLVED IN HIGHWAY SECTOR FOR BOT PROJECT
Risk is inherently present in all construction projects. Quite often, construction projects fail to achieve their time, quality, and budget goals. Apart from that, BOT road project involves huge investment and long gestation period. Hence proper and effective risk management model is very important for the success of the project; the aim of this project is to develop a risk management model for BOT road project and to discuss the risk mitigation strategies adopted
Introduction
National Highways and Roads as an infrastructure sector have certain key peculiar characteristics which expose this sector to the high degree of uncertainty and hence risks. Some of the important characteristics are as follows: Demand Estimation for a road / national highway project cannot be accurately forecasted. Catchment Area future development affects the demand of a road to a great extent and is beyond the control of the private player or concessionaire or even in few cases, the government.
Non-recourse debt is not fully effective in the road or national highway project. The main asset for Special Purpose Vehicle (SPV) in a road project is not worth anything without the revenue collection. Thus, the lenders are exposed to high degree of commercial risk because in a road project, the usage of road can fluctuate sharply. Certain level of commercial risk cannot be mitigated completely.
In India, usage of road has not been linked with Toll in the past. The scenario is changing recently but the willingness of the commuters to pay toll is not high.
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The services provided by a road or national highway project cannot move with the demand. A shift of residential or commercial centres can shift the traffic volumes from the project.
Land Acquisition in a road project is different from other infrastructure sectors. Failure to acquire a small portion of the land parcel can delay and hamper the implementation of the project.
Owing to these peculiar characteristics, it is imperative that roads and national highways as an infrastructure sector needs strong institution building and comprehensive concession structure. Weak institution will lead to recurrent delays. In addition, complete dependence on tolling revenue to recover project cost and service non-recourse debt is not a feasible solution to increase private participation. Private sector participation is typically through construction or management contracts and Build-Operate-Transfer (BOT) contracts. BOT contracts permit tolling on stretches of the NHDP by the private operator or may also be based on the lowest annuity payment from the Government. In the current scenario, all projects awarded by NHAI, be it construction / management or BOT, are through competitive bidding.
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Objectives
1. To find out the risks & uncertainties involved in conceiving & developmental, execution & operation phase of a most feasible model like B.O.T. applicable to highway projects.
2. To find out the risk mitigation measures for major risks.
BRIEF
The construction sector is in many ways unique amongst the national & international industry. As it is a large industry but is a fragmented one. The statistics shows that the construction sector contributes annually @ 10 % of the gross national product of the developed world. The risks & uncertainties associated with the construction projects affect the entire spectrum of project objectives i.e. Performance, Productivity, and Profitability & Quality. This has stressed the importance of risk management. Governments worldwide have shown increasing initiatives in private finance of public infrastructure and services across a wide range of industries and sectors, including Power, Transportation, Water supply and disposal, Telecommunications, Oil and Gas. But, along with the invitation of this Private Public Partnership models by governments, the risk of Conceiving & Developmental phases, Execution & Operation phases have also increased which leads to cancellation of the project after bidding, prolonged delay in finalization / award of concessionaire, resettlement & rehabilitation problems, change in design or technology, encroachment problems during land acquisition, interferences of environmental activists & delay in statutory clearances, problems with the lenders not comfortable with the project viability etc. Thus the need of risk management study of these sectors arises.
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SCOPE OF WORK
Study of various terminologies; like risk, risk management, BOT projects, PPP model, etc.; basic risk components in a BOT project, risk management framework.
Identification of sources and types of risks in a BOT Project would be done through discussions with the experts.
A risk checklist/questionnaire would be made based on the identified risks. Experts opinion would be taken, through the made questionnaire.
Analysis of data would be done. Risks would be classified into low, minor, moderate, major or high risk categories based on the analysis.
Risk Allocations would be done based on the analysed data. Various measures for minimizing the risk would also be suggested.
Conclusions would be drawn regarding the percentage risk
allocation between
different parties forming the project company. Also conclusions regarding the risk category to which BOT highway projects generally belong in U.P. state would be made.
General risk mitigation measures and mitigation measures for particular risks would be discussed.
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Work Methodology
The work was divided into 4 phases as follows:
PhaseI: Literature Review From several journal, books and published papers.
Phase II: Data Collection Identification of sources and types of risks through interviews and discussions with experts and creating a risk checklist/questionnaire. Collecting experts opinion regarding the probability and severity of those risks.
Phase III: Data Analysis Analysing the collected data for risk analysis and risk allocation.
Phase IV: Conclusions & Project Report Summing up the project work by providing several useful conclusions based of analysed data and suggesting feasible recommendations.
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Literature Review
Several books, Journals, Published & Unpublished Papers were referred for the purpose of literature. Some of the project reports done by previous students of different colleges were also referred to obtain an overall idea about the topic. The learning obtained from Literature Review can be categorized in to following Heads:
1)
Construction Industry & Risk Management Requirements
2)
Basic Concepts of Risk
3)
Risk Prevalent in Road Projects
4)
Risks Identification in Various PPP Models
5)
The BOT Model
6)
Risk Management Frame Work
7)
Risk Allocation and Cash Flow Management
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Basic Concepts of Risk
What is Risk?
In an ideal world, a project would be constructed on time and on budget, operating revenues and expenses would meet forecasted targets, and the quality of delivered services would meet everyones expectations. Unfortunately, this is not always the case. Furthermore, other unexpected events insolvency, failure by parties to perform as expected or as contractually required, site conditions or uncontrollable external events (wars, earthquakes, flooding, or fires) - can prevent a project from meeting expectations and leaving its commercial viability and ultimate success in question. Risk is a concept that is used to express concerns about the probable effects of an uncertain environment and can be characterized by its probability of occurring and the magnitude, or effect, it would have on expected returns or outcomes should it occur. Every aspect of a project has risks and because the future cannot be predicted with certainty, all parties to a PPP must consider a range of possible events that could take place; each of these events potentially having a material effect on the project and its goals. Risk analysis is the art of identifying those possible events, measuring them, prioritizing them, and then managing them. In fact, a key aspect of the PPP structure is its ability to help facilitate the transferring of risk to the party that is best suited to manage or minimize it.
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When considering risk, it is imperative to recognize that each party involved will have a different perspective and thus a different approach to risk assessment.
Risk and the cost of capital

As each party assesses a projects risk, they will establish a price for their services taking into account a profit margin that is required and expected to compensate for taking on the project and bearing the risks. If risks are not accurately assessed, too many risks at too high of a premium can be transferred to the wrong parties substantially increasing the cost of the project. Ultimately, all these are integrated into the project cost, which will ultimately be paid for in either higher taxes or user fees. All financial arrangements involve exposure to various types of risk, what financiers do is to minimize the possible impact of this exposure. Financiers look to negotiate financial structures designed to protect themselves from potential downsides due to identified project risks. Financiers want to assess all potential events or factors that can impact a projects cash flow. Then they are looking at the probability of one of these events occurring and the probability of that event forcing the project to default on its debt obligations. The level of risk perceived is priced into the risk premium, which is then priced into the cost of capital. 68 | P a g e
The greater the perceived risk by the financier, the greater the risk premium. Different weightings will be put on different risk criteria depending on the financiers risk appetite; and the decision to invest will be based on whether the potential returns are greater than the perceived risk.
Types of Risk
Risks can vary depending on the size of the project, sector, project cycle and the number of parties involved. Furthermore, risk is interrelated, meaning that each risk not only affects the project directly, but also affects the other risk factors. The following is a brief outline of a number of key risks that are considered when doing a risk assessment. It is not exhaustive and will vary from project to project.
a) Construction Risk
Construction risk includes anything that can cause non-completion, late completion, and cost over-runs. Any delays in the completion of the project delays the cash flow and thus repayment of any outstanding loans. Any cost over-runs will ultimately impact the net cash flow, which will affect a projects profitability. As the construction period is limited to the construction phase, the risks associated with this phase of a project are relatively easy to mitigate. For example, construction risk can be transferred to the contractor by negotiating a turnkey (ideally fixed price) construction contract. Contracts can also include provisions for the risk of non-completion, late completion, or cost over-runs.
b) Sponsor Risk
The identity of the sponsors and their commitment to the project is a vital part of any financiers assessment of a project. As it is the sponsors who will provide the equity or subordinate debt, the financiers will need to assess the levels of capital provided and the ability of the sponsors to access additional capital, if required. Financiers also look for evidence that the sponsors have the resources and skills necessary to deliver a project on time 69 | P a g e
and on budget and have the ability to resolve any problems encountered during the construction phase.
c) Operating Risk
Once a project is constructed the financiers will be primarily concerned with the project operator. The financiers will require an appropriately qualified operator to maintain the project and to meet the projected operating budget. They will also review proposed operations to see if sufficient funds have been allocated for the operations and maintenance and that sufficient trained personnel are available to operate the project facility.
d) Technology Risk
A financiers main concern is that technology under-performance will adversely affect the operations to the extent that the project is unable to make its debt repayments. As technology risk is seen by lenders as the responsibility of the sponsor, they will ask for additional support and guarantees from the sponsors. Sponsors will not generally be prepared to assume the full risk themselves, and will in turn require guarantees and warranties from the manufacturers of equipment and component suppliers.
e) Environmental Risks
The environment is a growing concern to financiers, and they are increasingly concerned to protect themselves against environmental liabilities. Financiers will require that all planning, environmental and other consents and approvals have been obtained. They may also look at potential changes in future environmental regulation for risks to the projects future economic operation.
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f) Legal Risks
Legal risks exist where laws are uncertain or can change. Lenders will seek legal opinions from local counsel to ensure that all the project contracts are legal, valid, binding and enforceable under the relevant laws.
g) Force Majeure Risk

Force majeure risk means a risk that is beyond the control of all parties to the project, typically acts of God such as severe weather. Often, a force majeure clause is used to excuse any partys performance in the face of occurrences beyond their control.
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CONSTRUCTION INDUSTRY & RISK MANAGEMENT REQUIREMENTS
Every human endeavour involves risk; the success or failure of any venture depends crucially on how one deal with it. Science and engineering increasingly progresses by major projects, many of them are high risk. However, the need to identify a projects uncertainties, estimate their impact, analyse their interactions, and control them within a risk management structure has only in recent years been realized, mainly within the defense, construction and oil industries. For years the engineering and construction industry has had a very poor reputation for coping with risk, with many major projects failing to meet deadlines, cost targets, and specifications. New product development demands shorter project duration owing to a tremendous amount of competition and fluctuation of customers demand. Risk and uncertainty are inherent in all construction work, mainly in highway projects, no matter what the size of the project. Although size can be one of the major causes of risk, other factors carrying risk with them include complexity, speed of construction, location of the project, technology being used and familiarity with the work.
The highway projects are exposed to more risk and uncertainty than others are. The construction process from initial phase to completion and use of the product is very long and complex, particularly in large projects. The process involves various kinds of people with various ideas, experience and skills. They usually have different interests, so coordinating project goals is very difficult. This complexity is compounded by a number of external and uncontrollable factors, such as weather and geological conditions. Recent trends in the industry indicate continuous use of alternative procurement methods such as design-build, construction management, and so on. These new procurement schemes require one to be more careful about risks, because new schemes increase complexity of projects. Among
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them, a comparatively a project procurement scheme, i.e. build-operate-transfer (BOT), has emerged to serve as an infrastructure arrangement scheme, used mainly in highway projects.
In the past few decades, this scheme has been employed more frequently in both developing and developed countries. The former employ the scheme mainly because of insufficient government funds for infrastructure investment, and the latter to enhance efficiency by private participation. Generally, it is very risky to implement a BOT project because of the uncertainty inherent in a long project period and the complexity of the project scheme. Particularly, from the viewpoint of private participants, it is much more risky than traditional project schemes, because governments tend to transfer more risk to private parties. In this scheme, the private sectors is expected to assume much longer involvement in a project, i.e. 20 or 30 years, and are given a wider scope of works. Governments cannot be totally free from risk, and some new risks derive from the context of this new scheme. The government also has to assume some of them in order to carry out projects successfully.
Owing to the risky nature, there have been many failures in BOT projects. In some cases, failures are due to insufficient risk management. The past records might have been the source of hesitation of project parties to participate in the projects. As a result, there are a number of infrastructure projects all over the world, which are yet to be implemented as BOT projects. The complexity of the BOT arrangement leads to increased levels of risk exposure for all parties, and gives rise to the need for a new perspective in risk analysis. Establishment of an appropriate risk management system or a risk management framework is necessary to manage and control risks in BOT projects. In a sense, the future development of this scheme is largely dependent on the risk management system.
An appropriate risk management system is desirable for construction projects and seems indispensable for BOT projects. There have been studies about risk management for construction projects, and some for BOT projects (Tiong, 1990a; Srikhanta, 1998; and others). Despite these efforts, it has not been sufficiently introduced in practice, according to a study in the UK (Akintoye and MacLeod, 1997). Some other surveys reported likewise (Ward and Chapman, 1991; Simister, 1994; Akintoye and MacLeod, 1997; and others). It can 73 | P a g e
be assumed that the same applies in India. It might be universal in the industry. Lack of understanding by managers and others concerned is always blamed for the lack of implementation in many surveys
There are various kinds of tools and techniques for risk analysis. Each has its strengths and weaknesses. Understanding those strengths and weaknesses is indispensable for their appropriate applications to risk management. Enhanced understanding of risk analysis tools and techniques will provide the industry with improved risk management support.
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RISKS PREVALENT IN ROAD PROJECTS
Like any other infrastructure sector, road or national highway projects are also exposed to risks related to construction, operation and maintenance. Road or national highway projects are also exposed to certain risks which are unique to this sector namely:
Risks relating to Route Characteristics / Specifications

Commercial viability of route Development of parallel or alternate toll free route Accessibility to the project road Government reneging regarding a particular route or specifications Land acquisition / area covered by the route Provision of adequate traffic disbursal facilities at the ends or around project facility
Risks related to Traffic

Low usage of road Construction of physical obstruction preventing traffic flow Diversion of traffic to alternate route Prevention of a particular type of vehicle affecting traffic flow Traffic control mechanism affecting traffic
Risks related to Toll

Determination of toll rates Levy and revision mechanism of toll rates Collection of tolls
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Risks associated with the appropriation of tolls by the concessionaire
To attract investments (domestic and foreign) in the roads and national highways sector in India, the government has implemented few prominent policy initiatives to strengthen the institution building aspect by promoting the Public Private Partnership (PPP) on Build, Operate and Transfer (BOT) basis (Toll and Annuity) or similar basis (BOO, DBFOT, etc.) for the highways projects.
To address the complexities involved in highway projects, a comprehensive risks mitigation framework has been designed under the name of Model Concession Agreement (MCA).
This framework addresses the issues which are typically important for limited recourse financing of infrastructure projects, such as mitigation and unbundling of risks; allocation of risks and rewards; symmetry of obligations between the principal parties; precision and predictability of costs and obligations; reduction of transaction costs; force majeure; and termination. MCA has been designed comprehensively afters inputs from senior industry leaders, academicians and foreign case studies and has been recently updated to make the investment environment more investor friendly.
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Risks Identification in Various PPP Models
Scope Definition
As per the project scope, various risks prevalent in the different PPP models have been identified. PPP Models selected for this study are BOT Toll, BOT Annuity and Engineering Procurement & Construction (EPC).
Methodology
As per the study of the scope, various risks prevalent in the different PPP models have been identified. PPP Models selected for this study are BOT Toll, BOT Annuity and Engineering Procurement & Construction (EPC). The project methodology encompasses five stages namely:
Stage 01: This stage involved comprehensive understanding of the Indian roads and highways sector via literature available from the secondary sources and paid reports. It also involved incorporating learnings gained from the past professional experience.
Stage 02: This stage involved risks identification in the three PPP models i.e. BOT Toll, BOT Annuity and Engineering Procurement & Construction (EPC) via comprehensive study of the Model Concessionaire Agreements (MCA) available on the NHAI and PPP India website. In addition, the name of the bearing party (private or government) and the execution condition associated with each risk was also identified.
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Stage 03: A road project was conceptualized in this stage and a financial model for the same was built. Secondary and primary research was conducted for this stage. The model was made to be as robust as possible by inclusion of as many risks as possible.
Stage 04: Industry experts were consulted for the short listing of four risks for conducting the sensitivity analysis of the model. Evaluation of short listed risks in terms of criticality and impact on the project NPV was studied in this stage.
Stage 05: A risk management framework is designed in this stage after incorporating feedback on the above stages.
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Risk Characterization of BOT Toll
TYPE OF RISK PRE COMPLETION RISK
BEARING PARTY
REMARK
Granting authority will be liable for enabling access to the Site, free from
Encumbrances. Delay in any case other Force Majeure will LAND AVAILABILITY GOVERNMENT invite NHAI paying
Concessionaire damages at the rate of Rs.50 per day per 1000 (one thousand) sq. meters or part thereof if such area is required by the Concessionaire for Construction Works. Such Damages shall be raised to Rs.2000 (Rupees two
thousand) per month after COD if such area is essential for the smooth and efficient operation Highway. DESIGN PRIVATE PLAYER The concessionaire is required to finalise the design and detailed engineering basis In the event the concessionaire fails to meet the project of the Project
milestone, he or she has to pay 79 | P a g e

TIME
AND
COST PRIVATE PLAYER
damage to NHAI at the rate of Rs.1, 000,000 (Rs. One
OVERRUNS
million) per day until such milestone is achieve or 0.1% of the performance security amount (which is about 5% of the total project cost) for each day of delay. However, the damages paid will be refunded in case the project achieves completion on or before the scheduled completion date CHANGE IN SCOPE PRIVATE PLAYER/GOVERNMENT Granting authority will bear all the costs arising out of any change of scope order if the costs exceed 5% of the total project cost. Otherwise, the costs shall be borne by the concessionaire. FUNDING PRIVATE PLAYER Private Player is required to arrange for financing. VGF is available but only to the extent of 20% of project cost If the Concessionaire shall fail to achieve Financial Close within the said 180 (one hundred eighty) days period, DELAY CLOSURE IN FINANCIAL PRIVATE PLAYER the Concessionaire shall be entitled to a further Period of 90 (ninety) days subject to an advance weekly payment by the Concessionaire to NHAI of a sum of Rs.100, 000 (Rupees
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one hundred thousand) per week. Beyond 270 days,
concession agreement shall be deemed terminated to have by been mutual
agreement of the parties. The granting authority the right to forfeit the bid security. Incorrect valuation by Private Player The Feasibility Report of the Project provided by NHAI is to be taken only as preliminary reference document by way of assistance to the Bidders who are expected to carry out their own surveys, investigations
government authority
and other detailed examination of the project before
submitting their Bids. Nothing contained in the Feasibility Report shall be binding on the NHAI and it shall have no liability whatsoever in relation to or arising out of any or all contents of the Feasibility Report.
POST COMPLETION RISK Performance Private Player The Concessionaire shall operate and maintain the Project Highway by itself, or and through if O&M
Contractors
required,
modify, repair or otherwise make improvements 81 | P a g e

to
the
Project
Highway
to
comply
with
Specifications and Standards TRAFFIC VARIANCE PRIVATE PLAYER In the traffic falls or grows more than 2.5% of the expected traffic growth, MCAs provide for
AND REVENUE RISK
extension or lowering of the concession period in the event of a higher or lower than expected growth in traffic. Also, if the traffic grows beyond the traffic cap in a particular year, the revenues
earned beyond the traffic cap level will be submitted in Safety Fund. For every 1% shortfall in actual traffic compared to target traffic, concession period increase by
1.5% with Cap on Concession Period Variation as 20%. For every 1% excess in actual traffic compared to target traffic, concession period decreases by 0.75% with Cap on Concession Period Variation as 10%. TOLL COLLECTION PRIVATE PLAYER Concessionaire will levy and
collect Fees from users of the Project Highway at the rates set forth in the Fee Notification and in accordance with MCA ENVIRONMENTAL ISSUES GOVERNMENT / PRIVATE Applicable permits PLAYER environmental relating to and
protection
conservation of the site to be obtained by the granting authority, other applicable permits are to be
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obtained by the concessionaire COMPETING ROUTES ROADS / GOVERNMENT The granting authority will pay the concessionaire compensation equal to the difference between the realizable fee and the projected daily fee until the breach is cured.
TECHONOLOGY RISK PERFORMANCE PRIVATE PLAYER
The Private Player is responsible DESIGN PRIVATE PLAYER for any technology upgradation during or after construction phase or during operations phase. The additional cost would be borne by private player.
FINANCIAL RISK INTEREST RATE INFLATION FOREIGN EXCHANGE EXPOSURE INSOLVENCY AND PRIVATE PLAYER OUTSIDE CREDITOR RISK PRIVATE PLAYER PRIVATE PLAYER PRIVATE PLAYER The interest rate and inflation risk is factored in the bid value quoted by the private player
It is borne by the Private Player and is factored in various costs pertaining to construction, operation and maintenance phase. Insolvency and outside
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POLITICAL RISK CHANGE IN LAW GOVERNMENT/ PRIVATE If as a result of Change in Law, PLAYER the Concessionaire suffers an increase in costs or reduction in net after tax return or other financial burden or enjoys a reduction in costs or increase in net after tax return or other financial benefit, the aggregate financial effect of which exceeds Rs.10 million (Rupees ten
million) in any accounting year, the Concessionaire may notify NHAI and propose amendments to this Agreement so as to put the Concessionaire in the same
financial position as it would have occupied had there been no such Change in Law GOVERNMENT RENEGING GOVERNMENT/ PRIVATE No PLAYER pre fixed penalty or
compensation decided and it would be mutually decided
depending upon the situation
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Risk Characterization of BOT Annuity

TYPE OF RISK PRE COMPLETION RISK LAND AVAILABILITY GOVERNMENT NHAI will provide the BEARING PARTY REMARK
physical possession of the project site. DESIGN PRIVATE PARTY The concessionaire is
required to finalise the design and basis TIME AND COST OVERRUN PRIVATE PARTY Penalty is attached for not achieving schedule FUNDING PRIVATE PARTY Private Player is required to arrange for financing. CHANGE IN SCOPE GOVERNMENT/PRIVATE PARTY Change in scope with the project detailed engineering
maximum permissible limit of INR 175 million is to be borne by the concessionaire. Anything beyond the limit will be NHAIs
responsibility. POST COMPLETION RISK PERFORMANCE PRIVATE PLAYER The Concessionaire shall
operate and maintain the Project Highway by itself, or through O&M Contractors and if required, modify,
repair or otherwise make improvements to the Project Highway to comply with Specifications and Standards 85 | P a g e
TRAFFIC VARIANCE
GOVERNMENT
Granting
authority
will
assume the risk of traffic variance as revenue to
concessionaire is in the form of annuity and is independent on the traffic volume.
TOLL COLLECT
GOVERNMENT
NHAI will levy, demand, collect and retain the toll fee either by itself or may
authorise any other person to collect fee.
ANNUITY FEE
GOVERNMENT
Annuity payments would be made by NHAI as MCA terms and conditions. Bonus and penalty are provided for early and delay project
completion given by the
respectively following
formula: B or R = ((SPCD COD) + X)*A/180 Where in B or R is Bonus / Reduction, Scheduled SPCD is Project
completion date, COD is Commercial Date of
Operations, A is Annuity, X is number of delay days computed by independent
engineer. If COD is achieved
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between
two
annuity
payments, then B or R = ((PAPD COD) + X)*A/180 wherein PAPD is Previous Annuity Payment Date
ENVIRONMENTAL ISSUES
GOVERNMENT/ PRIVATE Applicable permits relating PARTY to environmental protection and conservation of the site to be obtained authority, by the other
granting
applicable permits are to be obtained concessionaire by the
COMPETING ROUTES
ROADS/ GOVERNMENT
Private Player is independent of any approval of any competing road or route by NHAI and is solely
dependent on the Annuity.
TECHNOLOGY RISK PERFORMANCE PRIVATE PLAYER The Private Player for is any
responsible DESIGN PRIVATE PLAYER technology
upgradation
during or after construction phase or during operations phase. The additional cost would be borne by private player.
FINANCIAL RISK
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INTEREST RATE INFLATION
PRIVATE PLAYER PRIVATE PLAYER
The interest rate and inflation risk is factored in the annuity quoted by the private player
FOREIGN EXPOSURE INSOLVENCY OUTSIDE RISK
EXCHANGE PRIVATE PLAYER
It is borne by the Private Player and is factored in
AND PRIVATE PLAYER CREDITOR
various costs pertaining to construction, operation and maintenance phase.
FORCE MAJEURE
GOVERNMENT
The Force Majeure risk would be borne by both parties but it is highly dependent on the time when force majeure happens i.e. before COD or after COD and whether it is political or non-political force majeure. In case force majeure happens before COD and is a non-political event then NHAI is not obliged to pay anything to Concessionaire. In all other cases, NHAI would be paying the concessionaire the force majeure payments dependent upon the type of event.
POLITICAL RISK
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CHANGE IN LAW
GOVERNMENT/PRIVATE PLAYER
If there is an increase in capital expenditure or
increase in taxes owing to change in law, the additional amount shall be allocated and shared between NHAI and Concessionaire subject to
some limit bands. If capital expenditure is upto INR 60 million or increase in taxes is upto INR 10 million, NHAI would not share any
additional cost and all would be borne by concessionaire. Anything above this limit would be completely borne by NHAI. GOVERNMENT RENEGING GOVERNMENT/PRIVATE PLAYER No pre fixed penalty or compensation decided and it would be mutually decided depending upon the situation.
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RISK CHARACTERIZATION OF EPC AGREEMENT

TYPE OF RISK PRE COMPLETION RISK Government will provide the physical possession of the project site free from all encroachments encumbrances. Any and delay BEARING PARTY REMARK
will lead to extension in construction period. In case a specific date has been
mentioned for Right of Way and the authority fails to provide the project site
within 14 days of specified date, then the authority will LAND AVAILABILITY GOVERNMENT pay for the damages incurred by the Contractor provided by the formula: Amount of Damages / day = 0.05*(Road Works RW + Cost of Major bridges and structures BS)* (1/30) If the delay in handing the project site is more than 14 days and beyond 10% of Construction Period,
damages would be equal to 1.5 times the damage
mentioned above.
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The Contractor at its own cost is required to follow the
DESIGN
EPC PLAYER
standards and specifications set forth by the authority.
The Contract Price shall not TIME AND COST OVERRUN EPC PLAYER be adjusted to take into account difficulties Contractor any and is unforeseen costs. failed If to
achieve any project milestone within 30 days of the date set for such milestone,
contractor shall pay damages to the authority at the rate of 0.05% of the contract price for the design and
construction delay for each delay until the milestone is achieved
EPC Player is required to FUNDING EPC PLAYER arrange for financing.
Change in scope can be initiated by either the
Authority or the EPC Player. In both cases, the reduction GOVERNMENT/EPC PLAYER CHANGE IN SCOPE or increase in cost due to change in scope is
determined and in mutual consultation decided. There
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is always an upper limit in terms of change in scope i.e. change exceed of scope % cannot of the
some
Contract Price but it varies on project basis.
The Contractor has to ensure SUB- CONTRACTORS OBLIGATION EPC PLAYER that comply its sub-contractors with all the
applicable permits and laws related to the project POST COMPLETION RISK PERFORMANCE GOVERNMENT /PRIVATE Prior to start date of the PLAYER Project Highway, the EPC Player maintain shall operate the and
Project
Highway by itself, or through sub-contractors and if
required, modify, repair or otherwise make
improvements to the Project Highway to comply with Specifications and Standards. Post start date; the authority would maintain the Project Highway at its own cost and expense. Also, the contractor shall pay all loss or damage to the Project Highway or Material from the start date till Defects Liability Period if the loss or damage is
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attributable to contracts acts or omission. TRAFFIC VARIANCE EPC PLAYER Granting authority will
assume the risk of traffic variance as revenue to EPC Player is in the form of lump sum contract and is
independent on the traffic volume
TOLL COLLECT
EPC PLAYER
NHAI will levy, demand, collect and retain the toll fee either by itself or may
authorise any other person to collect fee.
EPC FEES
EPC PLAYER
EPC fees would be made by NHAI contract as per the EPC and
terms
conditions. For all the work done within the stipulated time, price adjustment to the labour component, fuel cost, cement, steel, etc would be taken care of.
Price Adjustment for Labour V1 = 0.85*R*P1/100*((L1 L0)/L0) V1 = Increase or decrease in cost of work during month due to changes in labour rates R = Total work done during
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the month P1 = % of labour
component of work L0 = Average consumer price index for industrial workers L1 = Average CPI in the previous month
Similarly, price adjustments are calculated for bitumen, fuel & lubricant, cement, local steel,
materials,
plant, machinery and spares component If the Authority does not make the payments as per the time period stated, the Authority has pay the Contractor interest at the rate of 5% above the Bank rate for all the sums unpaid and which should have been paid.
ENVIRONMENTAL ISSUES
GOVERNMENT /PRIVATE Applicable permits relating PLAYER to environmental protection and conservation of the site to be obtained authority, by the other
granting
applicable permits are to be obtained concessionaire by the
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TECHNOLOGY RISK PERFORMANCE DESIGN PRIVATE PLAYER PRIVATE PLAYER The EPC Player for is any
responsible technology
upgradation
during or after construction phase or during operations phase. The additional cost would be borne by EPC player
FINANCIAL RISK INTEREST RATE INFLATION PRIVATE PLAYER PRIVATE PLAYER The interest rate and inflation risk is factored in the lump sum contract price quoted by the EPC player.
FOREIGN EXPOSURE INSOLVENCY OUTSIDE RISK
EXCHANGE PRIVATE PLAYER
It is borne by the EPC Player and is factored in various
AND PRIVATE PLAYER CREDITOR
costs
pertaining
to
construction, operation and maintenance phase.
FORCE MAJEURE
GOVERNMENT/ PRIVATE The PLAYER
Force
Majeure
risk
would be borne by both parties but it is highly
dependent on the type of Force Majeure. In case Force Majeure is upon the
occurrence of Non Political Event, both parties will bear their respective Force
Majeure costs and will not pay anything to the each
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other. In case Force Majeure is upon the occurrence of Indirect Political Event, all costs upto Insurance Cover shall be borne by the EPC Player. Any costs exceeding Insurance those Cover, one of be
costs
shall
reimbursed by the Authority. In case Force Majeure is upon Direct the occurrence of
Political
Event,
Authority would be paying the EPC Player the force majeure payments PS: Force Majeure costs shall not include Contractors debt repayment obligations
POLITICAL RISK CHANGE IN LAW GOVERNMENT/ PLAYER EPC If there is an increase in capital expenditure or
increase in taxes owing to change in law, the additional amount shall be calculated and shared with the
Authority. The Independent Engineer appointed by the Authority shall review and will determine any addition or reduction in Change in Contract Price due to Change
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in Law
GOVERNMENT RENEGING
GOVERNMENT/ PRIVATE No pre fixed penalty or PLAYER compensation decided and it would be mutually decided depending upon the situation.
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SUMMERY OF RISK
TYPE OF RISK BOT TOLL BOT ANNUITY EPC
HIGH LAND AVAILABILITY MEDIUM DESIGN HIGH TIME AND COST OVERRUNS MEDIUM-HIGH CHANGE IN SCOPE FUNDING HIGH
HIGH
LOW
MEDIUM
MEDIUM
HIGH
HIGH
MEDIUM-HIGH
MEDIUM-HIGH
HIGH
HIGH
DELAY IN FINANCIAL CLOSURE INCORRECT VALUTION GOVERNMENT AUTHORITY PERFORMANCE BY
HIGH
MEDIUM -HIGH
LOW
MEDIUM
LOW
LOW
MEDIUM
MEDIUM
MEDIUM
TRAFFIC VARIANCE AND
HIGH
N.A.
N.A.
REVENUE RISK
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TOLL COLLECTION/ ANNUITY EPC FEES ENVIROMENTAL ISSUE COMPETING ROADS/ROUTES FEES/
HIGH
MEDIUM
MEDIUM
MEDIUM-HIGH
MEDIUM
MEDIUM
MEDIUM-HIGH
N.A.
N.A.
POST CONSTRUCTION PERFORMANCE FORCE MAJEURE
MEDIUM
MEDIUM
N.A.
MEDIUM
MEDIUM
MEDIUM
CHANGE IN LAW
MEDIUM
MEDIUM
MEDIUM
GOVERNMENT RENEGING
MEDIUM-HIGH
MEDIUM-HIGH
MEDIUM-HIGH
INTEREST RATE INFLATION FOREIGN EXCHANGE EXPOSURE INSOLVENCY AND OUTSIDE
MEDIUM-HIGH
MEDIUM
LOW
CREDITOR RISK
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The DFBOT Model
The DFBOT Scheme

The concept of DFBOT, private finance initiative (PFI), or any other privatization schemes, has been attracting both government and private sectors all over the world in recent decades. Although requirements of the infrastructure facilities are increased continuously, many governments fail to implement the development projects owing to the governments inability to finance such major projects that are remarkably high in cost. Thus, demand for such privatization schemes as DFBOT and PFI is drastically increasing in both developed and developing countries.
In our society, there are many kinds of infrastructures, such as roads, toll-ways, bridges, harbours, railways, etc. In general, it is considered that a government or a public sector is required to intervene in provision of these infrastructures, or in many cases they themselves invest for and operate the facilities. The reasons for the intervention by government are:
The initial investment is tremendously large, so normally it is too much for private sectors.
These facilities can serve for so long-term periods once they are provided that they need to take a long term to recover the investment.
The services provided by those facilities tend to be in a monopoly situation, while demand for the service is relatively high. The price of the service tends to be improperly high unless the government intervenes to some extent properly.
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In many cases it is so difficult to collect a fee or toll from the service users that taxes and duties are the most practical manner for service pricing.
These facilities bring about external benefits together with internal benefits. In other words, they provide benefits not only directly to the service users, but also indirectly to people outside, such as those who work in the industry. Moreover, these external benefits are considerably large in infrastructure projects.
These facilities require large amounts of land acquisition, which is very difficult for private sectors without appropriate assistance by the government.
Though many governments may wish to build much of their infrastructures through private financing, not all projects are suitable for privatization. Projects those are well suited for a DFBOT agreement should have the following characteristics:
The country in which the project is situated should have a stable political system.
The legal system in the country should be predictable and to be reasonable.
The economy should be promising in the long term with adequate local financial markets.
The currency exchange risk associated with the project should be predictable. This is particularly necessary if expected income is to be paid in local currency.
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The project itself should be in the public interest, with governmental support being available to it.
There should be long-term demand for the service to be offered by the project.
There should be limited competition from other projects.
Profits from the project must be sufficient to attract investors.
The cash flow from the project must be attractive to lenders.
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DFBOT PROJECT STRUCTURE
A whole series of risks has to be considered and allocated among the various parties involved in the project. The parties identify each other's positions and come up with a scheme. The various parties in a BOT project are identified below
Government: The government grants a concession to the project company. A

government's strong commitment to a project and its ability to cooperate with the private sector is important for the success of the project.
Project sponsor: In general, project sponsors are developers, contractors, operators,

suppliers, or other investors. There may be two groups of investors involved in the project. The initial shareholders, or sponsors, who either responded to an invitation from the host government to bid or have come up with a scheme which they believe the host government should adopt. The shareholders of the wining consortium enter into a shareholders' agreement with each other which govern the relation among themselves and describe how the project company will be managed.
Contractors: Usually, the contract between the contractors and the project company is a
fixed-price design-build contract, which limits some of the risk. In order to facilitate financing, the contractor takes responsibility of the design risk, by assuming risks for longer period of time as opposed to standard construction contracts of shorter concession life.
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Lenders: Usually, equity contributions from shareholder constitute a limited part of the
financing. Lenders usually provide the major amounts of funding needed for the project. Usually, senior lenders form syndication and lend to the sponsor through it.
Suppliers: Large machinery and equipment companies sometimes participate in the

financing of the project in order to sell their product. Equity participation could be beneficial for the suppliers in such cases.
Operator: The operator operates and maintains the project during the concession period.
Usually, the operator is required to maintain a certain performance level to produce the maximum potential of the facility.
Insurance:It is helpful to have insurance advisors to consider when insurance can be used
to mitigate some of the project risks. The government also needs insurance advisors to determine the risks that need insurance coverage.
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Risk Management Frame Work
The process of risk management is broken down into the risk management systems in figure 4 which shows the sequence for dealing with risk. Naturally the risk management system must be applied to each option under consideration. Generally, the stages are:
1. Risk identification: Identify the source and types of risks.
2.Risk classification: Consider the type of risk and its effect on the person or
organization.
3.
Risk analysis: Evaluate the consequences associated with the type of risk, or
combination of risks, by using analytical techniques. Assess the impact of risk byusing various risk measurement techniques.
4.Risk attitude: Any decision about risk will be affected by the attitude of the person or organization making the decision.
5.Risk response: Consider how the risk should be managed by either transferring it to
another party or retaining it
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RISK IDENTIFICATION
RISK CLASSIFICATION
RISK ANALYSIS
RISK ATTITUDE
RISK RESPONSE
Figure 4
Risk Identification
Figure 5 shows the factors to be considered in the risk identification phase; the various aspects are discussed in sequence. It is worth stating that an identified risk is not a risk, it is a managerial problem. Inevitably, bad definition of a risk will breed further risk.
When attempting to identify risk, it is rather like trying to map the world. Maps of the world tend to be centred on the location of the mapmaker. Much of the world is not visible from
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where you stand. Some territory which is familiar and obvious to you may not be so obvious to everyone. Similarly, looking at a large project from the top, with multiple layers of planning, complex vertical and horizontal interactions, and sequencing problems, resembles looking into the world map through a fog. Management's ability to influence the outcome is limited to what they can see. A clear view of the event is the first requirement, focusing on the sources of risk and the effect of the event.
SOURCE EVENT & . EFFECT OF RISK
CONTROLLABLE
UNCONTROLLABLE
DEPENDENT
INDEPENDENT
TOTAL DEPENDENCE
PARTIAL DEPENDENCE
FIGURE
Risk Classification
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There are three ways of classifying risk: by identifying the consequence, type and impact of risk, as shown in Figure 6.
RISK CLASSIFICATION
CONSEQUENCE OF RISK
TYPE OF RISK
IMPACT OF RISK
PURE RISK
MARKET RISK
COMPANY
MARKET/ INDUSTRY
ENVIRONMENT
PROJECT/INDIVI DUAL
BUSINESS RISK FREQUENCY SEVERITY/ PREDICTABILITY
FINANCIAL RISK
Type of Risks IMPACT

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Basically, risks are grouped into two types:
Market risk, which is common to many assets, is also called systematic risk or nondiversifiable risk.
Specific risk, which is specific to individual asset, is also called unsystematic risk, pure risk or diversifiable risk.
Impact of Risk
Figure 7 gives a simplified view of the risk hierarchy. At its broadest level, risk will have an impact upon environment. The project itself is at the lowest level of the hierarchy.
THE PROJECT/INDIVIDUAL THE COMPANY THE MARKET/INDUETRY THE ENVIRONMENT
Figure 7. The risk hierarchy
Consequence of Risk
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When considering the consequences of a risk occurring, the relevant factors relating to effects of the risk are taken into account. Most professionals will tend to rely upon expert judgment and knowledge, tempered with some information, if it is available, about past events.
There are many sources of risks where no reliable data are available. Rather than ignore these sources, the course of action should be considered within the overall risk management system.
Risk Analysis
The most important task of risk management is to analyse risk to provide an integral solution to decision-maker. A simple method for considering project risks would be to analyse any risk independent of others, with no attempt to estimate the probability of occurrence of that risk. The estimated effects of each risk could then be accumulated to provide total project outcome values.
Another approach, though more complex, greater realism and confidence can be achieved by applying probabilities to risks and considering the inter-dependencies between the risks. The two most useful techniques for doing so are sensitivity analysis and probability analysis.
The essence of risk analysis is that it attempts to capture all feasible options and to analyse various outcomes. By giving specific weighted number to each option, decision-maker is able to quantify risk and respond to it. The choice of risk analysis technique to be used should be based on following factors:
The type and size of project.
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The information available.
The cost of the analysis and the time available to carry it out.
The experience of the analyst.
The application of any risk analysis technique requires that the uncertain data can be given a range of different values. For example, if the duration and costs for specific activities are uncertain, use a range of values within which the decision maker believes they are likely to lie.
Risk Response
The response to, or the allocation of, risk can be grouped into four basic forms:
Risk retention
Risk reduction
Risk transfer
Risk avoidance
Proper allocation of risk must be considered the ability to absorb risk and the premium offered to bear the risk. For example, a contractor will pay for the insurance to transfer the risk to surety. On lump sum contracts, clients are passing more risk to contractors and trade contractors. Risks and rewards should go hand in hand in order to encourage specific party to bear the specific risk. 111 | P a g e
Risk Retention
Risks that produce small, repetitive losses are those most suited to retention. Not all risk can be transferred, but even if they were capable of being transferred it may not prove to be economical to do so. The risk will then have to be retained. Besides, it is preferable to retain a portion of the risk in certain circumstances. For example, a reduction in an insurance premium with a corresponding retention in the form of limited excess provision in the event of a claim, may be preferred to full coverage; the gamble is between paying the premium and the probability of the event occurring and the consequential loss that would result. In summary the relevant factors are:
The cost of the insurance premium;
The maximum probable loss;
The likely cost of the loss;
The likely cost of paying for the loss, if uninsured.
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Risk Reduction
One of the ways of reducing the risk exposure is to share risks with other parties. For instance, the general contractor will attempt to reduce his risk exposure to pay liquidated damages for late completion by imposing liquidated damages clauses in sub-contract agreement.
Similarly with the contractual arrangement, the use of management fee types of contract will remove the adverse attitude of contractors and should reduce the likelihood of claims from contractors and should reduce the likelihood of claims from the contractor for direct loss and expense.
Risk Transfer
Transfer risk does not reduce the criticality of the source of risk; it just removes it to another party. In some cases, transfer can significantly increase risk because the party, to whom it is being transferred, may not be aware of the risk they are being asked to absorb.
The most common form of risk transfer is by means of insurance which changes an uncertain exposure to a certain cost. On construction projects, fault-free building cannot be guaranteed and defects may be discovered long after practical completion. Latent defects which cannot reasonably be discovered at the stage of a building's completion period are a fact of life.
One advantage of current arrangement of risk transfer by means of insurance is it reduces the likelihood of litigation between different parties. As a matter of fact, surety acts as an intermediate deputy who bears the risk with reasonable awarding.
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Payment bond and performance bond are provided by surety to ensure the project will be completed in the event of default by the contractor. Bond is the form of insurance paid by the principal.
Risk Avoidance
Risk avoidance is synonymous with refusal to accept risks. It is usually associated with precontract negotiation but it may well be extended to decisions made in the course of execution of the project. The use of exemption clauses is an example to avoid specific risk or the consequence resulted from the risk.
Risk Attitude
As mentioned before, risk always goes hand in hand with reward. The premium that gives the basic judgment of whether one should bear the risk is quite different among individuals. In other words, the attitude toward risk choice is based on each individual's risk preference. Simply speaking, there are three types of people:
Risk loving
Risk averse
Risk neutral.
Most of the risk theories are based on the rational of risk aversion. It is more unpleasant to lose a given sum than to gain the same amount since one would change his standard of living to which his is accustomed. 114 | P a g e
Risk Allocation and Cash Flow Management
The type and degree of risk in project financing vary by project and industry. Project finance requires the following measures:
1. Identifying the risks at each stage of the project.
2. Allocating each risk to the appropriate participant.
3. Arranging guarantees to cover risk components.
Each phase in the project has its own financial considerations, participants, and risks. The phases of the highway project are development (pre-investment and implementation), construction, and operation.
The phases in a typical DFBOT highway project are shown below
Figure 8
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Risks are therefore grouped by project phase in this section. Each sub-section discusses risks involved in a particular phase. On-going risks that may occur in different phases of the project are discussed in an independent section. In addition, political risks and environmental risks are discussed in separate sections.
Development Phase
Development phase usually takes from one to three years to complete. The development phase includes both pre-investment and implementation. Usually, developers and contractors take an equity position. Sponsors may retain equity until the project is completed. Financial advisors sometimes provide their services on a success fee basis, thus assuming a part of the risk that the project may not start. The risks associated with the development phase and the agreements that can allocate these risks to the participants include the following:
Technology risk
A new technology may not be economically viable or regulation regarding its use may change. Project sponsors have to assume the technology risk through equity participation.
Credit risk
The credit risk is related to the creditworthiness of the sponsor or the project. Credit is enhanced through letters of credit issued on behalf of developers by banks. This allocates credit risk away from the sponsor and ensures that the lenders need not rely only on the creditworthiness of an individual sponsor. In some situations, rating agencies, such as Standard and Poor, rate projects based on the credit strength of the sponsoring consortium
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Bid risk
Any project involves the risk of not being launched successfully. Usually, this risk is assumed by project sponsors, as well as by financial advisors Table 1 lists the major risks that are faced during the development phase in a BOT project along with potential solution to mitigate these risks.
Risks and solutions during development phase

Development phase Risks Technology risk Solutions Equity or subordinated debt
Credit risk
Letters of credit credit rating
agency
Bid risk Equity Success fee
TABLE 2
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Construction Phase
Any interruption in the construction delays the revenue flow and jeopardizes the repayment of debt. Construction phase risks include the following:
Completion risk
Projects can be delayed due many reasons, but poor interface coordination and late design changes are very common. Because BOT highway projects rely on the income generated from operation to service their debts, the rolled-up interest from a delayed project can be substantial and can seriously affect the project's profitability. Usually, the engineering and construction contractors assume the completion risk. Project sponsors can commit the contractors to lump-sum contracts, using proven technology and agreed schedules, which define contractually the timing and relationship of critical stages of the projects with payment incentives. Contractors could also be required to provide completion guarantees that specify a time frame and a minimum efficiency rate, and performance bonds. In this case the risk of cost increases due to late completion is born by insurance companies or banks, for which a premium is charged. Sometimes, the contractor allocates a part of this risk to equipment and material suppliers. It is also common to use performance incentives for work completed before the contractual deadline.
Construction difficulties
Unforeseen soil conditions and breakdown of equipment are common on construction site. Construction contracts under BOT arrangement are usually of the Design-Build type, which do not provide redress for contractors against adverse geological conditions. In lump-sum fixed-price contracts, contractors normally either include a substantial risk allowance in the price or they simply gamble and hope for the best
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Cost Overrun risk

When construction costs exceed original estimates, either due to inflation or excessive design changes, drawdown from loans may not be able to match the payments due to contractors. This may cause lenders to question the viability of the project. Additional financing has to be arranged. Cost overrun risks can be covered by providing price escalation clauses in off-take contracts. Sometimes, completion bonds issued by indemnity companies can be used to limit this risk. It is suggested that cost overrun risk can be mitigated in the ways described below:
o Additional capital injected by project sponsors.
o Standby credit facility from original lenders. o Fixed price contracts from contractors.
Table 3 lists the major risks encountered in a BOT highway project during the construction phase with potential solutions to mitigate these risks.
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Table 3. Risks and solutions during construction phase
Construction phase Risks Solutions
Completion delays
Turnkey contracts Penalties
Completion guarantees Performance incentive es and guarantees
Cost overruns
Fixed price contracts Completion bonds Standby credit
Force majeure
Increased equity Insurance Government Indemnities
Export credit agency cover
Joint venture with publicpatner Political risk 120 | P a g e

Operation Phase
The following are risks encountered during the operation phase of the highway project:
Income risks: This is the risk that the project may not meet revenue projections. This risk is sometimes called the toll revenue risk in highway projects, and in general, the economic risk of the project or market risk. For any project, these risks include both price and demand for the output. For highway projects, the initial traffic forecast may be overoptimistic, either due to wrong assumptions, or to the availability of alternative routes. Income from direct tolls may then fall short of expectations and hence the cash flows of the sponsors are jeopardized. Off take agreements may guarantee that the purchaser pays for a product delivered over an extended term. Such agreements give lenders security because loan repayment is assured in spite of a fluctuating market demand Table 4 summarizes risks encountered in the operation phase with possible solutions
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Table 4. Risks and solutions during operation phase Operation phase Risks Market Solutions Market study Off take agreements
Raw material supply
Feedstock agreements
Performance/technical
Performance guarantees Contractor's equity Proven technology
Operations/maintenance
Experienced operator
Liability risk
Insurance contracts
Equity resale risk
Subordinated debt
Foreign exchangeCentral bank assurances Swaps Currency option
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On-Going Risk
Serious financial-exposure risks are present throughout the project finance process and must be monitored on a continuous basis. This exposure is best handled through financial engineering. Financial engineering concerns include the following:
Interest rate risk

Fluctuations in interest rates affect the cash flows and market values of borrowers and lenders who use fixed income securities. Coupon swaps are used to limit interest rate risks. A coupon swap is an exchange of one coupon or interest payment for another that has a different configuration but the same principal amount. Coupon swaps are essential to effectively manage long-term interest rate exposure. For shorter maturities, Treasury notes and Treasury bills interest rate future contracts can be used to cover interest rate exposure.
Currency risk
Foreign exchange rate fluctuations affect international projects in which project revenues or expenses are paid out in foreign currency. The income generated from operation is in local currency. On the other hand, the investment and the loans are in foreign currency, and repayment of foreign loans has to be made in foreign currency. Therefore, project sponsors have to seek convertibility guarantees from the host government. To limit this risk, short term transactions in major currencies can be hedged in the foreign currency forward or future markets. For much longer periods, it is possible to hedge with a series of long-date forward contracts or with a currency swap to limit the currency risk. Currency collateralized loans and foreign exchange options are used to convert the exposed cash flows into the desired currency. During the bidding stage of the project, options are used to cover uncertain future foreign exchange cash flows. The option to buy or sell the foreign currency would not be exercised should the bidding be unsuccessful.
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Political Risks
Political risk is sometimes the most significant risk faced by foreign investors and lenders in developing countries because of the likelihood sudden political change. Such changes can jeopardize projects at a critical stage. Political risk is associated mostly with public sector projects. It includes the possibility that governments will not allow repatriation of funds, as well as regulatory or legislative changes that occur during project construction. Usually, political risks are difficult to control. Many developers involved in public sector transportation projects require the government to provide strong backing and expectations of high traffic flow. Providing tax-exempt financing is a commitment that the government can make to help mitigate this risk in domestic projects.
Environmental Risks
Managing environmental risk is becoming a major part in risk management in BOT highway projects. Environmental risk mitigation can give companies and their financier competitive advantage, and lower the risk of damage to the natural environment. Infrastructure projects can affect the environment through major hazards, emissions, and site contamination. These impacts may jeopardize the viability of a project, and therefore expose the companies and their financiers to risks. Potential losses to companies include civil and criminal liabilities, plant closure, rejection or delay of contracts and permits, and increased cost of capital. Legal instruments are used to prevent the financial institution from assuming risk transmitted through the company, and using insurance to transfer risk to third parties
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Project Cash Flow Pattern
After identifying the risks involved in a DFBOT highway project, it is very essential to look at the techniques for analysing project cash flows. This is a major function in the risk management process.
Different risks relate to different stages in a highway DFBOT scheme, and any DFBOT infrastructure project can be viewed as two projects:
a higher risk construction project and a lower risk utility project.
Following is a description of the risk pattern that explains this distinction. After commencement of the construction work in a highway project, the risk begins to increase as money is used to pay for material, labour, and equipment. Interest charges on loans start accumulating. Force majeure risks also increase during the construction and development phase. All these risks reach their peak value in the early operational years of the project because of the pressure due to maximum debt service when the highest interest burden occurs. When the operation phase starts, the revenues are collected from toll fees, and debts are paid. This pattern of risk distribution should be appreciated by all parties involved in the project. Investors should expect dividend payments only after risks have levelled off. Lenders should expect repayment according to a progressive schedule. The government should also consider this risk pattern when structuring the concessionaires' obligations In general, reducing the risk to one party consists of passing this risk to other parties. The role of the project sponsors is to evaluate the risks and allocate them to the parties best able to assume them. The allocation of risk to parties like contractors will bring additional cost to the project. Also, coverage of risks by insurance companies increases the cost of the project. As a
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conclusion, risk management is an important process necessary in order to achieve a successful project financing.
Preliminary Data Collection
Preliminary data collection was done by taking experts opinion. It was done before the risk identification stage with an intension to find the major risk phase in the BOT highway project. To achieve the above mentioned objective, the whole BOT highway project was divided into six phases and experts having experience of more than 1-5 years were asked to rate the phases from I to VI, with I for least critical phase and VI for the most critical phase. The six different phases were as follows:
Development Phase Pre-construction Phase Construction Phase Start-up Phase Operational Phase Transfer or Termination Phase
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Results & Conclusions
The frequency distribution of criticality for different phases of BOT highway project is shown in figure 9. As seen from the figure, the opinions are largely varying in nature and thus no dependable conclusions can be made. But still nearly 31% experts believe that PreConstruction Phase is the phase which has the highest risks in it considering the financial aspects of those risks. While there are nearly 25% experts who believe that Construction phase is the most critical of all phases. From frequency distribution curve for pre-construction phase (figure 10), it is clear that results are largely varying in nature and cant be used for the work.
PERCENTAGE FREQUENCY DISTRIBUTION OF CRITICAL PHASES I Development Phase Pre-Construction Phase Construction Phase Start-up Phase Operational Phase Transfer Phase 11 11 14 17 10 36 II 25 16 1 16 19 22 III 23 11 11 23 16 19 VI 11 14 30 16 14 14 V 19 16 19 14 27 3 VI 11 30 25 14 14 5
Also figure 9shows a pie chart depicting percentage distribution of experts opinion for the most critical phase in terms of financial and other risks.
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40 35 30 Development Phase 25 20 15 10 5 0 I II III VI V VI Pre-Construction Phase Construction Phase Start-up Phase Operational Phase Transfer Phase
Figure 9. Percentage Frequency Distribution of Criticality of Phases
Figure 10. Frequency Distribution Curve for Pre-Construction Phase
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Figure 11. Frequency Distribution for Most Critical Phase
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Causes of Failure
The following are the possible reasons for the failure of the preliminary data collection:
1. Deciding the phase having maximum risk without proper analysis and just on the basis of experience turned out to be merely a guess work.
2.
From all the experts contacted, mostly all were dealing with pre-construction and
construction phase. So it can be said that the samples selected didnt represent the complete lot.
3. Collecting reviews regarding individual risks in every phase and then analysing those reviews for coming to a conclusion would have been a better option.
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Respondents' Particulars
Experts were contacted personally or through emails and questionnaires were sent by mail or given personally to project sponsors, developers, consultants, lenders, investors, and contractors. A total of 28 valid responses were received from participants which accounts for a response rate of about 13.3%. Although the response rate was a little low, the reliability of survey results is high.
Sample Questionnaire
The questionnaire basically comprised of five sections, viz. development phase, construction phase, operational phase, transfer phase & on-going risks. In the first four sections, the risks occurring in different phases of the project life cycle were listed; whereas in the last section, the risks which can occur irrespective of the phase of the project were taken up. Below given is an overview of the questionnaire.
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RISK QUESTIONNAIRE 1) Construction Difficulties 2) Completion risk 3) Cost overrun risk 4) Legal risk 5) Delay risk 6) Management risk. Etc. 1) Bidding risk DEVELOPMENT PHASE 2) Financial risk 3) Technical risk 4)Legal risk 5)Market risk CONSTRUCTION PHASE
OPERATIONAL PHASE
1) Financial risks 2) Future operation risks 3) Legal risks TRANSFER PHASE
1) Pricing or Tariff risk 2) Performance risk 3) Operation risk 4) Financial risk 5) Management risk 6) Legal risks. Etc.
ONGOING RISK
1) Interest rate risk 2) Currency risk 3) Force Majeure 4) Political/Regulat ory risks 5) Environmental/S ocial risks
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Conclusions
In a nut shell, the below mentioned conclusions can be drawn from the study work:
Due to the governments inability to finance major infrastructure projects, the concept of Built-Operate-Transfer comes into picture.
Out of 152 risks listed for BOT highway project, only 96 risks are mainly applicable.
Expected monetary value method provides accurate results for risk analysis.
Out of 96 risks, only 37 risks belong to major and high risk categories and contribute to 58% of total project risk.
Land disputes and land clearance are the two risks which belong to high risk categories and contribute to 6% of total project risk.
Due to the effective mitigation measures taken from the government side, intensity of majority of risks is reduced.
Construction phase turned out to be the highest risk phase which alone contributes to more than 50% of the total project risk.
Government, concessionaire and contractor share nearly equal percentage (29%) of project risk.
Contractors All Risk (CAR) policies and workmens compensation act 1923 are very important insurance policies and takes care of majority of construction risks.
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Phase & Party Wise Risk Allocation
Risk allocation process was done for the 96 identified risks. After risk allocation process, phase and party wise risk allocation can be done. It helps in deciding the project phases which requires more attention in terms of risk mitigating measures. It also gives an idea regarding the risk sharing pattern between different parties. Table gives phase and party wise risk allocation. Figure 9 and figure 10 respectively depict pie-charts of party and phase wise risk allocation. As seen from table, government, project sponsor and contractor share nearly equal percentage of project risk. It might be considered as an important reason behind huge success of BOT road project scheme. Many of the private investors are attracted towards BOT road projects due to this equal risk distribution policy adopted.
Parties/Project Phase Development Phase Construction Phase Operational Phase
Governme nt 10.58
Concessionnair e 3.97
Lende r 1.64
Contrator
Operato r
Othe r 0.00
Total
0.00
0.00
15.90
9.25
14.28
0.69
28.04
0.00
1.67
54.29
0.85
5.19
0.00
1.06
5.46
0.00
12.56
Transfer Phase 4.54 On-going Risk Total 4.29 29.21
3.64 1.91 29.00
0.48 2.15 4.95
0.00 0.24 29.70
0.00 0.00 5.46
0.00 0.00 1.67
8.66 8.59 100
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While considering the project phases, Construction phase turned out to be highest risk phase. It alone contributes to more than 50% of the total project risk. It might be due to the presence of following factors:
Maximum number of party are associated with the construction phase. It is the phase were actual execution of work is done. Any alteration from the proposed plan can prove to be very costly during this stage.
Apart from construction phase, development phase constitutes 16% of total project risk while operational and transfer phase constitute 13% and 9% of total project risk. It is to be noted that every project contains certain risks like force majeure, environmental, social or political risks which can occur in any phase. These risks were classified under on-going risks. Ongoing risks also constitute to 8% of total project risks.
FIGURE 12: PARTY WISE RISK ALLOCATION
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FIGURE13: PHASE WISE RISK ALLOCATION
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Top 10 Risk & Mitigation Measures
It is to be noted here that the Risk Number quoted here are in accordance with those specified in Experts' Opinion Questionnaire. SR. NO 1 LAND DISPUTES Careful site selection backed by investigation of history and characteristics. TYPE OF RISK MITIGATION MEASURES
Systematic provision of land related information to the bidders.
Addressing all environmental issues before the bid process, including impact assessment.
Land Clearance
Interfacing with concerned departments to ensure land approvals in place or face least obstacles.
Community consultations to ensure least resistance
from local population. Ensure Concession Agreement deal with the approval issues for example, making certain critical approvals conditions precedent to the agreement/ commencement of construction. 3 Project cost comes out to be high 4 Design faults (design SPV) by govt. or Contractor participates in design. Subordinate loan by government. Changed condition clause (Delay). Hire a consultant to suggest cost cutting measures.
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5 Design faults (design by the contractor) 6 Project not performing to costs 7 Cost overrun Risks (inflation or excessive design changes 8 Pricing or Tariff Risks according
Adoptable design/Construction methods. Performance Guarantee. Retention bond & guarantee Performance & maintenance hypothecation guarantees. Escrow amount. Performance & maintenance hypothecation guarantees.
Contractor's All Risk (CAR) Policy. Escalation Clause. Price Contingency in the Bid. Have a formula for tariff adjustment that can enable objective calculation of tariffs each year. Maintain good relations with government and a positive public image of the project. Separate and redefine tariff, e.g. some portions of tariff fixed while other portions adjusted.
Breach of trust by the contractor
Arbitration clauses. Security deposit. Obtain governments guarantees to adjust tariff or extend concession period.
10
Force Majeure
Insure all insurable force majeure risks. Obtain governments guarantee to provide finance help if needed.
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Bareilly Sitapur road project
PROJECT DETAIL
The project which I am considering is the Bareilly- Sitapur road project. The project involves 4-laning of the existing stretch of 151 km 2-lane road between Bareilly and Sitapur in UP. Bareilly Highways Project Ltd, the SPV floated by Era Infra Engineering Ltd and OJSCSibmost on Design, Build, Finance, Operate and Transfer (DBFOT) toll basis under NHDP-III in state of U.P. The total project cost has been envisaged at Rs.1,951.50 crore being funded through grant of Rs.255 crore from NHAI, term loan aggregating Rs.1,350 crore, equity of Rs.296.5 crore by promoters and subordinate debt of Rs.50 crore.
The highlights of the Project are: 1 .Project sponsors: Era Infra Engineering Limited (EIEL) 2. Technical Partner: OJSC SIBMOST 3. Concession Period: 20 years from the date of commencing from appointed date i.e. date of Financial Closure (including 3 years of the construction period). 4. Project Cost: Rs.1, 951.50 crore
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BACKGROUND
The Government of India (GOI) has entrusted to the National Highways Authority of India (NHAI), the development, maintenance and management of national highways. NHAI is currently augmenting the Bareilly Sitapur on Design, Build, Finance, Operate and Transfer (DBFOT) pattern on BOT toll basis by 4 laning of the existing Road.
The bidding process:

The NHAI accordingly invited proposals by its Request for Qualification (RFQ) in June 2010 for short listing of bidders for the Project and subsequently short listed bidders, including the consortium of Era Infra Engineering Limited (EIEL) and its technical partner OJSCSIBMOST (Russian Company).
The NHAI then invited bids or Request for Proposals (RFP) from shortlisted bidders under prescribed technical & commercial terms and conditions. The list of other shortlisted bidders is:
Ramky Infrastructures Limited Soma Enterprises Limited NCC Infra Holdings Limited Era Infra Engineering Limited & OJSC-SIBMOST
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Concession Agreement
CONCESSION PERIOD
The Concession has been awarded to BHPL for a period of 20 years from the Appointed Date, which is 180 days from the date of execution of the Concession Agreement i.e. JUNE 24,2010. NHAI is the Concessioning Authority.
Conditions Precedent
The following Conditions Precedent is to be satisfied by the Authority before Financial Closure:
a) Provide to the Concessionaire right of way in accordance with the provisions of theConcession Agreement
b) Procured approval of the Railway authorities that would enable the Concessionaire to construct road over bridges / under bridges at level crossings on the Project Highway
c) Procure all applicable permits relating to environmental protection and conservation of the project site
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The Conditions Precedent to be satisfied by the Concessionaire prior to the Appointed Date will be deemed to be fulfilled if the Concessionaire has:
a) Provided Performance Security to the Authority
b) Executed and procured execution of the Escrow and Substitution Agreement
c) Procured all the Applicable Permits specified and executed the Financing Agreements
d) The Concessionaire shall have delivered to NHAI from the Consortium Members, their respective confirmation, in original, of the correctness of their representations and warranties set forth in the Concession Agreement
e) NHAI shall have received the legal opinion of legal counsel of the Concessionaire with respect to the authority of the Concessionaire to enter into the CA and the enforceability of the provisions thereof
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Obligations of the Concessionaire

The Concessionaire shall:
a) Procure finance for and undertake design, engineering, procurement, construction, operation and maintenance of Project Highway
b) Comply with all applicable laws and Applicable Permits
c) Procure and maintain appropriate proprietary rights, licenses, agreements and permissions
d) Make reasonable efforts to facilitate acquisition of land required for the purpose of the Concession Agreement
e) Perform and fulfil its obligations under the Financing Agreements
f) Transfer the highway to NHAI upon Termination of the Concession Agreement
g) Ensure that the Project Site remains free from all encroachments and take all stepsnecessary to prevent or remove encroachments
h) Not to undertake or permit any Change in Ownership, except with the prior approval of NHAI
i) Not, except with the previous written consent of NHAI, become engaged in any other business other than as envisaged herein
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Obligations of NHAI
Specific Obligations
a) Handover peaceful physical possession of the Project Site to the Concessionaire, in accordance with the Project Site Delivery Schedule.
b) Grant in a timely manner all such approvals, permissions and authorisations which theConcessionaire may require from the Government Agency / the Board in connection withimplementation and operations of the Project
General Obligations
A. Provide assistance to the Concessionaire in procuring Applicable Permits
B. Assist the concessionaire in obtaining access to all necessary infrastructure facilities andutilities
C. Ensure that no barriers are erected or placed on the Project Highway
D. Make best endeavours to procure that no local tax, toll or charge is levied or imposed onthe use of whole or any part of the Project Highway
E. Assist the Concessionaire in procuring Police assistance for regulation of traffic, removalof trespassers and security on the Project Highway
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F. Support, cooperate with and facilitate the Concessioner in the implementation andoperation of the project in accordance with CA
G. Provide reasonable assistance to the Concessionaire or its contractors to obtain applicablevisas and work permits for the purposes of discharge of their obligations by theConcessionaire or its Contractors
H. During the development period NHAI shall maintain the Project Highway, at its own costand expense, so that its traffic worthiness and safety are at no time materially inferior ascompared to its condition 7 days prior to the last date for submission of the Bid, and inthe event of any material deterioration or damage other than normal wear and tear,undertake repair thereof, or pay to the Concessionaire the cost and expense, asdetermined by the Independent Engineer, for undertaking such repair after the AppointedDate
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Sources of Revenue
The concessionaire had the right to levy the toll from the users. The base toll rate at the start of the project has been in accordance with the rates specified under the Toll Policy of National Highways. Annual increase of 6% in toll rate has been considered thereon till concession period. This is different from the specifications mentioned in Toll Policy of National Highways because change in Wholesale Price Index (WPI) cannot be forecasted for next 20 years. In addition to the toll revenues, concessionaire would also receive a small amount of revenue from advertising and renting facility. They are expected to form 5% and 10% of the total revenues during the concession period.
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Project Costs and Sources of Funds
The estimated costs for the project is 1951.50 crore. The critical inputs to the financial model are the traffic and revenue forecasts along with the construction and operating costs. The funding of the project is expected to come from three sources namely
loans from commercial banks; funding provided by the NHAI and Equity from the shareholders.
The senior debt i.e. commercial loan from the banks has a maturity period of 20 years and is charged at a rate of 8% with principal repayment at 6.25% to be paid annually. Like majority of DFBOT Toll projects, cash waterfall mechanism has been specified in the concession agreement defining the allocation of the total revenues. The priority order for the flow of funds is:
Meeting operating and maintenance expenses including the land lease fees payable to government
Payments towards CAPEX (Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.)
Amount payable towards interest and principal repayments on the senior debt
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Analytical Methodology
Once the cash flow model has been developed, an analysis is done using various criteria including:
Debt service coverage; Net Present Value; Project Internal Rate of Return; Payback Period; Return on Equity; Ratio analysis
i. Debt Service Coverage

The Debt Service Coverage Ratio (DSCR) is an historical measure that calculates the cash flow for the previous period in relation to the amount of loan interest and principal payable for that same period. As it is an historic measure, it will only indicate financial difficulties after the event, but by tracking it, lenders will be able to identify trends.
ii. Net Present Value

The Net Present Value (NPV) of a project is the sum of the all future cash flows discounted to present value. As previously mentioned, the discount rate used is usually, though not always, equal to the WACC. An NPV equal to 0 signifies that the financial benefits of a project are enough to recoup the capital investment. An NPV greater than 0 implies that the project will earn excess returns, which will be distributed to the equity holders. Should the NPV be less than 0, this implies that the financial benefits are not enough to recoup the costs of the project.
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iii.Project Internal Rate of Return

The Project Internal Rate of Return (PIRR) represents the yield of a project, regardless of the financing structure. Unlike the NPV where the discount rate is stated and the NPV is calculated, the PIRR is calculated by setting NPV = 0. The higher the PIRR for a project the better, though the expected PIRR value will vary depending on the project sector as well as the financiers investment mandate.
iv. Payback Method

The simple payback method measures the number of years it takes before cumulative forecasted cash flow equals the initial investment. The simple payback method does not discount cash flow to a present value.
v.Return on Equity
Return on Equity (ROE) calculates the yield of a project based on dividends paid out to the shareholders. The higher the ROE the better, but as previously mentioned, the expected ROE will vary depending on the sector and financier
vi. Accounting Ratios

Besides the coverage ratios previously discussed, there are a number of other ratios that financiers use to analyze cash flow and other financial statements. However, ratios by themselves mean almost nothing and need to be compared or benchmarked against other ratios in order to provide the greatest use. Ratio analysis can help to indicate whether a projects situation is getting better, worse, or staying the same. Ratios can also be used to indicate areas of strength and weakness within a project.
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ANALYSIS OF THE PROJECT

In the given project I have consider IRR method because it considered by government for assigning the project at DFBOT basis . Also weighted average cost of capital and NPV is also calculated for the same project.
Project Assumptions
The various project assumptions included in the financial model related to Construction, traffic projections, alternate route development, capacity equivalent, O&M expenses, interest on long term debt and other sources of revenues are mentioned below. CONSTRUCTION PARAMETERS PROJECT CONSTRUCTION TIME NUMBER OF LANE LENGTH OF LANE(IN KMS) CONSTRUCTION COST(INR/KM/LANE) PROJECT DELAY COST PER ANNUM TOTAL PROJECT COST INFLATION INTEREST CONSTRUCTION RATE 5% 1951.50 4% DURING 16% ASSUMPTION 3 YEARS 4 151 13
EXPENSES/COST TAX
ASSUMPTION 30%
ENVIRONMENTAL MONITORING (% 0.004% OF TOTAL REVENUES 150 | P a g e

MAJOR
MAINTENANCE
(%
OF 6.00%
TOTAL REVENUES) ANNUALMAINTENANCE TOTAL REVENUES) TOLL PLAZA O&M COST (% OF 0.018% TOTAL REVENUES) FINANCE CHARGES DEPRECIATION @WDV 2% 10% (% OF 1.00%
TRAFFIC PROJECTIONS INITIAL PROJECTION INITIAL YOY GROWTH RATE ACTUAL RATE DECLINE IN
ASSUMPTION 50000 20%
GROWTH 1%
TOLL AVERAGE RATE(INR/VEHICLEPER KM) Y-O-Y GROWTH RATE AVERAGE VEHICLE) NUMBER OF DAYS PER YEAR TOLL RATE(INR
ASSUMPTION TOLL 0.65%
6% PER 20
360
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OTHER SOURCES OF REVENUES ADVERTISING RENTING FACILITY
ASSUMPTION 5% 10%
FINANCIAL STRUCTURE LEVERAGE(D/V)
ASSUMPTION 72%
INTEREST RATE ON LONG TERM 8% DEBT Kd
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Calculation of Weight Average Cost of Capital (CAPM MODAL)

Risk free rate (Rf) has been assumed to be similar to MIBOR rate 8.8% Risk premium (rm rf) has been assumed to be around 12.75% after averaging out the different values available on different secondary resources
Beta asset (a) of 0.45 . Indian road sector is high on risk and uncertainty thus 0.45 has been assumed. Also, beta asset of listed infrastructure companies, which have roads as one of their segments, were referred and their beta asset was found to be in 0.6 1.0 range. These companies had portfolio of power, airport and port projects also which are on much high risk as compared to road projects.
Beta Equity = Beta*{1/(E/V)} = 0.45*(1/28%) = 1.60
Cost of equity (ke)= Rf + (rm-rf)*beta equity = 8.8 %+( 12.75%)*1.60 =8.8%+20.4% =29.2% WACC=kd*(1-tax rate)(D/V)+ke(E/V) =0.08*(1-30%) *(72%) +29.2%(28%) =0.04+0.08176 =12.18%
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CASH FLOW MODEL
1 TOTAL REVENUE TOTAL EXPENSES EBITDA LESS-DEPRECIATION EBIT INTEREST TAXATION EAIT ADD- DEPRECIATION NET WORKING CAPITAL NET CASH FLOW CAPITAL EXPENDITURE FREE CASH FLOW 950.45 -950.45 0 0 0 0 0 0 0 0 0 0 0
2 0 0 0 0 0 0 0 0 0
5 300.00 21.00 279.00 48.24 230.76 140 0 90.76 39.07
6 350.00 24.50 325.50 43.41 282.09 131.25 0 150.84 35.16
0 250.00 0 17.50
0 232.50 0 53.60
0 178.90 0 0 0 0 140 0 38.90 53.60
0 0
0 0
0.00 92.50
0.00 129.84
0.00 186.00
469.13 -469.13
531.92 -531.92
0.00
0.00
0.00
92.5 129.835 186.002
7 400.00 28.00 372.00 39.07 332.93 122.5
8 450.00 31.50 418.50 25.63 392.87 113.75
9 500.00 35.00 465.00 23.07 441.93 105
10 550.00 38.50 511.50 20.76 490.74 96.25
11 600.00 42.00 558.00 18.69 539.31 87.5
12 650.00 45.50 604.50 16.82 587.68 78.75
13 700.00 49.00 651.00 15.14 635.86 70
14 750.00 52.50 697.50 13.62 683.88 61.25
15 800.00 56.00 744.00 12.26 731.74 52.5
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0 210.43 31.65 0.00 242.08 0.00
0 279.12 20.76 0.00 299.88 0.00
0 336.93 18.69 0.00 355.62 0.00
0 394.49 16.82 0.00 411.30 0.00
0 451.81 15.14 0.00 466.95 0.00
0 508.93 13.62 0.00 522.55 0.00
0 565.86 12.26 0.00 578.12 0.00
186.79 435.84 11.03 0.00 446.87 0.00
203.77 475.47 9.93 0.00 485.40 0.00
242.077 299.879 355.617 411.305 466.949 522.554 578.124 446.874 485.399
16 850.00 59.50 790.50 11.03 779.47 43.75 220.71 515.00 8.94 0.00 523.94 0.00
17 900.00 63.00 837.00 9.93 827.07 35 237.62 554.45 8.04 0.00 562.49 0.00
18
19
20
950.00 1000.00 1050.00 66.50 883.50 8.94 874.56 26.25 254.49 593.82 7.24 0.00 601.06 0.00 70.00 930.00 8.04 921.96 17.5 271.34 633.12 0.00 0.00 633.12 0.00 73.50 976.50 7.24 969.26 8.75 288.15 672.36 0.00 0.00 672.36 0.00
523.939 562.492 601.058 633.119 672.357
IRR =
13%
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Result and Conclusion
The results of the valuation are comparable to the awarding policy of government in terms of IRR. (DFBOT projects are awarded by the government if the IRR is found to be equal or less than 18%. In some cases, the benchmark is around 21% for projects to be awarded on DFBOT basis.)
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PRELIMINARY QUESTIONNAIRE
(From concessionaire point of view) Experts Detail Name: Designation & Experience Email Id. & Mob. No.: Companys Name: Instruction
Risk Rating: I- LOW Risk Phase; II- MINOR Risk phase; III MODERATE Risk Phase ; IV-MAJOR;V - HIGH; VI-MOST Risk Phase
Sr. No.
Project Phases
Risk
Rating(considering
financial impact of risk)
Development phase(market risks, legal risks, financial risks, political, environment& social risk)
Pre- construction phase(Bidding risks, legal risk due to unacceptable terms of bid document, technology risks due to use of un tried technology)
Construction Phase(Operational risk due to accident or damage to properties or due to defective material, machinery & workmanship; completion risks resulting from disputes between sub-contractors; defective construction work, accumulation of claims by both parties, design default, default of any party, etc. ; delay risks;
157 | P a g e
management risks caused by labour union, bad labour relationship, etc. and environmental risks)
Start-up phase (performance risks due to nonperformance according to specification, too much gap between start-up phase & operational phase due to various factors,etc.)
Operational phase(Market risks, pricing or tariff risks, opeartions risk due to reduction in the life of structure, management risks due to increase in routine & major O&M, performance risks, political& environmental risks)
Transfer or Termination phase (Financial risks caused during to final payment to sponsors, issues, for
compensation insufficient
operator,
valuation
escrow
account
balance
appropriation; operational risks due to O&M becoming too high, issues pertaining to retention or transfer of existing staff, replacement of machinery and equipments, etc., legal risks due to extension of concession period and problems in identification of assets to be transferred)
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REFERENCES
1. Projects Planning, Implementation and Review (Prassana Chandra, 2009) 2. Corporate Finance Khan And Jain
3. Project Information Memorandum 4. Model Concessionaire Agreement BOT Toll Projects, NHAI 5. Risk Management in PPP Projects- Vijay Sharma
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SUMMER INTERNSHIP REPORT

ON ANALYSIS OF THE FINANCIAL STRUCTURING OF PUBLIC-

PRIVATE PARTNERSHIP (PPP) FOR ROAD INFRASTRUCTURE PROJECTS IN INDIA

VARIOUS RISK INVOLVED IN HIGHWAY SECTOR FOR DFBOT PROJECT

COMPANY NAME- ERA INFRA ENGINEERING LTD.

This report would not have been possiblewithout their help.

NIKITA JOHARI (4112023015)

Key Feature Vision Mission Group Structure Infrastructure Business

PPP - Introduction..23-28 Type Of PPP Models.29-30 Bot Toll Bot Annuity

OMT Concession Special Purpose Vehicle

Brief Scope Of Work Work Methodology

Basic Concept of Risk67-68 Type of Risk.69-71

The DFBOT Model100-104 DFBOT Scheme DFBOT Project Structure

Risk Management Framework..104=114

Bareilly- Sitapur Road Project...139-158 o Project Detail o Background

o Concession Agreement o Sources Of Revenue

Project Assumption o Calculation Of WACC o Valuation Of Project o Conclusion

Preliminary Questionnaire.157-158 References...159

Era Infra Engineering

Era business school

A dedicated workforce of 4500 permanent employees

Pan-India spread and expanding globally

Era Landmarks Ltd.

Era Infa Engineering Ltd.

Era Buildsys Ltd.

Verticals Engineering Procurement & Equipment Management

Subsidiaries Era infrastructure(I) Ltd. Era T&D Ltd.

Backed by two distinct Business Divisions Construction and Equipment Management

- Engineering Procurement &

PROJECTS UNDERTAKEN; OVERVIEW Road/ Highways:

Thermal Power projects:- NTPC, BHEL, LANCO , ADANI

Private Sector Clients

ROAD INFRASTRUCTURE IN INDIA

Key Developments and Investments

Public Private Partnership

The Special Purpose Vehicle

The Escrow Account

Types of Public Private Partnerships:

Operate, Maintain and Transfer (OMT) Concession

Special Purpose Vehicle for Port Connectivity Projects

The Key Drivers for PPP

Apart from these, the other aspects to drive PPP are:

Operations and Maintenance

o Project management o Establishing standards through the life cycle of a project

8 . Rigorous enhancement in the bankability of the project and

9 . Enhancement of implementation capacity

Advantages of the PPP structure

Misconceptions about PPP structure

Privatization or disinvestment- where the underlying asset is not an infrastructure

Simple outsourcing where in substantial financial, technical and operational risk is

Commercialization of a public function by the creation of a state owned

BOT contracts permit tolling on those stretches of the NHDP.

100% income tax exemption for a period of 10 years

Grants / Viability gap Funding for marginal projects by NHAI.

Formulation of Model Concession Agreement

Road Sector PPP Model Characteristics

of based on performance and

Financial Structuring of PublicPrivate Partnerships

Key Difference between Debt and Equity capital

Debt No Senior to equity Stated Interest deduction

Equity Yes Subordinate to debt None No deduction

The Target Capital Structure

Public Sponsor Availability payment or subsidies Shared revenue

Equity investment Concessionaire