India Financing Highways

Report No.
30363-IN
India
Financing Highways
Energy and Infrastructure Sector Unit
South Asia Region
Document of the World Bank
2004 The International Bank for Reconstruction and Development/ The World Bank
1818 H Street, NW
Washington, DC 20433
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GOVERNMENT FISCAL YEAR
April 1 M arch 31
CURRENCY EQUIVALENTS
Currency Unit = Indian Rupees(Rs.)
USD 1 = Rs. 45
Rs.1 = USD 0.0222
1 Lakh (Lk.) = 100,000
I Crore (Cr. ) = 10, 000, 000
ABBREVIATIONS AND ACRONYMS
ADB Asian Development Bank
A P Andhra Pradesh
A PRDCL Andhra Pradesh Road Development Corporation
BO LT Built O wn Lease and Transfer
BO O T Bui ld O wn O perate Transfer
BO T Bui ld O perate Transfer
DBFO Design Build Finance and O perate
EPC Engineering Procurement & Construction
EU European Union
FHWA Federal Highway Administration
G DP Gross Domestic Product
GO I Government of India
G Q G olden Q uadri lateral
HDM -4 Highway Development and M anagement M odel
IPO Initial Public O ffering
KRDCL K arnataka Road Development Corporati on Ltd.
M O RTH M inistry of Road Transport and Highways
M SRDC M aharashtra State Road Development Corporati on
NH National Highways
NHAI National Highways Authority of India
NHDP Nati onal Hi ghway Development Programme
O & M O perati ons & M ai ntenance
PM G SY Pradhan M antri G ram Sadak Yoj ana
PSP Pri vate Sector Parti ci pati on
PWD Public Works Department
RBI Reserve Bank of India
SH State Hi ghways
SPV Special Purpose Vehicle
UNCITRAL United Nations Commission on International Trade Law
UP Uttar Pradesh
Vice President : Praful C. Patel
Country Director : M ichael F. Carter
Sector M anager : Guang Z. Chen
Task Team Leader : PiersA. Vickers
www.highwayfinindia.org
www.worldbank.org/in
ACKNOWLEDGEMENTS
This report is designed to provide information and advice to the Indian Union and States
Governmentson the principlesand practicalitiesfor establishing a sound and sustainable system
of highway financing. The report also has an associated summary policy note, available
separately.
M uch of the data used to prepare the report wasobtained through a baseline study conducted
during 2003 by Consulting Engineering ServicesLtd and Ernst and Young. Thisbaseline survey
obtained information from variousnational entitiesaswell asfrom six states Andhra Pradesh,
Karnataka, M adhya Pradesh, M aharasthtra, West Bengal and Uttar Pradesh. The baseline also
benefited from a workshop held in Delhi where representativesof both the public and private
sectorsworking in thisfield contributed their viewson the preliminary findings. Specific material
provided by othersisgratefully acknowledged in footnoteswherever applicable.
The reports have been prepared by a team of Bank staff, including Abha Joshi Ghani, Alok
Bansal, Aniruddha Patil, Isabel Chatterton, Raghu Kesavan, Simon Thomas, Supriya Sen, and
Piers A. Vickers (Task Leader). Sangeeta Anand and Rajesh Singh provided administrative
assistance throughout. The report hasbeen prepared under the general guidance of Guang Z.
Chen, Sector M anager for Transport South Asia Region. Peer reviewerswere Kenneth Gwilliam,
Stephan von Klaudy and Richard Scurfield.
TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................. i
INTRODUCTION ........................................................................................................ 1
1. PRINCIPLES OF A USER CHARGE REGIME ............................................................. 3
O bjectives for Road User Charging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Costs To Be Covered by Road User Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Suitable Tax and Charging Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Charging Structures Effectiveness vs. Efficiency Trade-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2. ROAD TAXES AND HIGHWAY EXPENDITURES ..................................................... 11
Road Related Taxes and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Government Revenue from the Road Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Government Expenditure on the Road Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Comparison of Aggregate Revenue and Actual Expenditure ..................................... 14
3. THE ROAD USER CHARGE REGIME ..................................................................... 17
Road User Charges in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Road User Charges vs. Road Expenditures .............................................................. 18
Road User Charges vs. Full Road Costs .................................................................. 19
Assessment of the Road User Charging Regime ...................................................... 21
4. FUTURE FUNDING NEEDS .................................................................................. 23
Highway M aintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Highway Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
The Funding Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5. MAJOR FINANCING ISSUES AND CAUSES ........................................................... 25
M ajor Financing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Underlying Causes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6. PRINCIPLES OF PRIVATE FINANCE ...................................................................... 29
Rationale for Private Sector Participation in Indian Highways .................................... 29
Enabling Environment for PSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The Public/Private Risk Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Additional Support by the Public Sector ................................................................. 33
Additional Support by the Public Sector ................................................................. 34
7. INTERNATIONAL EXPERIENCE WITH PRIVATE FINANCE ........................................ 35
O vervi ew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Enabling Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The M anagement of Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Additional Public Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8. INDIAN EXPERIENCE WITH PRIVATE FINANCE ...................................................... 42
Policy and Legal Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Progresswith Private Sector Participation at the National Level ................................. 44
Progress with Private Sector Participation at the State level ...................................... 49
India l Financing Highways
Financial Engineering on NHAI and State Projects ................................................... 50
Indicators of Remaining Constraints to PSP ............................................................. 52
Systemic Constraints To PSP In India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
9. RECOMMENDATIONS ........................................................................................ 57
The Foundations for Financial Sustainability in the Sector ......................................... 57
Options in Financing the Highway Program ............................................................ 60
Recommended Changes to Charging Instruments ................................................... 61
Additional Reforms to Help Spur Private Finance ..................................................... 64
ANNEXURES ....................................................................................................... 69
Annex 1 Pump PricesFor Super Gasoline And Diesel ................................................ 70
Annex 2 Excise Duty Rates, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Annex 3 M otor Vehicle Tax in Selected States ......................................................... 71
Annex 4 Rates of Sales Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Annex 5 Assumptionsbehind the Assessment of Road Sector Revenue ...................... 72
Annex 6 Revenue Contribution by Road Network, 2001-2002 ................................... 73
Annex 7 Revenue - Cost Comparison at Vehicle Level .............................................. 73
Annex 8 Vision 2021 Capital Investment ................................................................ 74
Annex 9 Formsof Government Support for Road Concessions................................... 75
Annex 10 Risk Framework of NHAI BOT M odels .....................................................76
Annex 11 Risk Allocation Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Annex 12 Private Sector Concernswith BOT Projectsin India ..................................... 79
Annex 13 Practical Limitsto Extent of Private Involvement ........................................ 81
Annex 14 Examplesof Inter-State Cooperation on Tax Instruments............................ 83
Annex 15 M easuresto Compensate Non-road Usersfor Levieson Diesel ................... 84
1
Recentlyanother 7, 000 km of lower categoryroadswere reclassified asnational highways.
2
Thisreport mainlyaddressesthe National and State Highways, the highwaysector
3
Vision 2021
EXECUTIVE SUMMARY
Background
1. Indi a has a very large network of low
standard roads. The Nati onal Hi ghways,
totaling only 58, 000 km
1
, carry 45% of total
traffi c but are mostly two lane wi th hi gh
traffi c, low servi ce and slow speeds
2
. There
i s no network of hi gh quali ty, hi gh capaci ty
hi ghways or expressways, and, despi te 3. 5
mi lli on km of roads, some 40% of Indi as
vi llages have no all weat her access.
G overnment expendi ture on roads i s
significant - representing 12% of capital and
3% of t ot al expendi t ure - but road
mai ntenance i s grossly under-funded wi th
only one third of needs being met, resulting
i n road deteri orati on, hi gh transport costs
and loss of accessi bi li ty.
2. Road transport i s now the pri mary
t ransport syst em i n I ndi a and i t i s
i ncreasi ngly a maj or constrai nt to faster
economi c growth and soci al development.
Uni on and State G overnments recogni ze
the defi ci enci es i n the road network and
plan: ( i ) over Rs. 225, 000 crore ( US$50
bi lli on) on hi ghway i mprovements i n the
peri od t o 2011
3
; and ( i i ) subst ant i al
i nvestment, through the Pradhan M antri
G ram Sadak Yoj ana ( PM G SY ) , to connect
vi llages. In addi ti on, annual expendi ture of
Rs. 7, 000 crore i s essenti al to mai ntai n the
170, 000 k m of Nat i onal and St at e
Hi ghways and further fundi ng i s requi red
to maintain the urban networks and district
and rural roads. All these expenditureshave
to be fi nanced wi thi n a current fi scal
envi ronment of hi gh government defi ci ts,
amounting to 9. 5% of GDP. There are major
i ssues as t o who wi ll f i nance t hese
expenditures and how the financing will be
structured.
Approaches to Highway Financing
3. Traditional. In thisapproach, roadsare
treated as publi c goods and fi nanced from
general revenue wi th li ttle connecti on
between the costsof road provision and the
taxes or charges paid by road users (though
fuel i s often heavi ly taxed for general
revenue) , and there i s no attempt at di rect
road pricing.
4. Commercial. Wi t h a commerci al
approach, roads are treated as capi tal
assets, commerci al accounti ng i s appli ed
and users are charged, ei ther di rectly or
i ndi rectly, for road use. Road transport
remai ns a source of general revenue, but
sector taxes are desi gned to mi ni mi ze
di storti ons to transport patterns or choi ces.
Road finance is increasingly separated from
general government expenditures and road
users are i ncreasi ngly i nvolved i n deci si on-
maki ng.
5. Indian. I n I ndi a, t he t radi t i onal
approach largely persi sts, although a
nati onal and some state fuel cesses have
been i ntroduced, tolls are i ncreasi ngly
appli ed and substanti al pri vate sector
financing isbeing sought. The approach has
contri buted to under-f undi ng of road
mai ntenance, a di storted vehi cle fleet,
perverse i ncenti ves for traffi c allocati on
between road and rai l, and substanti al
economi c losses. A coherent structure for
highway financing should have high priority;
otherwi se the di storti ons and costs to the
economy wi ll ri se as overall expendi ture on
roads i ncreases.
6. Motivation for Private Sector
Financing. Private sector participation (PSP)
i n fundi ng i s i ncreasi ngly percei ved as the
answer to hi ghway fi nance and i t has some
very substanti al potenti al benefi ts.
Bridging the funding gap. Investment
requi rements are hi gh but the
publi c sector already faces a large
fi scal defi ci t. Pri vate fi nance could
supplement publi c fundi ng and
post pone t he cost of road
i nvestment to the taxpayer and/
or road user.
l (i)
Executive Summary
Increased expendi ture and revenue
effi ci ency. The pri vate sector has
stronger i ncenti ves to operate
ef f i ci ent ly, mi ni mi ze revenue
leak age, adj ust resources t o
changi ng si tuati ons, and adopt a
comprehensi ve li fe cycle approach
t o road i nvest ment and
mai ntenance.
Unbundli ng and reallocati ng ri sk.
O verall costs may be reduced by
allocati ng i ndi vi dual ri sks to those
parti es best able to control them
through some i nformati onal or
other advantage.
7. PSP depends on a sound framework for
overall sector fundi ng as: ( i ) most PSP
projectsrequire some public funding; (ii) PSP
highwaysare part of a network and demand
for thei r use can be substanti ally reduced
by i nadequate connecti ng li nks: and, ( i i i )
publi c acceptance of tolls may be partly
determined by perceptionsof the entire road
chargi ng regi me. PSP cannot replace the
role of the publi c sector nor reduce the
importance of a rational, fair and transparent
publi c fi nanci ng system. Internati onally, at
most only 5-10% of highway networkshave
been f i nanced by t he pri vat e sect or.
Throughout the world, publi c fundi ng
prevai ls for the hi ghway sector and thi s i s
very li kely to be the case for Indi a too.
Vehicle-Related Taxation and Road
Expenditure in India
8. In FY 2002, the road sector accounted
for slightly lessthan 3% of total government
expendi ture and contri buted about 15. 5%
of revenue. The total tax revenue from the
road sector i n the same year was Rs. 500
billion while total expenditures were Rs. 210
bi lli on. Hence, there was a large revenue
surplus from the sector.
9. However, aggregate numbers are not
very useful for assessi ng the adequacy of
highway financing, when: (i) taxation on fuel
i s a maj or source of general government
revenue; ( i i ) road mai ntenance i s under-
funded and the road asset base i s bei ng
eroded; and ( i i i ) substanti al i nvestment i s
required to remedy neglect and add capacity.
M ore important is the relationship between
road user charges, expli ci t ( e. g. the fuel
cesses) and i mpli ci t, and the levels of road
expendi ture actually requi red to meet the
needs of the sector.
Road User Charges in India
10. Vehi cles, fuel and related i nputs are
subj ect to a wi de range of Uni on and State
taxes. Vehi cles are taxed on i ni ti al purchase
and are then subj ect to annual fees; fuel i s
taxed by both Uni on and States; tolls are
becoming more widespread; and road freight
and passengers may be taxed. Some taxes,
li ke the cess, are clearly user charges; but
the def i ni ti on of other taxes i s more
ambi guous. Total annual road user charge
revenue, i n FY 2002, was bet ween
Rs. 15, 00020, 000 crore
4
, rather less than
total government road expenditure. In terms
of i denti fi ed expendi tures, there were
marked di fferences between the vari ous
segments of the road sector:
Hi ghways. Road user charges
collected ( Rs. 10, 000 crore) exceed
expendi tures ( Rs. 6, 300 crore) but
there would be a broad balance, i f
the highwayswere fully maintained;
Di stri ct and rural roads. Road user
charges ( Rs. 3, 400 crore) are
substanti ally below expendi ture
(Rs. 6, 400 crore)
5
;
Urban roads. Road user charges are
substanti ally greater than urban
road expendi ture.
11. Whi le the Rs. 10, 000 crore collected i n
user charges from users of the National and
State Hi ghways was suffi ci ent to fund
hi ghway expendi ture i n FY 2002, the
structure of charges i s defi ci ent i n k ey
respects.
The overall charges are too low.
Present revenue i s suf f i ci ent
because highwaysare being grossly
under-mai ntai ned. The charges are
also insufficient to fund the costsof
4
The low estimate includesonlytaxes/chargesspecificto road transport (like the cess); the high estimate also includesthe sales/excise taxesin excessof
the average ratesfor such taxes.
5
Rural roadsgenerallycarryfew vehiclesbut are essential for access. Theyare almost publicgoodsand could not be financed from economicroad user
chargesalone.
(ii) l
road accidents, road safety measures,
or environmental damage.
The structure i s di storted and
economically inefficient. User charges
on heavy trucks do not even cover
short-run attri butable costs, the
absolute minimum for cost recovery;
they need to be substanti ally
increased.
The structure isinequitable. Busesare
the most heavily charged vehicles,
paying over four times the charges
on multi-axle trucksbut responsible
for 60% lesscosts. Asbusesare used
by low income groups, the charges
appear grosslyinequitable, and should
be reduced.
There is no charge for road space.
The present chargestake no account
of the occupancy of road space. This
isimportant on highways(slow trucks
delay all vehicles) and critical in urban
areas. Congestion chargeswould be
economically efficient in major urban
areas, especially if the revenue were
used to fund public transport.
State charges are i nconsi stent.
Di f f erent States have adopted
different charges, based on revenue
opportunitiesrather than road costs.
There are no nationally consistent
pricing method and incentives for
vehicle owners.
12. The present structure results in: (i) too
much road use, especially carsin urban areas;
(i i ) too li ttle revenue for mai ntai ni ng and
improving the network; (iii) too many heavily
damaging two axle trucksand little incentive
for re-equipping with modern multi-axle truck/
trailers; and (iv) an uneconomic distribution of
traffic between road and rail with road user
chargesand rail cross-subsidiescombining to
promote too much road freight and too many
rail passengers.
The Highway Financing Gap
13. India needsmassive investment to provide
a modern high capacity network; but first
priority hasto be given to maintenance of the
existing highways. All the studies, in India and
elsewhere, i ndi cate that mai ntenance,
effectively implemented, gives the highest
economic returns: one Rupee spent well on
maintenance can generate seven Rupees in
net benefits. The highwaynetwork hasan asset
replacement value of roughly Rs.240, 000 crore
(US$ 53 billion); India simply cannot afford to
lose such assets.
14. Over the next ten years, about 32, 000 km
of National and 25, 000 km of State Highways
need to be wi dened, at a cost of some
Rs.1, 700 billion, and highway maintenance will
requi re over Rs. 950 bi lli on. Thi s i s a
conservative estimate and takes no account
of the need to build an expressway system, at
a cost of several million US dollars per km,
along new alignments on the most heavily
trafficked corridors. The present system of road
user chargeswill only generate over the next
ten yearsabout Rs.1, 600 billion
6
, leaving a total
funding gap of some Rs.1, 050 billion - or the
annual equivalent of more than US$2 billion.
Private Highway Finance: Present Status
15. Government of India (GOI). Lessthan
20% of the National Highway Development
Plan (NHDP) projectsare being funded through
private sector participation (PSP) which at
present consistsof the following.
Bui ld O perate Transf er ( BO T)
concessi ons. Nati onal Hi ghways
Authorityof India (NHAI) hasawarded
tolled concessionstotaling Rs.3, 400
crore on highlytrafficked road sections
with relatively low traffic/financial
risks.
A nnui ty concessi ons. NHA I has
awarded 467 km (about 8% percent
of the NHDP) of annuity concessions
amounti ng to Rs. 3, 000 crore for
projectswith generally higher traffic
risks.
Speci al Purpose Vehi cles ( SPVs) .
T he M oradabad Bypass was
constructed through a SPV and
several other proj ects are now
6
Road user charge defined here as(i) Central level cesson fuel and road tolls(ii) State level registration fees, cesson fuel, tolls, permitsand licenses,
finesand penalties, taxeslevied specifically on passenger and goodsvehiclesand the excesspercentage over the average state salestax rate for all
commodities.
l (iii)
Executive Summary
under implementation, including the Jaipur
Bypass Phase I I and some port
connecti vi ty road projects.
16. Based on itsrevenues(Central Road Fund
and increasingly toll revenue) and an implied
G O I guarantee, NHA I has i tself rai sed
substantial funds from the domestic bond
market. To date, NHAI hasraised Rs656 Crore
from two bond issuesin 2000-01, Rs. 804 Crore
through one issue in 2001-02 and Rs. 5, 593
Crore in 2003.
17. G O I has provi ded the followi ng fi scal
i ncenti ves for PSP: ( i ) full and parti al tax
holi days for ten years; ( i i ) tax exempti ons
t o I nf rast ruct ure C api t al Funds or
Infrastructure Capital Companies providing
long-term fi nance for i nfrastructure; ( i i i )
reduced import/excise duty on construction
i nput s; ( i v) reduced st amp dut y on
documents/agreements; and ( v) reduced
State sales tax on constructi on i nputs.
18. State Governments. Some States are
maki ng real progress i n attracti ng PSP i n
the hi ghway sector. M adhya Pradesh, for
example, has entered i nto a number of
maintain and transfer concessions. Andhra
Pradesh, G uj arat, M aharashtra, M adhya
Pradesh, Raj asthan and Tami l Nadu have
all signed BO T concessions. But, the majority
of States have li ttle or no PSP experi ence
and overall progressisvery limited. No State
has a defi ned poli cy for the selecti on and
prioritization of PSP projectsand, in general,
there is no systematic procedure for project
i denti f i cati on and procurement. Road
Development Corporati ons ( RDCs) have
been created i n Andhra Pradesh, G uj arat,
K arnataka, K erala, M aharashtra, and Tami l
Nadu, and Uttar Pradesh i s establi shi ng a
State Hi ghways Authori ty. These agenci es
are expected to attract private fundsthrough
corporate borrowi ng or leveragi ng pri vate
proj ect fi nance agai nst publi c grants. The
corporati ons have clearer obj ecti ves, more
flexi ble staffi ng, and more streamli ned
deci si on maki ng processes than the typi cal
Publi c Work s Department ( PWD) . Thi s
should i mprove the quali ty and ti meli ness
of PSP planni ng and procurement .
However, states need to guard agai nst
creating hidden contingent liabilitiesthrough
these RDCs wi thout consi derati on as to
strengtheni ng the revenue stream f or
repayment of thei r debts.
19. Legislative and Regulatory
Environment. G O I and some States have
already made legi slat i ve changes t o
faci li tate PSP generally and for road sector
PSP development. In parti cular: ( i ) G O I has
amended the National Highways Act (1956)
to permi t BO T proj ects and allow tolls on
both publi c and pri vate funded roads and
( i i ) some States have amended the Indi an
Toll Act ( 1851) to allow the pri vate sector
to levy tolls on State roads and bri dges.
Constraints to PSP Development
20. Indicators of constraints. While there
has been progress i n creati ng a better
enabli ng envi ronment, PSP f i nanci ng
remai ns li mi ted, PSP proj ects have taken a
long ti me to prepare and award, several
proj ects have had to be restructured, and
the value for money of Annuity PSPs (and
the addi ti onal G O I of f -balance sheet
li abi li ti es) has been questi oned.
21. Absence of Reliable Information. In
maki ng PSP deci si ons, potenti al i nvestors
must forecast thei r cash-flows. In turn thi s
requi res reli able dat a on, i nt er ali a,
construction and maintenance costs, traffic
flows, construction history of existing roads/
structures i n the proposed concessi onai re.
Yet, reli able i nformati on i s generally not
avai lable and i nvestors have to rely on thei r
own i nvest i gat i ons whi ch, however
exhaustive, provide only limited information.
Theref ore, i nvestors probably have to
i nclude a very substanti al ri sk premi um i n
their bids.
22. Low Willingness to Pay. Indi an road
users wi lli ngness to pay tolls appears low.
Even though toll levelsare among the lowest
i n the world and represent a fracti on of the
expected vehi cle operati ng cost savi ngs,
their affordability islower than in many other
countri es. Further, as the sector i s heavi ly
taxed, users may be reluctant to pay further
charges i n the absence of substanti ve
di fferences i n servi ce quali ty and greater
transparency i n the overall use of taxes
rai sed from the sector.
23. Dispute Resolution. While subordinate
levels of di spute resoluti on are avai lable,
(iv) l
there remainsa high probability that serious
di sputes wi ll end i n arbi trati on, a lengthy
and costly process. A swi fter, more certai n
dispute resolution mechanism could reduce
the percei ved ri sks for pri vate i nvestors.
24. Additional Constraints at the State
Level. State governments face even greater
constrai nts than G O I : typi cally lower
credi tworthi ness and lower traffi c on thei r
hi ghways. M any states have yet to put the
basic building blocks in place, including not
only the enabli ng framework but also
procurement and contracti ng capaci ty and
a more assured revenue stream to meet
public sector contributions. Considering the
current status of the i nsti tuti onal and
regulatory framework for PSP, the States
may need to be realistic in their expectations
for PSP and probably focus on rehabilitate,
operat e and mai nt ai n concessi ons,
bypasses and/or bri dges as the most vi able
PSP proj ects for the moment.
Foundations for Sustainable Highway
Financing
25. Improving the Information Flow. It
is very difficult to see how rational decisions
are made wi th the present level/quali ty of
i nformati on on hi ghways and hi ghway
f i nance. C omprehensi ve databases on
t raf f i c, t ender rat es, hi ghway asset
condi ti on, etc. would result i n better
planni ng and more accurate tenderi ng,
gi vi ng benefi ts to all parti es the publi c
agency, the pri vate i nvestor and the road
user. M any countri es, both developed and
developi ng, have started to treat roads as a
maj or busi ness and moved to commerci al
account i ng f or road agenci es
7
. Such
accounti ng clari fi es fi nanci al flows and
demonstrates whether the asset base ( the
hi ghways) i s bei ng i ncreased, mai ntai ned
or eroded. At the present time, road agency
budgets seem more desi gned to obfuscate
than reveal. High quality, timely information
i s essenti al for better deci si on-maki ng and
for creati ng fi nanci al transparency. If NHAI
and/or st at e Road D evelopment
Corporationswish to reduce the cost of their
borrowing, facilitate PSP and meet growing
publi c demand for clearer accountabi li ty,
adopti ng a modern accounti ng system that
showsthe economic reality of their business
wi ll be a cri ti cal bui ldi ng block.
26. Establishing National Coordination.
There would be many advantages i f the
poli ci es toward road user charges and
hi ghway f i nance i n general could be
coordi nated between the State and Uni on
governments and between the States
governments. Thi s would ensure that
consi stent pri ci ng si gnals are gi ven to the
transport i ndustry and an effi ci ent fleet
configuration developed. A Strategic Roads
Authority might be the ultimate embodiment
of such an approach; i t could recei ve the
cessand other designated road user charges
and channel thi s fundi ng i n such a way as
to develop a coordi nated approach across
all states. However, at thi s ti me, thi s may
be too radi cal and a more acceptable
approach may be t he creat i on and
mai ntenance of a Counci l of Transport
M i ni sters. Thi s would be si mi lar i n concept
to the European Conference of M inisters of
Transport whi ch has demonstrated that
there can be consi derable benefi t i n j oi nt
action to resolve common problems without
compromising sovereignty.
27. Generating User Acceptance for
Increased Road User Charges. It is almost
i nevi table that road users, whether present
or future, wi ll pay for the costs of the
hi ghway network, i rrespecti ve of whether
the i nvestments are made by the publi c or
private sectors. Road users already pay high
taxes and many may feel that addi ti onal
charges are simply exploiting an easy target
that i s already overtaxed. O ther countri es
face the same i ssues, and many are turni ng
to an approach whi ch combi nes: ( i ) greater
transparency i n hi ghway fi nanci ng and
governance; (ii) greater accountability to the
road users who are fi nanci ng the network;
and ( i i i ) a more busi ness ori ented approach
to the planni ng and i mplementati on of
hi ghway i nvestment and mai ntenance.
28. Central to the approach is often a Road
Fund managed by a Roads Board, outsi de
the tradi ti onal government structure. The
Board advi ses on the level of charges,
recei ves the user charge revenues
7
The physical assetsembodied in the highwaynetwork dwarf those in perhapsanycommercial enterprise in India.
l (v)
Executive Summary
automati cally and di rectly - wi thout the
revenue bei ng routed through the M i ni stry
of Fi nance and Consoli dated Fund - and
t hen buys road mai nt enance and
construction from road agencieson the basis
of approved work programs. Transparency
i s core to the approach; regular fi nanci al
and technical auditsof both the RoadsBoard
and road agenci es are statutori ly requi red
and al l audi t s are publ i shed.
Representati ves of road users and other
pri vate stakeholders are represented, and
i ncreasi ngly these representati ves provi de
not only a maj ori ty of the Board but also
the chai rperson. The M i ni stri es of Fi nance
and Work s/Roads ret ai n i nf l uence
( changes i n the fuel levy or other user
charges have to be approved by the
M i ni stry of Fi nance) but the process i s
st rengt hened by t ransparency and
accountabi li ty i ntroduced by bri ngi ng the
effecti ve consumers i nto the deci si on-
maki ng and moni tori ng process.
Reform to the User Charge Regime
29. Some of the fundi ng gap may be met
by borrowi ng or pri vate sector fi nance but
there i s sti ll a pressi ng need to restructure
user charges to remove the economi c
distortionsand raise revenue for full highway
mai ntenance, whi le conti nui ng (or perhaps
i ncreasi ng) hi ghway i nvestment. G O I may
consider increasing the fuel cessto Rs. 3/liter,
the average level i n other developi ng
countri es. States may consi der dedi cated
fuel levi es of perhaps Rs. 0. 5 1. 0/li ter. The
addi ti onal revenue should be dedi cated to
hi ghway mai ntenance. Addi ng Rs. 2. 0/li ter
i n hi gher cesses would i ni ti ally i ncrease the
variable costs of trucks by 5 6% , and their
total costs by 3 4% . O ver ti me, however,
trucki ng costs would be reduced by the
ensuing better highway maintenance. While
the current hi gh i nternati onal oi l pri ce
compli cate thi s acti on, i t does not rule i t
out.
30. M ore wi de-reachi ng reforms should be
based on a comprehensi ve study of road
costs. The study should establi sh the most
practi cal and economi cally effi ci ent means
to relate user charges to road costs. Such
means mi ght i nclude: ( i ) i mposi ng a hi gher
cess on diesel; (ii) restructuring annual fees,
especi ally for trucks; ( i i i ) reduci ng user
charges on buses; ( i v) extendi ng tolli ng at
low rates but to more of the hi ghway
network; ( v) pi loti ng congesti on chargi ng;
and (vi) assessing the utility of truck weight/
distance charging. Road user cost and charge
studi es should be repeated peri odi cally and
made publi c.
Strengthening PSP for Highway
Development
31. Justification for PSP. M any expect
pri vate fi nance to meet much of the future
highway investment; but there hasbeen little
analysi s of what modes of PSP would result
in better-value highways. It isrecommended
that a speci al Comptroller and A udi tor
General efficiency/performance audit of the
value for money from the vari ous PSP
models be undert ak en, pri or t o t he
concessi oni ng of the next 10, 000 km of
nati onal hi ghways. Indi vi dual projects need
due di li gence by the cli ent as well as the
i nvestor, to ensure that value i s obtai ned
and that consumers are protected. Several
governments have i ntroduced detai led
Public Sector Comparator processes; without
such process, a hi gher probabi li ty of
unf avorable outcomes i n PSP can be
expected.
32. Project vs. Corporate Approach to
PSP. The progress made under the PSP
approach has been achi eved at a relati vely
hi gh ri sk and cost to the Government. Wi th
the exception of links having captive traffic,
for whi ch the proj ect fi nanci ng approach i s
sui ted, i t i s worth explori ng whether
corporat e f i nanci ng, based on t he
hypothecated cess and uniform tolls, would
attract the required funds and minimize the
hi gh traffi c ri sk premi um normally charged
under PSP.
33. With a securitized revenue stream from
the cess and completed toll roads, NHAI
could rai se further debt or enter i nto non
toll based Design Build Finance and O perate
(DBFO) agreementswithout GOI guarantee
8
.
Alternatively, the private sector could also be
successfully utilized through maintenance
concessionsor long-term performance based
maintenance contracts.
8
BO Tscould still be used for linkswith high traffic and limited traffic risk, such asmajor bridges
(vi) l
34. Thi s corporate approach would: ( i )
di versi fy the traffi c ri sk across the whole
network ; ( i i ) allow cross-subsi di zati on
bet ween li nk s; ( i i i ) i mprove t he
understandability of the toll system for road
users; ( i v) gi ve economi es of scale; ( v)
ensure uni formi ty of servi ce standards; ( vi )
allow for the i ncremental i ntroducti on of
tolls; and ( vi i ) gi ve greater i ncenti ves to
manage the whole network effi ci ently to
minimize costs and maximize revenues. GO I
could provi de concessi onal fundi ng for
necessary but fi nanci ally unvi able proj ects.
NHAI would have several financing options,
including (i) issue non GO I guaranteed debt
on the strength of i ts future anti ci pated
revenues; (ii) enter into non toll based DBFO
contracts, usi ng annui ty, lane avai labi li ty or
acti ve management payments; or ( i i i )
develop hybri d f i nanci ng usi ng a
combi nati on of annui ty and i ncremental
shadow toll payments where only some
traffi c ri sk i s passed to the pri vate sector.
35. The Regulatory Framework. If DBFO
or toll based concessi ons are to be a maj or
part of the hi ghway sector, G O I should
establish a regulator, similar to the Telecom,
Insurance and Energy sectors. At the State
level, unless the GO I regulator can be used,
regulati on through contract by a di spute
resoluti on board may be appropri ate.
36. Additional State Actions. G O I and a
few states have establi shed the broad
i nsti tuti onal and legal frameworks for PSP;
but most States conti nue wi thi n the PWD
approach. They need to make substanti al
changes, i ncludi ng ( i . ) ref orm or the
replacement of the tradi ti onal PWD, ( i i )
adoption of a corporate approach with Road
Development C orporat i ons/Hi ghways
Authori ti es and dedi cated road funds wi th
hypothecated revenues from road user
charges; ( i i ) adopti on of a PSP framework
and enactment of accompanyi ng laws.
l (vii)
Executive Summary
The Importance of Roads and Road
Transport
1. While the railwaysremain important for
some bulk commodi ti es and i n some
passenger markets, Indi a i s i ncreasi ngly
dependent upon road transport. Rai l traffi c
conti nues to grow, but i ts share of frei ght
and passengers has been falli ng for many
years. The growth in road transport hasbeen
accelerating; during the 1990s, the national
vehi cle fleet grew from 21. 3 mi lli on to 48. 4
mi lli on. Faster economi c growth, especi ally
i n non-tradi ti onal sectors, and hi gher
personal incomeswill undoubtedly continue
the growth in demand on the road network.
However, unless maj or reforms as well as
i nvest ment are made, I ndi a s road
i nfrastructure wi ll be an i mpedi ment to
economi c growth and soci al development.
The Indian Tenth National Plan (2002-2007),
proj ects a G DP growth rate of 8% per
annum and an industrial growth of 10% per
annum and identified transport infrastructure
asa major constraint on accelerated growth.
2 India has 3. 5 million km of roads which,
by i nternati onal compari sons, provi des a
relati vely dense network. The maj or i ssues
i n the sector are not pri mari ly the length of
the network but i ts low capaci ty and poor
quality.
Duri ng the 1990s, the nati onal
hi ghway network expanded from
33, 700 km to 58, 100 km
9
and,
though it constitutesonly 2% of the
network, it carriesabout 45% of all
road traffic. M ost of the network is
still two lane, providing low service
standards and slow vehicle speeds.
M any NH have simply be reclassified
from lower categoryroadswithout any
upgrading.
At the other extreme, about 40% of
vi llages are not connected by all-
weather roadsand have thuslimited
access to economi c and soci al
infrastructure and opportunities.
INTRODUCTION
Road maintenance throughout the
network isdismal, contributing to both
poor pavement condition and the loss
of all-weather accessibility.
3. Therefore, India combinesboth the need
to increase very substantially the maintenance
of a very large network and the need to
provi de a hi gh quali ty hi ghway system,
sufficient to support the development of a
rapidly developing economy.
Highway Sector Financing Issues
4. G overnment expendi ture on roads i s
significant, presuming 12% of capital and 3%
of total expenditure; but road maintenance is
grossly under-funded with only one third of
needsbeing met. The Union Government (GOI)
recogni zes the defi ci enci es i n the road
network. The Tenth National Plan hasassigned
a hi gh pri ori ty to the Nati onal Hi ghway
Development Plan (NHDP) for the construction
of a Golden Quadrilateral of high capacity, high
quality highways, linking the four major cities,
aswell assimilar highwaysalong North-South
and East-West corridors. Verylarge investments
are also envisaged on State highways. The
capital funding needsare immense:
over Rs.225, 000 crore (US$50 billion)
on hi ghway i mprovements i n the
period to 2011; and
10
substanti al i nvestment ( about Rs.
70, 000 crore or US$15. 6 bi lli on) ,
through the Pradhan M antri Gram
Sadak Yojana (PM GSY), to connect
villages
5. In addition, annual expenditure of about
Rs. 7, 000 crore is essential to maintain the
170, 000 km of National and State Highways
and further funding isrequired to maintain the
urban networksand district and rural roads.
All these expenditures have to be financed
within a constrained fiscal environment in
whi ch the combi ned G O I and State
Government deficitstotal about 9.5% of GDP.
There are major issuesasto who will finance
these expendituresand how the financing will
be structured.
9
Recentlya further 7, 000 km have been reclassified.
10
Vision 2021
Introduction
l 1
6. It isnot only the level of highway funding
which isimportant but also the meansbywhich
it isfinanced. The financing arrangementsfor
the highwaysector have significant implications
for overall government expenditure, the role
of private finance as well as having major
impactson the efficiencyof the transport sector
and thusindirectlyfor the efficiencyof the entire
economy.
Approaches to Highway Financing
7. The management and financing of roads
isnot a new issue for governments. The Roman
Emperorsinvested heavily in road construction
and maintenance throughout Europe and the
M i ddle East. However, wi th the growi ng
transport dominance of the motor vehicle,
roadsand highway finance hasassumed major
importance and a number of approacheshave
been adopted.
8. Traditional. In thisapproach roadsare
treated much like public goodsand financed
from general government revenue. There is
little connection between the costs of road
provision and the taxesor chargespaid by road
users (though fuel is often heavily taxed for
general revenue purposed), and no attempt
at direct road pricing.
9. Commercial. I n the commerci al
approach, governmentsdeal with roadsasa
business sector. Roads are treated as capital
assets, commercial accounting isapplied and
usersare charged, either directly or indirectly,
for their use of the roads. Road transport
remainsa source of general revenue, but taxes
are desi gned to mi ni mi ze di storti ons to
transport patternsor choices. In some countries,
road finance isbeing separated from general
government expendituresand road usersare
increasingly involved in decision-making.
10. Indian. The traditional approach largely
persistsin India, although a national and some
state fuel cesseshave been introduced, tolls
are increasingly applied and substantial private
sector financing isbeing sought. India may be
early i n a transi ti onal stage between the
traditional and commercial approaches. Yet,
the present structure of financing contributes
to the under-funding of road maintenance, a
distorted vehicle fleet, perverse incentivesfor
traffic allocation between road and rail, and
substanti al economi c losses. A coherent
structure for highway financing should have
high priority; otherwise the distortionsand costs
to the economy will rise asoverall expenditure
on roadsincreases.
The Purpose of the Report
11. Thi s report i s desi gned to provi de
information and advice to the Indian Union
and StatesGovernmentson the principlesand
practicalities for establishing a sound and
sustainable system of highway financing.
The report revi ews the economi c
principlesfor establishing efficient and
equitable road user charges (road
pricing), and examinesthe potential
mechanismsfor charging road users.
Present road taxati on i n Indi a i s
assessed i n the li ght of these
consi derati on and the levels of
highway funding required to meet
government objectives.
The report revi ews the potenti al
contribution of private sector finance
to the sector and assessesthe present
use of pri vate f i nance and the
alternative possibilitiesfor utilizing the
private sector in the financing and
management of the network.
The report also examines the need
for an agenda of sector reform which
addresses both the fi nanci al and
institutional frameworks needed to
achieve network sustainability and
publi c acceptance of hi gher user
charges.
12. The report isspecifically concerned with
the main highway network (defined as the
170, 000 km of National and State Highways)
which carry the great majority of vehicle-km.
There isalso a very large network of rural roads
which carry little motorized traffic but which
providesbasic accessfor the rural population
and facilitatesthe administration of the country.
These rural roads are crucial to the social
infrastructure of the country but their financing
raisesissuesoutside the scope of thisreport.
These roads generate major benefits but, in
view of their low traffic levels, it would be
inconceivable to finance their construction and
maintenance from road usersalone.
2 l
Objectives for Road User Charging
1. Roadshave often been treated aspublic
goods, financed from general taxation rather
than through cost-related charges. In this
chapter, the objectivesof road user charges
are considered and their implicationsfor the
levels and structure of taxes whi ch are
generally used as proxi es for di rect road
charges
11
.
2. Efficient allocation of resources
between sectors. Economi c effi ci ency
requiresthat the user of resourcespaysthe
marginal social costsassociated with the use
of those resources. If the user ischarged less
than these costs, then the cost of resources
used wi ll be greater than the benefi ts
generated and the resourcescould be better
used elsewhere. Conversely, if the user is
charged more than the marginal costs, then
demand will be lessthan optimum and overall
benefi ts could be i ncreased by i ncreased
resource use. The use of the resourcesshould
only be free in the case of pure public goods
for which the use by one consumer has no
impact on the availability of the resource for
other consumers.
3. For roadsand road transport, thismeans
that no category of vehicle should pay less
than the sum of the following.
The economic cost of the fuel and
the other resources consumed i n
mak i ng the tri p. These may be
termed the private marginal costsof
using the road network.
The marginal road maintenance cost:
additional traffic, especially heavy
commercial traffic, increases road
deterioration, reducesthe pavement
life and increases the cost of road
maintenance and renewal.
The margi nal envi ronmental cost:
increased traffic raises the levels of
vehicle emissions, noise pollution,
etc. These costsare not borne by the
road user but by society, mainly those
1. PRINCIPLES OF A USER CHARGE REGIME
people living and working close to
the roads.
The marginal congestion cost imposed
on other vehicles: as vehicle flows
increase, vehicle speedsdecline. The
individual road user considersonly his/
her personal time and cost; but their
use of the road may well increase
the travel time and costsof all users
of that road.
4. There are recurrent costsassociated with
road provision and maintenance that are not
related to use and on whi ch the level of
vehicle flow hasno impact: weather and time
related road maintenance for example. Such
costsshould be financed by the meanswhich
causes the least economi c and equi ty
distortion.
5. Whether road users should also be
charged the capi tal costs of network
expansion/enhancement, in response to traffic
growth and heavier vehicles, what might be
termed the long-run marginal cost of the
network, raisesfurther issuesand isdiscussed
below.
6. Efficient use of resources within the
road sector. Another important efficiency
dimension in structuring a charging system is
to avoid significant distortionswithin the sector.
In the transport sector, it isimportant to avoid
three distortions.
Distortion between vehicle classes
and their users: chargeson different
categori es of vehi cle should
appropriately reflect the differences
in the coststhat they impose on the
system.
Di storti on between modes:
inappropriate charging structureson
di fferent transport modes, whi ch
compete closely for the same types
of passenger and freight traffic, can
have a marked negative impact on
traffi c allocati on and economi c
eff i ci ency. Thi s i s a si gni f i cant
distortion in India.
11
For a more detailed exposition of thisissue see Efficient Transport Taxesand Charges, ECM T, 2000, also available at http://www/oecd. org/cem/
Principlesof A User Charge Regime
l 3
Distortion between locations: thiscan
occur, i f the chargi ng/fi nanci ng
structure in some statesissignificantly
different to those in others. Thismay
distort decisions on the location of
economi c acti vi ty or vehi cle
registration; but itsimpact isprobably
lower than for the first two distortions.
7. Equity. There are several dimensions of
equity that are or may be relevant to the
structuring of a road user charging system.
Horizontal equity: vehicleswithin the
same category, imposing the same
costson society, should pay the same
level of charges. Fuel tax isequitable,
i n thi s regard, as the payment i s
generally proportionate to road use.
Di fferent annual vehi cle charges,
depending upon the place of licensing
asin India, may not be.
Verti cal equi ty: charges pai d by
different vehicle categories should
vary in proportion to the costs that
the categoriesimpose. Fuel tax isnot
equi table; the i ncrease i n f uel
consumed, as vehi cle wei ght
increases, isnot proportional to the
increase in road damage imposed.
Insofar asheavier vehiclesuse diesel,
a rough degree of vertical equity may
be achieved by imposing relatively
heavi er taxes on di esel than on
gasoline.
Distributional equity: thisisnormally
interpreted asrequiring charges/taxes
to be progressive, with higher income
users payi ng hi gher charges. Thi s
would suggest hi gher taxes on
gasoline which, in low and medium
income countries, isused in the cars
owned by the relatively rich. Equity
considerations may be particularly
i mportant to fi nance those costs
which are not directly attributable to
i ndi vi dual vehi cles. Di stri buti onal
equi ty, however, can also be
interpreted asrequiring road usersto
fund all the cost associated with the
provision of roads.
8. Hence, the implicationsfor policy, when
considering equity, are complex.
9. Environment. Particularly in urban areas,
road transport can be a significant source of
ai r polluti on. A bsolute tax levels, and
differential taxes on specific fuels, can be
important instrumentsin supporting policiesto
reduce total traffic and encourage the use of
less polluting modes of transport, transport
technologiesand/or fuels, such asCompressed
Natural gas(CNG).
The Costs To Be Covered by Road User
Charges
10. There isa broad consensusregarding the
costs that should be covered by road user
charges wi th the excepti on of whether
investment in new or improved roadsshould
be financed exclusively by present road users.
11. Full road maintenance costs. For
efficiency reasons, as discussed above, all
vehicles should be required to meet the full
costs of road mai ntenance whi ch are
attributable to their use of the road network.
Such maintenance includesnot only the day-
to-day routine maintenance (e. g. repairing
potholes) but also the periodic resealing and
strengtheni ng of pavements. Some
maintenance costsare, however, not directly
attributable to vehicle use but are caused by
non traffic related degradation. However, it is
now generally agreed that vehicles, asa whole,
should meet the full costsof road maintenance,
assuming that all the roads make economic
sense.
12. I n pri nci ple, charges should be
disaggregated by road type or even road
section but, in practice, this is not possible.
The road sectionsand typesof primary road
j oi ntly provi de a transport system: i t i s a
reasonable approxi mati on to make cost
recovery at the level of the aggregate primary
network. When considering the costs to be
recovered, it isimportant to remember that it
should be the costswhich are imposed on the
roads, and not the expendi tures on road
maintenance asthese may be inadequate to
remedy the level of wear and tear and the
quality of the roadsmay thusbe deteriorating.
13. There are some costsof road maintenance
which are not variable with use and cannot
be stri ctly attri buted to speci fi c vehi cle
categories, but costsneverthelesswhich need
to be financed. Two broad approachesmight
4 l
be adopted to finance these non-attributable
costs.
( a) Equity distribution approach: Higher
income groups, primarily car owners,
should fi nance the costs through
higher charges (higher charges on
gasoline) as they benefit from the
road network and can afford to pay
higher charges.
(b) Economi c pri ci ng approach: Fi xed
costsshould be financed by charges
which impose the least distortion on
the use of the road network. Such
chargescould be set by:
An annual vehicle license fee:
once paid, there would be no
i mpact on the i ndi vi duals
decisions as to whether to use
the network, the cost of the
margi nal tri p would not be
changed.
Charges establi shed through
Ramsey pri ci ng pri nci ples: to
minimize the impact on total use,
the additional chargesnecessary
to cover the fixed costs should
be set in inverse proportion to the
demand elasticity. Higher charges
would thus be established for
those vehicle categorieswith the
lowest travel demand elasticity.
14. System administration costs. The costs
involved in managing road use (traffic police,
traffic signaling, etc), in collecting the various
user chargesand in enforcing their payment,
should also be met by users. Where
admi ni strati ve servi ces ( such as li censi ng,
emissionstesting, etc) impose costs, these costs
at least should be recovered as a minimum
directly from the users concerned through
vehicle related fees.
12
15. Environmental and other externality
costs. In pri nci ple, the monetary cost of
environmental impactsshould also be included
in the costswhich should be recovered from
users. These externalitiesinclude global and
local air pollution, and road accidents. Asfar
asenvironmental externalitiesare concerned,
the health impact of local air pollution isusually
considered to be the most significant. These
can be roughly quantified, using dose/response
relationships and then monetarized using
stated preference evaluation methods for
valuesof life, lost output and medical costs
for morbidity.
13
16. Where the fuel tax includesan element
for environmental costs, the revenueswhich
thi s generates should, i n pri nci ple, be
dedicated to compensating those who suffer
from the impacts. In practice, because no
di rect compensati on mechani sms are
available, the second best would be to devote
the revenue to reducti ons i n the level of
environmental pollution.
17. Asfar asaccidentsare concerned, if there
were a well functi oni ng i nsurance and
compensation system in existence, it would
be reasonable to assume that accident costs
were being fully covered. However, where
medical costsare not paid for by the parties
to accidents, and where those are costsborne
by the state or by the injured parties, the
excessof total accident costsover insurance
payments should, i n pri nci ple, also be
recovered from road users. These revenues
should be transferred to the partiesbearing
the costs. In practice, these calculationsare
very difficult to make, so it ismore a matter
of political judgment than scientific calculation
asto what sumsshould be transferred.
18. Congestion costs. Road congesti on
pri ci ng i s now bei ng gi ven much wi der
consideration; Singapore hashad congestion
pricing for many years, and London introduced
a central area congestion charge in 2003. In
many countries, congestion pricing is only
relevant to urban and suburban areas.
However, congestion isalso a phenomenon
whi ch can be experi enced on i nter-urban
roads. In the UK and USA, for example, several
motorwaysnow experience congestion. M ore
particularly, in India, the low capacity of the
inter-urban highway network meansthat
12
These chargesneed not necessarilybe restricted to covering merelythe administrative costsif theyhappen to be an effective and efficient instrument
for allocating the fixed costsbetween usersin a non-distorting way, or to compensate for defectsin the precision of chargesfor the coststhat are variable
with use. For example, in the absence of anybetter wayof ensuring that heavygoodsvehiclespaytheir proper share of road maintenance costs, the
licensing dutystructure maybe set so that, on average, heavygoodsvehiclesdo payadequately.
13
Guidance on how to do this, and what information isavailable to assist it are to be found in the World Bank draft M anual on Air Pollution from M obile
Sources to be published later thisyear.
l 5
14
Efficient Transport Taxesand Charges, O ECD, 2000
vehicle speedsare low, service standardspoor,
and addi ti onal vehi cles wi ll reduce these
speeds/standardseven further. M uch of Indias
main road network suffers from a level of
congestion, and slow moving vehiclesimpose
significant costson other road usersand should
be charged for such costs.
19. Capital investment costs. The
treatment of investment costs for new or
improved roadsistheoretically more difficult.
It is agreed that road users should not be
charged for the vast i nvestment that has
already been made in the road network. It is
a more a question of whether road usersshould
pay for the investment which is now being
made i n expandi ng and i mprovi ng the
network; i.e. whether road usersshould pay
simply the short-run marginal costsor a longer
run margi nal costs i ncludi ng the capaci ty
expansion cost.
20. A normal business, expanding too rapidly
to finance capital expansion from revenues,
resorts to borrowi ng. The annual capi tal
charge may then be set to service the debt
on the capital investment. Where the road
system iswell established, and itssize isnot
growi ng rapi dly, current year capi tal
expenditure and the appropriate servicing
charge for capi tal may be approxi mately
equal. That isthe presumption made in road
cost accounting in some of the industrialized
countriessuch asthe United Kingdom.
21. In periods of very rapid growth of the
capital in the network, as envisaged in the
next decade in India, the annual investment
costsare likely to exceed the correct capital
charge. Trying to recoup these capital costs
from current revenue is likely to inhibit the
desired rate of investment aswell asimpose
substantial costson road users. Furthermore,
while the efficiency objective requiresthat all
categoriesof userspay at least the marginal
social costsof their use of roads, it doesnot
necessarily require that the full current year
costsof investment expendituresbe recovered
from current users; thiswould put the burden
of a long-term strategy excessi vely and
unnecessari ly on the current generati on.
Hence, in accordance with normal commercial
principles, the annual servicing charge on the
capital employed should be recovered from
users, and not the current years capi tal
expenditure. However, if the political decision
ismade to raise capital finance from vehicle
related charges, then thisrevenue should, as
far aspossible, be raised from vehicle related
charges(based on attributable costs) with a
zero marginal tax impact.
22. A recent European C onf erence of
M inisters of Transport report analyzed this
complex issue
14
. Itsconclusion wasthat 100%
coverage of infrastructure expenditures by
transport user charges alone i s not an
appropriate basis for ensuring efficiency. In
the rail sector, increasing returnsto scale mean
that margi nal soci al costs wi ll be below
average costs and transfers from general
taxation will be required to cover total costs.
In contrast, in the road sector, marginal social
Figure 1.1: Tax/Charging Instruments Applied to the Road Sector
6 l
costsmay vary greatly depending on the level
of congestion and other externalities. Hence,
marginal social cost pricing in the road sector
may result in surplusrevenuesin some urban
areas ( of the order of 150% ) but under
recovery in rural areas.
Suitable Tax and Charging Instruments
23. A range of instruments has been used
internationally to tax/charge users for road-
related costs. A n i mportant def i ni ng
characteristic of these chargesistheir proximity
to the point of use the directness of the
tax. The range of instruments, their prevalence
internationally, and a rough categorization by
directnessisshown in Figure 1.1. In general,
for practi cal and poli ti cal reasons, most
countri es sti ll use relati vely i ndi rect tax
instruments; however, this is changing as
technology hasdeveloped and public pressure
hasgrown to link road chargesmore directly
with use.
24. As fuel taxes, annual license fees, and
tolls are likely to form the backbone of the
revenue stream for the highway network in
the future, they are now explored in more
detail. In addition, a brief description isalso
given of some new user charging initiatives
that have been developed to overcome the
di sadvantages of previ ous chargi ng
instruments.
25. Fuel taxes. Both developed and
developing countriesrely on fuel taxation as
the major source of taxation to finance road
sector needs. Fuel taxation is also a major
source of general government revenue. In
India, gasoline, and lessso diesel, are already
subj ect to hi gher tax rates than other
commodities.
26. The retail fuel pricesfor motor spirit and
diesel, in different countries, are given in
Annex 1. Countriescan be broadly grouped
i nto four categori es wi th respect to fuel
taxation:
i . Oil producing countrieswith
very low pri ces or pri ce
subsidies(Egypt, Indonesia,
Iran, Nigeria);
ii. Countries with low overall
taxation rates(e.g. USA, an
average tax of 10 US cents
per liter);
iii. Countrieswith medium level
of taxesof 10 - 30 US cents
per li ter ( Indi a and many
other developing countries);
and
iv. Hi gh pri ce countri es wi th
taxes ranging between 60
centsto 110 centsper liter
(mostly EU and Japan).
27. Fuel tax as an i nstrument i n a well
structured road tax regi me has many
attractions.
It is fiscally efficient (cheap to
collect with low evasion). It can
be collected at the refinery and/
or point of distribution and good
records can be maintained to
ensure transparency.
Limited impact on demand due
to low price elasticity.
Relatively progressive as travel
demand isusually income elastic.
Reasonably good measure for
di stance related costs as fuel
consumption ishighly correlated
with the distance traveled; thus
reasonably fai r for allocati ng
vari able costs wi thi n vehi cle
categories.
Correlated with environmental
damage; global warming effects
are fairly directly proportional to
the amount of fuel consumed.
Where di f f erent f uels have
different environmental impacts,
e. g. emi ssi ons of parti culate
matter, di fferenti al levels of
taxation can be levied.
28. However, fuel tax, especially on diesel,
hassome major limitationsasan efficient road
user charge.
Fuel consumption doesnot vary
proporti onally wi th vehi cle
weight. Fuel taxation does not
accurately reflect road damage
costs and heavy vehi cles are
relati vely under-charged. Thi s
may adversely affect the choice
of vehicles.
l 7
15
Newbery, Hughes, Peterson and Bennathan, Road Transport Taxation in Developing Countries. The Design of user chargesand Taxesfor Tunisian, World
Bank Discussion Paper 26, 1988.
16
The annual UK license fee for a 40 ton/5 axle vehicle iscurrently3, 950: the fee for a 44 ton/6 axle vehicle is2, 950
17
Shadow tolls: concessionsare awarded to the private sector (e.g. in the UK in the early1990s) to build and maintain roadswith government paymentsto the
concessionaire based on the trafficusing the road. Such shadow tolls combine the advantagesof transferring some trafficrisk to the concessionaire while
avoiding the deterrence to trafficand other practical and political difficultiesand costsin imposing tolls. Shadow tollsshould not be confused with real tolls;
theygenerate no additional revenue and hence do not contribute to solving the financing issue. Theyare onlya contractual meansof determining payments
between an owner and concessionaire.
There can be fuel substitution or
adulteration
15
. If kerosene prices
are kept low for social reasonsit
may be added to diesel, with
adverse environmental and fiscal
consequences. One estimate of
substitutability, between fuels,
and between fuels and other
i nputs, suggests that the dead
wei ght tax loss ( i . e. what i s
l ost i n excess of what the
G overnment recei ves) may
amount to over 50% of the tax
revenue. M uch smaller dead
weight lossesare estimated for
taxeson vehicles, spare partsand
tires. Diesel and close substitutes
have usually to be taxed at
similar ratesto avoid widespread
fuel substitution or adulteration.
About 46% of diesel in India isconsumed
outside the transport sector. Non-transport uses
of diesel should normally not be charged for
highway use but exemptionsare difficult to
monitor and enforce effectively.
29. There are clearly limits to the levels of
tax that can be efficiently levied on diesel.
30. Annual vehicle licenses. M any countries
use annual license fees as both a policing/
control measure and as a means to
supplement fuel taxesfor road user charging.
The great advantage of vehicle licensesisthat
they can discriminate within vehicle categories
as well as between vehicle categories. They
can, for example, discriminate within the car
category by weight or power, and within the
heavy commercial vehicle category by weight
and/or axle configuration. Vehicle licensesare
thusa very flexible instrument for road user
charging.
31. License feesare often used to recover the
fixed costsof the network aswell asthe costs
of road damage that heavy vehiclesinflict but
are not adequately recovered by fuel and other
charges. The feescan thusbe set to encourage
the use of larger, multi -axle commerci al
vehi cles whi ch normally cause less road
damage
16
. Li cense fees are fi xed charges
which isan advantage for the recovery of fixed
costsasthey do not influence the decision as
to whether to make particular trips. On the
other hand, the fixed nature of the charge
makesannual license feesan imperfect charge
for the recovery of variable costs. The fees
discriminate against those vehicleswhich have
low total utilization, often old vehiclesmaking
short trips, though thismay have the benefit
of promoting the renewal of the vehicle fleet
with newer, more efficient and lessdamaging
vehicles.
32. While not ideal, annual license fees are
used very widely to recover road damage
costs. They are more costly to collect but are
already generally required for registration and
vehicle inspection purposes. Very high license
feesmay, however, result in evasion and the
use of counterfeit documentation.
33. Road tolls. There are two main economic
constraintsto implementing a toll system First
the costsof constructing and then operating
a road toll system are quite high and roads
with low traffic are not suitable for tolling.
Generally, traffic flowsof about 5, 000 PCUs/
day are required to make tolling financially
vi able, but most of the nati onal hi ghway
network ( 54, 000k m) already meet thi s
criterion. Second, tolls deter marginal users
and/or encourage the use of non-tolled
routes
17
. Normally, traffic diversion to non
tolled alternate routes should not be more
than about 15% . Any toll, above short-run
marginal cost will generally result in some
economic cost. However, in aggregate, the
imposition of higher toll levelsmay increase
total economic welfare in three circumstances.
Where the toll isnecessary to finance,
or accelerate, the provi si on of a
facility which would not otherwise be
provided. Benefits of this type are
particularly important in India where
demand i s growi ng rapi dly but
general taxation/road user charges
are insufficient to meet the desired
level of investment.
8 l
Where the tolled faci li ty i s i tself
congested and the toll secures a
more opti mal level of uti li zati on
(fewer users, moving more quickly).
These benefitsarise asa consequence
of deterring some trips with a net
margi nal value ( above pri vate
operating and time costs) less than
the toll and hence i mprove the
performance of the system for those
tripswith higher values.
Where the whole system, including
the tolled road and alternati ve
untolled routes, iscongested. The tolls
sort the traffic so that the vehicles
with the highest value of time savings
use the faster tolled route, while those
with a lower value of time, and hence
a lower willingness to pay, use the
untolled route. In such circumstances,
often in urban areas, overall user
chargesmight be increased to reflect
the prevailing congestion.
34. Where a new toll fi nanced route i s
provi ded, whi ch would not have exi sted
without tolling, both the traffic on the tolled
route and those users remai ni ng on the
untolled route benefit, when compared with
the si tuati on of only the untolled faci li ty.
However, when an existing route is tolled,
without any extra capacity or service quality,
userswith higher valuesof time will benefit
and users with lower value of time will be
worse off.
35. When tolls are i mposed on exi sti ng
faci li ti es, i n addi ti on to exi sti ng levels of
taxation, they will obviously increase the total
revenue raised from road users. When the
additional revenue is used to improve the
network (additional capacity and/or better
maintenance) road users may still be better
off than without the tolls. Thisimpact isoften
not recognized by road usersand governments
need to ensure that when i ntroduci ng a
general toll regime on major links, sufficient
attention isgiven to explaining to road users
how the toll hasbeen set, how revenueswill
be used and what benefitswill accrue.
36. What level of toll isacceptable to users ?
The answer is often given in terms of the
proporti on of the net benefi ts whi ch are
captured as tolls. Another answer can be
sought by considering the motivations for
choi ce. The users of new tolled faci li ti es
demonstrate, by their choice of route, that
they value their time and other savingsmore
than the cost of the toll. Conversely, those
who choose not to use the tolled road are
demonstrating that they value the potential
benefitslessthan the cost of the toll (though
they may still benefit from lower traffic on
the untolled road and thusincreased speeds
and higher service standards). Theoretically,
social welfare will be maximized when the
toll is set at the level which maximizes the
total net benefits to both sets of users plus
the profit to the operator.
37. Weight/distance charges. A serious
deficiency in the road tax structure existsin
relation to heavy commercial vehicles. The
road damage costs rise more steeply with
weight than fuel consumption and thusthe
tax/chargeson the fuel used. M any countries
compensate with annual vehicle fees, but
these are imperfect charges for use-related
costs. A more effi ci ent soluti on i s the
introduction of a weight-distance charge for
heavy goodsvehicles. Thistype of instrument
hasbeen used effectively in Switzerland and
New Zealand (see Box 1.1), isto be introduced
in Austria in 2004 and the United Kingdom in
2006. Germany had hoped to have its GPS
based wei ght/di stance charge system
operational in 2004
18
. The fact that a weight-
di stance charge appli es only to heavy
commercial vehiclesmakesit lessvulnerable
to fraud and corruption, especially if associated
with very heavy penalties.
Charging Structures Effectiveness vs.
Efficiency Trade-off
38. The tradeoffsto be considered in relation
to the use of wei ght/di stance charges
represent an example of a broader problem:
striking a balance between the practical and
the theoretically efficient. Thisisvery important
when designing a robust road user charge
system; simple structuresease administration,
reduce admi ni strati ve costs, reduce tax
evasion, and lower the costsof compliance.
Complexity encouragesevasion, lowersthe
18
Itsintroduction wasinitiallydelayed to 2004, bythe failure of the system to meet itstechnical specifications. Notice of contract termination hasrecently
been issued to the contractors. Germanystill intendsto proceed with some form of weight/distance charge system.
l 9
Box 1.1 Weight/Distance Charge Systems
New Zealand: the low technology route
All vehicles with a gross laden weight in excess of 3. 5 tones must pay the distance charge. Distance licenses
are purchased in multiples of 1, 000 km. Those vehicles paying the distance charge are classified according to:
(i) whether the vehicle is powered or un-powered (trailer); (ii) the number of axles on the vehicle, and (iii) the
number of tires per axle. A license for a two axle truck (six wheels), with a permissible gross laden weight of
12 tones, is $161. 05/1000 km. Licenses must be carried on the vehicle and displayed on the passenger side
windscreen. Vehicles with a gross laden weight in excess of 3. 5 tones must be fitted with an approved hub
odometer ($35) to record the distance traveled. The revenue goes to the National Roads Fund. The system
is administered by the Land Transport Safety Authority and enforced by the New Zealand Police. Revenue in
FY2004 is expected to be $634 million.
Switzerland: the high technology route
In 2001, Switzerland introduced a Heavy Vehicle Fee (HVF) system for all domestic and foreign vehicles. The
HVF has many objectives, including to (i) internalize the external costs from freight transport (ii) finance large
scale railway projects and (iii) encourage the transfer of goods from road to rail.
Fees are determined on a tone-km basis and also vary according to the emission category of the vehicle, with
the average rate currently as 1. 68 centimes (Rs 0. 54) per tone-km. The fee collection is based on the principle
of self-declaration and usesDedicated Short Range Communication technology. For domestic vehicles, installation
of an on-board unit (O BUs) ismandatory. For foreign vehicles, installation of O BUsisoptional. Foreign vehicles
can also pay using a ticket at self service stationsat variousentry and exit pointsto Switzerland. Currently the
Swiss O BUs have inter-operability in Austria and future inter-operability is planned in France.
The total i nvestments by the Swi ss authori ti es amounts to 160 mi lli on euros. The operati ng costs for the
system are around 16 mi lli on euros per annum. Total collecti on costs amount to 4-7% of revenues. Net
revenuesin 2002 were 500 million euros. Thisfigure isexpected to double to 1 billion eurosfrom 2005, when
increased tariffs come into force. High emission trucks are being replaced with those conforming to latest
pollution norms. The long run trend of a constantly growing number of lorries on the roads has now been
broken. The effect on consumer prices is negligible.
Source : http://www. are. admin. ch/are/en/verkehr/lsva/
http://www. transfund. govt. nz;http://www. ltsa. govt. nz
probability of detection and reducestransport
revenue collecti on
19
. Yet, there are also
substantial benefitsto charging close to the
point of use; thisallowspricing signalsto be
perceived more easily and more directly by
road users and enhances the incentives for
19
The Administration of Road User Taxesin Developing Countries, Bahl R, World Bank Working Paper, 1992
rational choice in travel demand. There isthus
a tradeoff between imposing charges that
closely reflect the social marginal cost of use
(and are perceived by usersasreflecting the
coststhey impose) and using instrumentsthat
are cost effective to collect and administer.
10 l
Introduction
1. Thischapter reviewsthe current state of
government financesrelating to the highway
sector in India and providesthe necessary basis
for assessing the need for restructuring the
approach to the financing of the sector. The
chapter considers:
! the direct and indirect taxesand charges
applied to vehiclesand road transport;
! the total level of government revenue
generated from the road transport sector;
! the total level of government expenditure
on roads and more speci fi cally the
National and State Highway networks;
and
! the expenditure responsibilitiesof different
vehicle categories.
2. The esti mates of revenues and
expendituresare based on national data and
a sample of six states
20
.
2. ROAD TAXES AND HIGHWAY EXPENDITURES
Road Related Taxes and Charges
3. I ndi a has a f ederal poli ti cal and
administrative framework under which the
Central, Statesand local authoritieshave well
defined powersfor taxation and management
of roadsand road transport
21
. Except for the
national highways, the responsibility for roads
is vested in the State Governments. Both
Central and State Governmentsimpose taxes
on vehicle purchase, vehicle ownership and
vehicle use, asshown in Table 2.1
4. With the exception of road tollsand road
cesses, revenue from the vari ous taxes/
charges are not hypothecated to the road
sector, but form part of general revenue. The
levelsof taxesand chargesvary widely across
the country.
5. Central Government taxes. The
followi ng taxes are i mposed by Central
Government.
Customsduty: Transport fuelscarry 20% duty
20
Andhra Pradesh, Karnataka, M aharasthtra, M adhya Pradesh, Uttar Pradesh and West Bengal
21
See http://parliamentofindia. nic. in/const/const. html, especiallySeventh Schedule and associated lists
Table 2.1: Classification of Road Taxes/Charges in India
Central Government State Governments
Vehi cle Central customs Sales tax on vehicle/chassis and cab/
Purchase Excise duty on motor vehicles body
Central sales tax on inter-state
transactions and shipment of vehicles
Vehi cle M otor vehicle tax (annual or lifetime)
O wnershi p Regi strati on fee
Certificate of fitness
Taxes levied on passengers & goods
vehi cles
Entry tax
( 1)
Vehicle Use Excise duty on fuel Sales tax on spares/ lubes/ accessories
Cess on fuel Sales tax on fuel
Excise duty on spares/ lubes/ Cess on fuel
accessori es Road user tolls
Road user tolls Permits & licenses
Fines & penalties
(1) Applicable to vehicles purchased/ registered in one state and brought into another state
Road Taxesand Highway Expenditures
l 11
+ Rs1.50 per liter. New vehiclesattract 60%
duty; used vehiclescarry 105% custom duty.
Excise duty: Gasoline 30% , high speed diesel
(HSD) 14% , other vehicle inputs 16 24%
(see Annex 2). The general excise rate is24% .
Fuel Cess: Under the Central Road Fund Act
2001, a special cess of Rs.1.50 per litre on
HSD and motor spirit hasbeen applied. The
cesssupportsthe development/maintenance
of nati onal and state hi ghways and the
development of rural roads.
C entral sales tax: 4% on i nterstate
transacti ons and transfer of vehi cles by
manufacturer/dealer from one state to
another.
6. State Government taxes. The following
taxesare imposed at the State level.
M otor vehi cle ( M V) tax / road tax: Small
pri vate vehi cles (2-wheelers and cars) are
generally charged a one time fee at the time
of initial registration. Commercial vehiclesare
charged annually on the basisof the number
of seatsfor busesand weight for trucks(see
Annex 3). The M V tax for commercial vehicles
isState specific and vehicles, operating in a
number of states, have to pay additional M V
taxes. There are wide variations in M V tax
between States and between vehicle types.
Buses and multi-axle vehicles (M AVs) often
pay more than private vehicles and smaller
Figure 2.1: Per Ton Incidence Of Motor Vehicle Tax ( In Rs )
goodsvehicles. The implicit tax/ton for trucks
showslittle consistency. Figure 2.1 suggests
there isno consistent approach to the setting
of charges.
Salestax: There iswide variation in the sales
tax rates between States ( see A nnex 4) .
Generally, fuel ischarged at a higher rate than
other vehicle related items: diesel 17.5%
34% ; gasoline: 20% - 30.5% ; other vehicle-
related inputs: 8 12% . The median state
salestax isapproximately 12% .
Fuel Cess: Some States, such asUttar Pradesh,
levy an additional tax on transport fuel sales
for the development and maintenance of roads
Entry tax: levi ed by some states on
commoditiesand vehiclesimported into the
state. In Karnataka, an entry tax of 2% is
levied on tyresand 5% on fuel and lubricants.
M i sc. Fees: fees for vehi cle regi strati on,
issuing/renewal of driver licensesand vehicle
permitsare collected, under the Central M otor
Vehi cle Rules 2001, to meet the cost of
provi di ng these servi ces and are uni form
throughout the country. Some Statescollect
additional feesunder powersconferred bytheir
respective State M otor Vehicle Rules.
7. Road tolls. Road tollsare being collected
by NHAI, some State governmentsand private
sector concessionaireson specific road sections
acrossthe country. However, the total revenue
12 l
22
World Bank assessment
23
The main sourceswere the Directorate of Data M anagement, Central Excise & Customsfor the central taxesand the RBI: StatesFinance, A Studyof
Budgets, 2002-03 for the state taxes. Data from six State Transport Departmentsand the SalesTax Commissionerswasused to supplement RBI data
and extrapolated for the countryasa whole.
from these tolls is still low, perhaps about
Rs.1, 500 Crore per year
22
, and have a marginal
impact on the overall financing of highways.
The willingnessto pay tollsappearslow, and
traffic levels on tolled roads are generally
below expectations.
8. Local Authority taxes. Local authorities
levy octroi and termi nal taxes on goods,
animalsand passengersentering a local area.
Octroi is not specifically a road-use tax but
the resulting delayshave a significant negative
impact on road transport.
Government Revenue from the Road
Sector
9. Total road-related revenue. Estimates
of the total Central and State revenue
generated f rom the road sector were
developed from a combination of primary
and secondary sources
23
and then
di saggregated between di fferent vehi cle
categories as shown in Table 2.2. (Annex 5
providesthe detailsof the assumptionsmade).
10. Fuel taxesand cessgenerate about 55%
of total sector revenue. Purchase and
ownership fees/taxesaccount for about 40%
of revenue, which is high by international
standardsand may encourage the intensive
use of vehicles(high fixed and low marginal
costs) . C entral and state revenues are
approxi mately the same; but the
overwhelmi ng maj ori ty of roads are the
responsibility of state or local governments.
A s a result, si gni fi cant i nter-government
transfersare required to match revenueswith
expenditures.
11. Revenue generated by vehicle
category. The incidence of taxeson individual
vehicles, and equivalent taxesper vehicle-km
are shown in Table 2.3. Among passenger
vehicles, busespay the highest taxeson both
a vehicle and km basis(though not on a seat-
km basis). Busesare taxed substantially more
than any category of freight vehicles, which
isvery unusual.
12. Revenue contribution by road type.
The levelsof revenue generated on the main
road network (National and State Highways)
as well as on rural and urban roads were
estimated, using the distribution of vehicle-
km on the network. Traffic on the main road
network isestimated to generate Rs. 254
Table 2.2: Assessment of Total Tax Revenue by Vehicle Type: FY2002 (Rs. billion)
2- Commercial Freight Vehicles
Total wheelers Cars Jeep/taxi Bus
Light Heavy Multi-axle
Central Government
Excise on Fuel 150. 9 32. 8 52. 2 4. 4 10. 1 15. 8 34. 3 1. 3
Excise on M otor Vehicles 31. 7 6. 6 15. 0 5. 0 1. 1 1. 5 2. 3 0. 1
Excise on Tyres 11. 2 1. 5 1. 6 0. 4 1. 0 1. 8 4. 2 0. 2
Excise on M otor Parts 15. 3 1. 4 2. 5 0. 9 1. 8 2. 7 5. 8 0. 2
Cess on fuel 28. 1 2. 8 4. 4 1. 4 3. 2 5. 0 10. 9 0. 4
Total Central Government 237.3 45.1 75.6 12.3 17.5 26.8 57.5 2.3
State Governments
Sales tax on Fuel 87. 9 9. 4 15. 0 4. 2 9. 7 15. 2 33. 0 1. 3
Sales tax on M otor Vehicles 39. 0 11. 2 14. 5 4. 8 1. 9 2. 5 4. 0 0. 2
Sales tax on Tyres 6. 2 0. 4 0. 3 0. 0 1. 5 0. 6 3. 2 0. 1
Sales tax on M otor Parts 4. 9 2. 3 0. 9 0. 1 0. 5 0. 3 0. 8 0. 0
Taxes on vehicles* * 124. 8 7. 4 9. 4 2. 8 81. 9 5. 2 16. 7 1. 3
Total State Governments 262.8 30.7 40.2 11.9 95.5 23.8 57.8 2.9
Grand Revenue 500.1 75.8 115.8 24.2 113.1 50.6 115.3 5.2
* not including customsdutieswhich are payable on import/export, a further Rs77 billion in 2001-02
* * including fees, fines, penalties, passenger and goods taxes
l 13
billion, slightly more than half of total road-
related revenue (Table 2. 4). Revenue from
freight vehiclesaccountsfor 50% of the total
revenue on the main road network, while light
vehicles generate over 80% of the revenue
on urban roads. The results are detailed in
Annex 6.
Government Expenditure on the Road
Sector
13. Expenditure on the overall road
network. Total recurrent and capi tal
expendi tures on the road network are
si gni fi cant for both C entral and State
G overnments, totali ng almost 3% of the
combined recurrent and capital expenditure.
A broad breakdown of total government
expenditure, for recent years, isprovided in
Table 2.5.
14. Roadsaccount for a little lessthan 2% of
total government recurrent expendituresand
about 12% of total capital expenditures.
15. Capital expenditure on roads has been
increasing and this is expected to continue,
up from Rs. 85 billion in FY2000, reflecting
the focus on connecting rural villages and
improving the major National Highway system.
Road maintenance, on the other hand, has
shown little increase in recent yearsand may
actually be falling in real terms. Between
FY2000 and FY2002, expenditure on road
maintenance only increased from Rs. 50 to
Rs. 53 billion
24
.
16. Expenditure on the main highway
network. All road expendituresmade by the
Central Government can be attributed to the
National Highways. For State expenditure, it
was assumed that funds were allocated to
State Highways, District Roadsand Rural Roads
pro rata to their total lengths and the unit
costs of construction/maintenance for each
category of road. This may understate total
expenditure on highways which have been
receiving priority in the allocation of available
maintenance funds. The estimates of total
expenditure on the main highway network are
given in Table 2.6.
Comparison of Aggregate Revenue and
Actual Expenditure
17. For FY2002, the total tax revenuesderived
from road userswere very substantially higher
than total expenditures on the road sector,
(see Table 2.7).
Table 2.3: Total Tax Revenue per Vehicle FY2002 (Rs.)
2-wheeler Cars Jeep/ Taxi Bus Freight Vehicles
Light Heavy Multi-axle
Average tax/vehi cle:
Purchase 680 8, 087 9, 087 8, 863 4, 428 7, 488 10, 818
O wnershi p 266 2, 487 2, 487 210, 340 5, 515 17, 628 33, 663
Road Use 1, 778 19, 947 10, 026 71, 228 43, 460 96, 499 91, 071
Total annual tax/vehi cle 2, 725 30, 521 21, 600 290, 431 53, 403 121, 615 135, 551
Total tax/vehicle-km 0.44 2.39 1.03 5.69 1.48 2.03 2.51
24
Recurrent expenditure in Table 2. 5 also includesadministrative costsfor the sector and are thussignificantlygreater than maintenance expenditure.
Table 2.4: Road Network Distribution of Road Tax Revenues FY2002, Rs Billion
Total Revenue Light Vehicles Buses Freight Vehicles
Nati onal/State Hi ghways 253. 7 100% 52. 4 21% 73. 5 29% 127. 8 50%
District and village roads 77. 6 100% 21. 8 28% 28. 3 36% 27. 5 35%
Urban roads 168. 7 100% 141. 5 84% 11. 3 7% 15. 9 9%
Total 500. 1 100% 215. 8 43% 113. 1 23% 171. 2 34%
14 l
18. Overall, total tax revenuesfrom road users
are two and a half timestotal expenditure on
the road network. Usersof the primary road
network are paying about four timesthe level
of expenditure, and the revenue/expenditure
difference is probably much greater in the
urban areas. Only for district and rural roads
(with low traffic flows) isthere a broad balance
between total revenue and expenditure.
19. Thi s may suggest that, i n terms of
highway financing and user charges, little
change i s necessary. However, Table 7
presentsa very incomplete representation of
reality in the road sector.
Table 2.6: Expenditure on National and State Highways FY2002 (Rs. billion)
Item National Highways State Highways Total Network
Highway Construction/Improvement 26. 17 14. 01 40. 18
Highway M aintenance:
Routi ne 1. 85 3. 80 5. 65
Peri odi c 5. 55 11. 39 16. 94
Sub -total 7. 41 15. 18 22. 60
Total Highway Expenditure 33. 58 29. 19 62. 78
Source M O RTH Directorate of Transport and Planning Commission, RBI State Finances
Table: 2.5 Government Recurrent and Capital Expenditure (Rs Billion)
Central Government State Governments All Governments*
FY 2002 FY 2003 FY 2002 FY 2003 FY 2002 FY 2003
Total Recurrent Expenditure 3,016 3,405 3,314 3,552 6,330 6,957
Development 823 974 1861 1971 2684 2945
Soci al Servi ces 185 193 1174 1207 1359 1400
Economi c Servi ces 638 781 687 704 1325 1485
( Roads/Bri dges) (68) (68) (48) (48) (116) (116)
( O ther Transport) (20) (17) (17) (18) (37) (35)
Non-Development 1, 746 1, 926 1, 399 1, 544 3, 145 3, 470
Total Capital Expenditure 444 521 383 437 827 958
Development 84 172 365 415 449 587
Soci al Servi ces -34 11 85 94 51 105
Economi c Servi ces 118 161 283 322 401 483
( Roads/Bri dges) (29) (34) (66) (82) (95) (116)
( O ther Transport) (55) (57) (10) (10) (65) (67)
Non-Development 178 232 18 22 196 254
O ther capi tal/loans 182 118 182 118
Roads/Bridges as % of:
Recurrent expendi ture 2. 3% 2. 0% 1. 4% 1. 4% 1. 8% 1. 7%
Capi tal expendi ture 6. 5% 6. 5% 17. 2% 18. 8% 11. 5% 12. 1%
Recurrent + capi tal 2. 8% 2. 6% 3. 1% 3. 3% 2. 9% 2. 9%
* Estimates are marginally higher than other sources
l 15
( a) Taxeson road use (vehicles, fuel, etc)
are used almost uni versally to
generate general government
revenue aswell asto finance the road
sector. Taxes on road use are not
necessarily equivalent to road user
charges.
(b) A ct ual expendi t ure on road
maintenance may not be sufficient
to maintain the network, which may
be deteriorating, and thusdoesnot
reflect the real road damage costs
imposed by vehicles.
(c) Present expendi t ure on road
construction and improvement may
not reflect the needs of the sector
nor provide a realistic reflection of
likely future financing requirements.
Table 2.7: Total Revenues and Expenditure in the Road Sector FY2002 (Rs. billion)
Tax/ChargeRevenue Road Expenditure Expenditure as% of Revenue
Nati onal/State hi ghways 254 63 25%
District and Rural Roads 77 64 83%
Urban Areas
(1)
169
Total 500 211
(2)
42%
(1)
Relativelysmall expendituresincluded with District roads
(2)
Including administrative costs
16 l
Road User Charges in India
1. In some countries, there are specific and
designated charges for road use (the road
cess, for example). But most taxeson vehicles
and operating inputs(fuel, tires, etc) are part
of the general tax structure; they generate
revenue for general expenditure as well as
implicitly performing a road user charging role.
A distinction needsto be made between these
normal taxation and road user charging
rolesin order to try and ensure that both are
set at appropriate levels. However, the road
user charging function is rarely recognized
explicitly in tax setting and thusit isnecessary
to determine an implicit separation between
the two functions. There is a spectrum of
possible approachesto making the separation.
( a. ) At one end of the spectrum: all
taxes and charges pai d by road
users(i.e. total road user generated
revenue), from their ownership and
use of vehicles, could be considered
as road user charges. This would
i mply that consumpti on of road
servicesisexempt from the general
application of indirect taxation; this
isimplausible.
(b. ) At the other end of the spectrum:
only those specific charges which
are dedi cated to road fi nanci ng
(such as the road cess and road
tolls), together wi th vehi cle and
driver registration fees might be
defined as user charges, and all
other revenues consi dered as
general taxation. Thiswould imply
that very high ratesof indirect taxes
on road-use related itemscontained
no i mpli ci t element of road use
charge; thisseemsunlikely.
2. Often, it isassumed that all commodities
carry the same rate of indirect tax for raising
general revenue and that any excessover this
general level can be considered asa road user
charge. Thisapproach can certainly be applied
3. THE ROAD USER CHARGE REGIME
in India at the state level, where there is a
general standard sales tax and higher rates
on transport fuels. It ismore difficult to apply
to Central Governmentscustomsand excise
duti es, whi ch vary wi dely. I n these
circumstances, the excess over the average
rate can be used, but i t i s less logi cal; a
distinction can also be made between average
taxeson consumer goods(and applied to light
vehicles) and average taxes on production
goodsand raw materials(and applied to freight
vehicles).
3. There are conceptual problemswith using
the excessover average tax to define road
user charges. A general principle of indirect
taxation isto minimize economic distortions.
Efficient taxes should thus be structured in
inverse proportion to the price elasticity of
demand for the products. The demand for
transport fuel is relatively price inelastic so,
for macro-economic efficiency, the general
revenue tax on fuel should be higher than the
average general revenue tax. For economic
equity or redistribution reasons, general taxes
may be above average on those goods
consumed di sproporti onately by the ri ch.
Gasoline, used in private cars, may thus be
more heavily taxed than the average.
4. Without an institutional separation of road
user feesfrom general taxation, there will be
ambi gui ty i n the esti mati on of road user
charges. It i s useful, however, to have a
baseline upon which to judge the adequacy
of user charges, and to explore the
implicationsfor increasing road expenditures.
Despite the methodological issues, the excess
over average indirect taxation hasbeen used
asthe basisfor one estimate of implicit road
user charges
25
. A second estimate of road user
charges has been made on a rather narrow
definition, which excludes the excess over
average indirect taxation element.
5. Based on the above assumptions, total
road sector revenueshave been divided into
general taxation and road user charges in
Table 3.1.
25
For excise duties, the road user charge isthe excessrate above the average excise rate of 24% , For state salestax, the road user charge isthe excess
rate above the average rate of 12 percent.
The Road User Charge Regime
l17
6. Depending on the assumptionsadopted
regardi ng i ndi rect taxes, such as exci se and
sales tax, total road user charges ( both
expli ci t and i mpli ci t) i n Indi a are between
30-40% of the total revenuesgenerated from
the road sector.
7. The levels of i mpli ci t road user charges
( RUC) pai d by vehi cle category are outli ned
i n Table 3. 2. The level of road user charges
are very substanti ally lower than total tax
revenues for all vehi cle categori es, wi th the
parti al excepti on of the bus category. The
most marked impact ison two-wheelersand
cars.
8. The di stri buti on of total user charges
between the di fferent road categori es i s
rather di fferent to the di stri buti on of total
road-user related tax revenues, reflecti ng
the very hi gh proporti on of li ght vehi cles i n
the traffi c flows on urban road networks
( Table 3. 3) .
9. The level of road user charge revenue
generated in urban areasismuch lower than
i ts charge of total road-user related tax
revenues. The proportion of total road user
chargesgenerated by buseson the non-urban
roadsisvery substantial.
Road User Charges vs. Road Expenditures
10. In terms of the total Centre and State
Government expenditure, reported in Table
5, there isa small shortfall when compared
to the revenue rai sed usi ng the broad
definition of user charges, and a rather larger
shortfall on the narrow definition, (see Table
3.4).
11. At a network level, there is sufficient
funding from highway usersto cover identified
actual expenditures on national and state
highways. There is a significant road-user
funding deficit for district and rural roads; this
isperhapsnot unexpected asa large part of
thisnetwork carrieslittle traffic but isrequired
for basi c access. However, as i ndi cated
previously, actual road expendituresmay not
reflect the level of road maintenance actually
requi red to keep the network i n a good
condition and remedy the damage inflicted
by road users.
Table 3.1: Total Road User Charges, Rs. Billion FY2002
Item Rs billion % of total revenue
Broad Definition of Road User Charges*
G eneral Taxati on 300 60
Road User Charges 200 40
Total 500 100
Narrow Definition of Road User Charges
G eneral Taxati on 347 69
Road User Charges 153 31
Total 500 100
* including excess over average taxes for excise and sales taxes on fuel
Table 3.2: Road User Charges per Vehicle FY2002 (Rs.)
Vehicle Type 2- wheelers Cars Jeep/taxi Bus Freight Vehicles
LCV HCV MAV
Total Tax Revenues
Per vehi cle 2, 725 30, 521 21, 600 290, 431 53, 403 121, 615 135, 551
Per vehicle Km 0. 44 2. 39 1.03 5.69 1.48 2.03 2.51
Broad Definition of Road User
Charges
Per vehi cle 747 8, 098 4, 902 226, 424 15, 866 40, 055 54, 910
Per vehicle Km 0. 12 0. 63 0.23 4.44 0.44 0.67 1.02
Narrow Definition of Road user
Charges
Per vehi cle 365 3, 642 3, 723 218, 574 10, 814 29, 109 44, 548
Per vehicle Km 0. 06 0. 28 0.17 4.29 0.30 0.49 0.83
18 l
Road User Charges vs. Full Road Costs
12. Full road maintenance. A ctual
expenditure on road maintenance isoften not
a good approximation to road damage costs.
Like many countries, India under-maintainsits
roadsand investment crowdsout operations
and mai ntenance. New roads are bei ng
constructed while the overall road network is
deteriorating through lack of maintenance. The
expenditure required to maintain fully the
National and State Highwayswasestimated,
using GOIsown norms
26
. The full maintenance
requirement for the highway network isthree
ti mes the level of actual mai ntenance
expenditure, (see Table 3.5).
26
An analysisof maintenance needswasalso made using the World Bankshighway design model (HDM 4). Thisanalysisconfirmed the magnitude of
maintenance needsasdetermined bythe norms, with estimated requirementswithin 20% for the National Highwaysand 10% for State Highways.
Table 3.4: Total Road Expenditures Road User Charges FY2002 (Rs billion)
Road User Charges
Road Expenditure Broad Definition Narrow Definition
National and state highways 63 112 92
District and rural roads 64 36 31
Urban N/a 52 30
Total 211 200 153
Table 3.3: Distribution of Road User Charges by Road Category, FY 2002
Total Total User Light Vehicles Buses Freight Vehicles
Revenue Charges
Rs. billion Rs. billion % Rs. billion % Rs. billion % Rs. billion %
Broad Definition of RUC
Nati onal/State Hi ghways 257 112 56% 14 12% 57 51% 41 37%
District and Village Roads 77 36 18% 6 15% 22 61% 9 24%
Urban Roads 169 52 26% 38 73% 9 17% 5 10%
Total 500 200 100% 57 28% 88 44% 55 28%
Narrow Definition of RUC
Nati onal/State Hi ghways 257 92 60% 7 8% 55 60% 30 32%
District and Village Roads 77 31 20% 3 10% 21 69% 6 20%
Urban Roads 169 30 20% 18 60% 9 29% 3 11%
Total 500 153 100% 28 18% 85 56% 40 26%
Table 3.5: National and State Highway Maintenance Needs FY2002*
(Rs. billion)
Item Highway Maintenance Needs
National State Total
M ai ntenance Requi rement 33. 76 37. 17 70. 93
Routi ne 7. 68 10. 98 18. 67
Peri odi c 26. 07 26. 18 52. 26
Actual Expendi ture 7. 41 15. 18 22. 60
A ctual/Requi rement 22% 40% 32%
* Assumesthe standard unit ratesfor Zone IV given in the normsfor Road M aintenance in India published by M O RTH
l19
13. In aggregate, road user charges would
meet the full maintenance costson the main
highways: Rs. 112 billion (Rs. 92 billion, using
the narrow def i ni ti on) compared wi th
mai ntenance needs of Rs. 71 bi lli on.
However, not all vehicle categoriesmay cover
their road costs.
14. The road maintenance costs, both routine
and periodic, incurred to maintain a road
network in a good and stable condition can
be broadly divided into two categories.
(a) Vehicle attributable costs: These are
variable coststhat increase with the level
of traffic flow. The costscan be specifically
related to individual vehicle categories,
accordi ng to ei ther the damage the
vehiclescause or the road space that the
vehiclesoccupy.
Road Damage: road deterioration and
the required strength of pavementsis
related primarily to the number and
weight of axle-loadsand ismeasured
by total Equivalent Standard Axles
(ESA). Light vehicles, such as cars,
impose very little damage to paved
roads, heavy commerci al vehi cles
impose substantial damage, especially
if they are heavily overloaded.
Road Space: the use of road space,
i mportant i n determi ni ng both
congestion and the required width for
new road construction, isa function
of the size and speed of vehiclesand
isnormally related to total equivalent
Passenger Car Units(PCUs).
(b) Fixed costs: These costs cannot be
di rectly attri butable to any parti cular
vehicle category and are usually caused
by the passage of time or the effectsof
weather. The costs are someti mes
di sregarded f or the purposes of
determining appropriate road user charges
and financed from general revenue, or are
allocated on an equitable basis to the
different vehicle categories, normally on
the basisof total PCUs.
15. The full road cost requirements for the
hi ghway network , both capi tal and
mai ntenance, have been allocated to
individual vehicle categories on the basis of
their cost contributions. Estimateshave been
made for both full maintenance costs, with
the fixed costs allocated according to their
PCUs, and vari able costs whi ch can be
specifically attributed to vehicle categories,
(see Table 3.6 and Annex 7).
16. If full maintenance wasto be undertaken
on the network, few vehicle categorieswould
fund their combined capital and maintenance
costs; under the narrow definition of user
charges, only buses cover their full share of
road costs.
17. M uch more seri ously, the heavy
commercial vehicle categories (Heavy and
M ulti -axle) only j ust cover thei r road
maintenance costs, even under the broader
definition of user charges. Under the narrow
def i ni ti on of user charges, the heavy
commercial vehicle group (excluding multi-axle
vehicles) failseven to cover their attributable
road maintenance costs, which isthe absolute
minimum requirement for a road user charging
strategy.
18. The user chargeson buses, however, are
greatly in excessof their share of road costs,
irrespective of the definition of cost or the
definition of road user charges. Quite clearly,
buses, and consequently buspassengers, are
subsidizing the system and implicitly the heavy
commercial vehicles, in particular.
19. Requirements for accident
externalities and network operations. In
addition to under-maintenance, India allocates
insufficient resourcesto ensure that roadsare
operated efficiently and safely. There are over
70, 000 road deathsannually, including many
pedestrians. A recent study estimated that
road traffic accidentscost India Rs. 190 billion
in FY2001, or about 1% of GNP. Improved
engineering, education and enforcement could
substantially lower these costs
27
but only Rs.
350 million ispresently invested in road safety
by central government, aswell asan unknown
but probably very small amount by state and
ci ty authori ti es. NHA I i s now starti ng
retroacti vely to provi de adequate safety
infrastructure on completed four lane highways,
at a cost of Rs. 2 2.5 million lakh/km
28
.
27
Definition of Road SafetyPolicyand Action Plan for India, Span Consultants/DRD for M O RTH, September 2003
28
Detailed Project Reportsfor M inor ImprovementsWorks, Third National HighwayProject, NHAI, 2003
20 l
20. It has not been possi ble to esti mate the
fundi ng provi ded for operati ng ( excludi ng
road safety) the highway network. However,
as very few secti ons of hi ghways have any
traffi c i nformati on, emergency faci li ti es or
other road servi ces, the fundi ng must be
low.
21. Congestion Costs. Very heavily loaded
trucks are dri ven at low speeds. These slow
truck speeds, together with the limited road
wi dths, road si de development and non-
motori zed traffi c result i n low average
speeds for all vehi cles on most of Indi as
hi ghway network. Li ght vehi cles, whi ch
could travel at much faster speeds, are
delayed by the heavy trucks, i . e. even on
the i nter-urban hi ghway network there i s a
level of congestion. Ideally, those responsible
for the slower speeds should be charged for
the delays that they cause to other road
users. Thi s would si gni fi cantly i ncrease the
total road costs attri butable to all frei ght
vehi cle categori es.
Assessment of the Road User Charging
Regime
22. A pproxi mat ely Rs. 100 bi lli on i s
collected, as expli ci t and i mpli ci t road user
charges, from vehi cles usi ng the nati onal
and state hi ghway networks. Whi le thi s i s
sufficient to fund present public investment
and mai ntenance on the network , the
present chargi ng regi me i s defi ci ent i n a
number of maj or respects.
23. The total level of road user charges
is insufficient. The present level of user
chargesissufficient for present expenditures
only because the hi ghway network i s bei ng
grossly under-mai ntai ned, poorly operated
and wi th li ttle attenti on to road safety. A
sizeable proportion of the investment being
made in the network is, in effect, capitalized
mai ntenance, a very i neffi ci ent way of
mai ntai ni ng roads. M oreover, i t i s apparent
that the present levelsof user chargescannot
i nclude any si gni fi cant element for the
i mportant externali ti es of congesti on, road
safety or envi ronmental damage.
24. The structure of road user charges
is economically inefficient. The present
charges on heavy commercial vehicles cover
Table 3.6: Road User Charges : Full Road Costs FY2002
National and State Highways (Rs. Per km)
Vehicle:- 2- wheeler Cars Jeep/taxi Bus Freight Vehicles
Item Light Heavy M ulti-axle
Broad Definition of Road User Charges
User Charges/vehi cle 0.12 0.63 0.23 4.44 0.44 0.67 1.02
Road Cost/vehicle
Total cost 0. 17 0. 33 0. 33 1. 14 0. 55 2. 03 2. 81
Capital cost 0. 13 0. 25 0. 25 0. 84 0. 41 1. 34 1. 88
M aintenance cost (total) 0. 04 0. 08 0. 08 0. 30 0. 14 0. 69 0. 93
M aintenance cost (variable) 0. 02 0. 04 0. 04 0. 19 0. 09 0. 58 0. 78
User Charge : Cost Ratio
Total cost 0. 7 1. 9 0. 7 3. 9 0. 8 0. 3 0. 4
Narrow Definition of Road User Charges
User Charge/vehi cle 0.06 0.28 0.17 4.29 0.30 0.49 0.83
User Charge : Cost Ratio
Total cost 0. 4 0. 8 0. 5 3. 8 0. 5 0. 2 0. 3
l 21
only 80% of their attributable damage costs
( vari able road mai ntenance) , whi ch i s the
absolute mi ni mum level for user charges.
In addition, trucksimpose substantial delays
on other road users through thei r slow
speeds, even on the highway network. Road
user charges on heavy commerci al ( two,
three and multi -axle) vehi cles need to be
substanti ally i ncreased.
25. The present charging structure takes no
account of the road space occupied by each
vehi cle. Thi s i s i mportant for the hi ghway
network and critical on urban road networks,
where charges related to congesti on costs
would be economi cally effi ci ent and yi eld
substanti al revenues for the i mprovement
of publi c transport servi ces. The present
congesti on charge i n Central London has
substanti ally reduced congesti on and
i ncreased servi ce standards and has been
accompani ed by a si gni f i cant shi f t of
passengers to the bus servi ce
29
.
appears inequitable. Buses are the most
heavi ly taxed/charged category of vehi cles;
they are very heavi ly taxed i n most states
t hrough a heavy vehi cle t ax and i n
M aharashtra by a very heavy tax based on
passengers carri ed. The i mpli ci t road user
charges on buses are more than four ti mes
the charges on multi -axle frei ght vehi cles,
despite their much lower road damage costs.
Buses are also charged much more heavi ly
than cars, i n relati on to thei r road damage
costs, even though they are f ar more
effi ci ent than cars i n terms of road space.
There i s no economi c reason for such hi gh
charges and, as buses are used by the lower
i ncome groups, they appear i nequi table.
promotes an uneconomic distribution of
traffic. Road f rei ght vehi cles are
undercharged. Road f rei ght rates are
below thei r economi c level encouragi ng
the shi ft of frei ght from rai l ( rai l frei ght
generates profi ts for I ndi an Rai lways) .
Buses are overcharged, bus f ares are
much hi gher than thei r full economi c cost
and thus more people deci de to travel by
rai l ( Indi an Rai lways lose money on most
passenger servi ces, especi ally t hose
competi ti ve wi th bus) . Both the road and
rai l sectors, as well as the overall economy,
lose as a consequence of the present level
and structure of road user charges.
29
See http://ecaweb.worldbank.org:8080/Transport.nsf/ECADocByUnid/D1B8523C31854F3685256D4700536A4E?Opendocument
22 l
Highway Maintenance
1. M ai ntai ni ng Indi as present hi ghway
network to full maintenance standards will
require annual funding of about Rs. 70 billion,
three timesthe current level of expenditure.
Some may argue that India cannot afford to
maintain fully itsroadsand priority should be
gi ven to expandi ng the network. All the
evidence suggeststhat India cannot afford not
to maintain itshighway network valued at
roughly Rs.240, 000 crore (US$53 billion). A
recent study analyzed the economic impact
of inadequate road maintenance
30
and found
that:
The economic road user costs are
23% hi gher on roads i n poor
condition than on good roads, and
55% higher, if the roadsare in very
poor condition;
The cost of surface dressing (for roads
in good condition) is66% lower than
resurfacing or strengthening (for roads
in fair condition); and only 25% of
the reconstruction cost;
The annual maintenance backlogs
range from 2.5 4 timesthe required
steady state expenditures; and
In some states, for every one Rupee
spent on maintaining the network,
there are net benefits(NPV) in excess
of Rs7.
2. The study mak es a strong case for
substanti al i ncreases to the level of
mai ntenance expendi ture, i f necessary by
reallocati ng f rom capi tal expendi ture.
Extrapolati ng the results to Indi a gi ves a
maintenance backlog in the order of Rs. 130
billion. Cutting back on road maintenance
neither makeseconomic sense nor long-term
fi scal sense as the future costs for road
reconstruction will be much higher.
Highway Investment
3. The Central and State Governmentshave
4. FUTURE FUNDING NEEDS
realized the importance of improving Indias
road system, both i n terms of provi di ng
wider accessibility to rural areas, and adding
traffi c capaci ty and i mprovi ng servi ce levels
on the pri mary hi ghway network. These
i mprovement s are essent i al i f t he
G overnments are to meet thei r obj ecti ves
of achi evi ng hi gh economi c growth rates
and reduci ng poverty.
4. Plans have been prepared for road
development by the M ORTH and the Planning
Commission. The GOIsVision 2021 assessed
the demand for road transport, based on the
desired future annual economic growth of the
6-8% , and esti mated the need for road
development in the country for the next 20
years. Vi si on 2021 sets out physi cal and
financial targetsfor highway development. In
broad terms, the investment needs of the
Expressways, National Highways, and State
Highways, in the ten years2001 2011, are
estimated as Rs. 300, Rs. 1, 200 and Rs. 750
billion respectively (1999 prices), over Rs.2
trillion in all (the estimatesare summarized in
Annex 8). In addition, the PM GSY program
will require substantial funding, of the order
of Rs.70, 000 crore over the period to 2010, to
connect every village with all weather road
access.
5. So far, si gni fi cant progress has been
made by central government i n the
i mplementati on of the Nati onal Hi ghway
Development Program and PM GSY, and state
governments have made improvements to
about 20, 000 km of the State Hi ghway
network.
The Funding Gap
6. Thissection estimatesthe overall financial
resourcesneeded, over the next 10 years, to
develop and maintain the primary highway
network, assessesthe likely revenue from road
user charges, and compares the li k ely
expendituresand road user charge revenues.
The estimates are based on network wide
analysisusing the HDM 4 model.
30
Costsof Deferred M aintenance in India, World Bank, 2003. http://www.worldbank.org The studyundertook a network strategicevaluation, using HDM -
4, for the core highwaynetworksin Tamil Nadu, Gujarat, and Karnataka.
Future Funding Needs
l 23
Road user charge revenues are
esti mated on the traffi c growth
rates for di fferent vehi cles types,
based on proj ect ed economi c
growth, and the present chargesfor
each vehicle category. No allowance
ismade for the widespread imposition
of tolls.
The mai ntenance costs are based
on the norms recommended i n the
Report of the Committee on Norms
for M ai ntenance of Roads i n Indi a -
2000 .
Capital investment (four/two laning
exi sti ng two/i ntermedi ate) lane
hi ghways was assumed necessary
when t raf f i c levels reached
category C as per IRC norms.
7. The analysi s esti mated the need to
widen 15, 000 km of national highwaysfrom
two to four lane, and a further 16, 500 km
from i ntermedi ate to two lane. The total
cost would be about Rs. 1, 098 bi lli on (2003
pri ces) , very close to the esti mates i n Vi si on
2021. The analysi s suggested that about
25, 000 km of state hi ghways wi ll need
wi deni ng to two lanes, at a cost of about
Rs. 623 bi lli on ( 2003 pri ces) . Thi s i s a very
conservati ve esti mate. No allowance i s
made for addressi ng the mai ntenance
back log, whi ch may be consi derable.
However, much of the backlog would be
covered in the widening works, which would
also i nclude rehabi li tati on. Nor i s any
allowance made f or est abli shi ng an
expressway which at roughly Rs. 15-20 crore
per k m would add consi derably to the
financial requirement (Vision 2021 estimates
a further Rs. 300 billion for expresswaysfrom
2001-2011).
8. Revenue from road user charges wi ll
more than cover hi ghway mai ntenance, i f
the fundi ng i s dedi cated to hi ghways.
However, even wi th thi s conservati ve
esti mate of needs, the requi red capi tal
i nvestment cannot be fully funded by road
user charges, ( Fi gure 4. 1) .
9. With the revenue from the defined road
user charges, the cumulati ve f undi ng
shortfall over the 10 year period isestimated
at Rs. 1, 048 bi lli on, 39% of the total
requi rement . Hi ghway mai nt enance
representsabout 35% of the total projected
network cost, considerably above the actual
22% allocation in FY2002. The funding gap
assumes that all the road user charges
generated on the hi ghways are returned to
the highway sector. If the current proportion
of road-user charge revenue i s returned
(56% ), then available funding for highways
would be only Rs. 912 bi lli on, less than the
mai ntenance needs, and the fundi ng gap
would ri se to Rs. 1, 760 bi lli on.
Figure 4.1 Revenue from Sector Taxes/RUCs vs. Highway Requirements, 2002-2011
24 l
Major Financing Issues
1. The maj or i ssues, requi ri ng urgent
attenti on, i nclude the followi ng.
Highway Financing
Inadequate mai ntenance fundi ng.
Thi s appli es to both nati onal and
state highways, and is partly due to
the low poli ti cal profi le of road
mai ntenance ( parti cularly at the
state level) .
I nvestment f i nanci ng gap. Thi s
results from the very rapi d i ncrease
i n expected road i nvestment, from
NHDP and PM G SY, and t he
i nadequacy of budget funds i n the
early years of the programs.
Road User Taxation
Proli ferati on and overlappi ng of
taxes. Thisarisesfrom the allocation
of expendi ture responsi bi li ti es and
taxing powersto the states, together
wi th the lack of standardi zed
approaches. Significant differences
become entrenched and are very
di ffi cult to eradi cate.
Regional disparities. The stateshave
the constitutional prerogative to levy
charges on transport and there are
nei ther nati onal gui deli nes nor a
consultati ve forum to help ensure
consi stency.
Road User Charges
Underchargi ng of heavy goods
vehi cles. Thi s may result from the
desi re to keep frei ght rates low but
i t i s also a consequence of reli ance
on fuel taxes whi ch are i nadequate
to reflect the costs i mposed by
heavy vehi cles. The costs are not
fully recovered by fixed annual fees
whi ch are a state responsi bi li ty.
Overcharging of buses. Both vehicle
and passenger taxati on are state
functi ons and bus transport i s an
easy revenue source. The levels of
charges appear nei ther equi table
nor effi ci ent.
Urban congesti on. There i s nei ther
urban road chargi ng nor extensi ve
traf f i c management to control
congest i on. C ost ly addi t i onal
i nfrastructure ( e. g. the M umbai
overpasses) i s constructed, wi th
si gni fi cant fi nanci al i mpli cati ons.
Lack of Di rect Chargi ng. As most
chargesare not applied at the point
of use, consumers have no
i ncenti ve to manage thei r demand
for road transport.
Inter-modal Transport Policy
Lack of coordi nated i nter-modal
policies. There islimited coordination
between the poli ci es of I ndi an
Rai lways and t he rest of t he
transport sector. Railway pricing and
road user charges encourage too
much road freight and too many rail
passengers, result i ng i n an
inefficient distribution of traffic.
2. The Nati onal Fi ve-Year Plan has a clear
vi si on of an i mproved/expanded hi ghway
network asan essential foundation for faster
economi c growth. Thi s vi si on may be
frustrated unless soluti ons are found to:
the i nadequate provi si on for road
mai ntenance;
the insufficient budgetary resources
for the capi tal program; and
the fragmented and i nconsi stent
road tax and chargi ng systems.
3. Soluti ons have to be found wi thi n a
poli cy envi ronment i n whi ch there i s heavy
reli ance on road-user taxes for general
revenue, a fragmented deci si on maki ng
structure and i nadequate i nformati on.
Underlying Causes
4. Road users as general tax revenue
generators. In Indi a, only a thi rd of road
user taxes are returned to the road sector
5. MAJOR FINANCING ISSUES AND CAUSES
M ajor Financing Issuesand Causes
l 25
as i nvestment or mai ntenance; thi s i s
comparable to Western Europe but much
less than the USA ( +90% , most road taxes
are hypothecated)
31
or Australia (50 60% )
32
.
While road-related tax revenue in India, asa
share of GDP, issimilar to other countries, road-
related tax revenue as a share of total tax
revenue ismuch higher, (see Table 5.1).
31
See http://www.fhwa.dot.gov/ohim/hwytaxes/2001/
32
Australian Bureau of Statisticsand Dept of Transport
33
HighwayEfficiencyStudy, World Bank, 2003
5. Total tax revenue in India is only about
18% of GDP, and both the Government of
India and the State governmentsrely heavily
on the road sector for general revenue; road
related taxesare generally cheap and easy to
collect. A broadening of Indiastax base may
be desirable but perhaps not achievable in
the short term. Increasing expenditure in the
road sector may thus requi re addi ti onal
charges on road users. These addi ti onal
chargesmay be more acceptable to road users
if, in conjunction with the higher charges, there
i s greater earmarki ng of road user taxes/
charges to the road sector. Some countries
have accompani ed hi gher road-related
taxation with giving road userssome control
over how the fundsare spent.
6. The high level of tax on the sector may
have a profound effect on public acceptability
of tolls. Tollsare being set generally at a small
fraction of the operating cost savingsexpected
for passenger vehiclesand nominal toll rates
in India are some of the lowest in the world,
(Table 5.2). However, in relation to average
incomes(the affordability index) the tollsmay
be considered as relatively high, although
private car usershave much higher incomes
than the average. The Indian truck/car toll
ratio also appearshigh but, on the other hand,
two/three axle trucksare generally much more
heavi ly loaded than elsewhere and thus
i mpose much greater costs on the road
network.
7. A study, commi ssi oned by the Bank,
concluded that the actual savings to trucks
may be much lower than isoften used in toll
studies. The study estimated time costsat only
about Rs.70-80/hour (perhaps slightly more
than Rs. 2/km
33
), and doubling speedswould
only save truck owners about Rs.1/km. This
limits the potential for high tolls on freight
vehi cles unless there are also appreci able
distance savings, as generally the speed of
the trucks establi shes the speeds on the
untolled network. Tolls for trucks are often
higher than this, even in India. Overall, the
survey suggested that the percei ved user
benefit of high quality toll roads i s relatively
Table 5.1: Road Sector Tax as Share of Total Tax and GDP
Country Road Taxes as % of Total Taxes Road Sector Tax Revenue as % of GDP
Australi a 4. 7 2. 0
G ermany 5. 6Z 2. 1
Italy 4. 5 1. 9
United Kingdom 6. 7 2. 4
Denmark 5. 9 3. 0
Fi nland 7. 0 3. 2
G reece 10. 0 3. 3
Ireland 10. 2 3. 2
Netherlands 6. 8 2. 7
USA 3. 6 1. 1
India 15.5 2. 2
Note: Data for EU countries is for year 1999, and for India relates to year 2001-2002
Sources: Studyon Vehicle Taxation in the M ember Statesof the European Union, January, 2002 and Data for USA isfor 1996-
97, Source: International Road Federation, World Road Statistics, 1999
26l
low at present, especi ally f or f rei ght
vehi cles
34
.
8. So whi le general tax levels are so hi gh
and benefi ts, to commerci al user at least,
from upgraded roadslesscertain, willingness
to pay i s low.
9. Fragmented tax decision-making
structure. Highway financing iscomplicated
by the levels and types of sector taxati on
and expendi ture whi ch are establi shed by
several di fferent agenci es and layers of
government. The Consti tuti on of I ndi a
i ncorporates detai led provi si ons relati ng to
the enactment of laws and the pri nci ples of
devoluti on of taxati on powers between the
Central and the State G overnments.
( a) Central G overnment i s responsi ble
for customs duty, exci se duty and
central sales tax on i nter-state
trade.
( b) Both the Central and the State
G overnments are empowered to
legi slate on mechani cally propelled
vehi cles i ncludi ng the pri nci ples on
whi ch taxes on such vehi cles are to
be levi ed.
( c) State G overnments have the ri ght
to levy taxes on motor vehi cles
(road tax), on goodsand passengers
carried by road, tolls and octroi and
entry tax. Regulatory control i s
exercised under State specific rules,
wi thi n the broad framework of
M otor Vehi cles Act 1988
35
.
10. There i s no nati onal road pri ci ng/user
chargi ng poli cy nor any procedures to
harmoni ze the type and level of road taxes.
Consequently:
there i s multi pli ci ty of taxes, duti es
and f ees, levi ed at vari ous
admi ni strati ve levels;
motor vehicle taxesvary substantially
bet ween st at es wi t hout any
apparent rationale for the levelsand
di f f erent i als bet ween vehi cle
categori es; and
tax rates appear to be fi xed i n an
ad hoc, arbi trary manner.
11. The overriding motivation for changing tax
levelsappearsto be generally to increase tax
revenue, wi th li ttle regard to economi c
effi ci ency, equi ty or other publi c poli cy
objectives.
34
Road freight servicesin India are primarilybulk, low cost and relativelylow qualityin which high speed deliverycommandsrelativelylittle premium
35
The M otor Vehicles Act 1988, a GO I Act, covers the regulation, control and operation of transport vehicles, including the licensing of drivers and
conductors, registration of motor vehicles, control of traffic, insurance and other related matters. ThisAct, supplemented bythe Central M otor Vehicle
(CM V) Rules1989, define the powersof the Central and State Governmentswith regard to the framing of rules, practicesand procedures. It isthe main
instrument through which motor transport isregulated in the countrybyState Governments.
Table 5.2: International Road Toll Rates
Road Toll US/km
Cars Trucks Affordability Index*
Country 2/3 axles 4+ axles Car 2/3 axle truck
Australi a 6. 0 15. 3 15. 3 0. 284 0. 621
Italy 5. 3 6. 7 12. 1 0. 285 0. 273
Portugal 4. 0 8.0 10. 0 0. 395 0. 452
Spai n 6. 5 14. 9 17. 4 0. 352 0. 750
USA 2. 6 5. 6 9. 0 0. 204 0. 163
Brazi l 3. 8 8.9 16. 2 0. 990 1. 259
South Africa 3. 2 8.7 13. 0 0. 642 0. 797
Average toll 4. 5 9.7 13.3
Truck/Car Index 1.0 2.2 3.0
India 1. 0 3. 5 2. 482 1. 241
* toll/per capita income at purchasing power parity
M ajor Financing Issuesand Causes
l 27
12. Lack of information for policy
formulation. There i s a lack of reli able,
complete and ti mely i nformati on on the
current levels of road user taxes and
charges, and their allocation to roads. There
hasbeen no study of road user charges/costs
since 1988-89
36
.
In some cases, the pri mary sources
are not held i n a way that allows
analysiswithout making far-reaching
assumpti ons. For example, most
road agenci es do not record the
di vi si on of expendi ture between
road categories; many statesdo not
report sales tax on motor spi ri t and
lubri cants separately, only total
sales tax revenue.
I n other cases, i nf ormati on i s
present ed i n such an opaque
manner that interpretation isalmost
i mpossi ble. The state budget i n
Karnataka, for example, hasdozens
of budget heads/subheadscovering
expendi tures by the Publi c Works
Department on di f f erent road
categori es. M any of the budget
head t i t les are not readi ly
understood, outsi de a select few i n
G overnment, and relate to proj ect
acti vi ti es no longer acti ve.
13. Thi s lack of reli able and/or coherent
i nformati on affects both poli cy makers and
the road user who pay the taxesand charges.
It i s di ffi cult to see how poli cy makers can
make coherent poli ci es and expendi ture
decisions without accurate data on the level
and distribution of taxation and expenditure.
Even i f a road user chargi ng poli cy exi sted,
a sound i nf ormat i on base would be
necessary to monitor its impact and provide
the basi s for correcti ve changes. The lack
of information also makesit difficult for road
users to hold anyone accountable for the
more effecti ve or effi ci ent use of taxes
collected from the road sector. The consumer
of publi cly provi ded water and sewer
servi ces recei ves regular detai led bi lls, and
audi ted annual accounts are publi cly
avai lable. Wi th such i nformati on, there can
be accountability for both service standards
and the level of user charges. There i s
nothing comparable in the road sector and,
whi le i t may not be possi ble to provi de the
same level of detai l as for a water uti li ty,
there should be accurate, comprehensi ble
and ti mely i nformati on on the charges
rai sed from and the expendi tures made
t o t he sect or. I ndeed, t hi s l evel of
di sclosure i s now mandated through the
Ri ght to I nformati on A ct.
36
The World Bank commissioned a studyon Vehicle Fleet M odernization and Road User Charges
28 l
Introduction
1. There isan ongoing public policy debate
in India on how to fund the necessary new
i nvestment as well as operati ons and
maintenance on the growing national and
state highway network. The GOI and many
state governments are i nterested i n
broadening the role of the private sector in
hi ghway development wi th a vi ew to
strengthening and expanding private financing
of hi ghways. There are several k ey
determi nants of the vi abi li ty of pri vately
financed road programsincluding the country
regulatory and legal environment and the
resulti ng nature of the publi c/pri vate ri sk
regime. Compared with other infrastructure
projects, there are several financing difficulties
inherent in road projects e.g. the acquisition
of long-segments of ri ght of way and
associ ated resettlement i ssues as well as
unforeseen geological and weather conditions.
I n addi ti on, there are substanti ve ri sk s
associ ated wi th the unpredi ctabi li ty of
revenuesand toll receiptsdue to competing
routes, unexpected revi si on i n toll rates,
adverse local reacti on and avai labi li ty of
connecting roads. Thissection briefly describes
why and how governments can faci li tate
private sector participation (PSP).
Rationale for Private Sector Participation
in Indian Highways
2. Bridging the funding gap. Pri vate
funding first and foremost isoften seen asan
increasingly important means to bridge the
funding gap between the requirementsof the
sector and public resources available. Like
other publi c servi ces, the sector faces a
constrained fiscal environment - the general
fiscal deficit hasreturned to the 9-10% of GDP
range during the Ninth Plan period (1997/98-
2001/02)
37
. It hasbeen shown elsewhere that
the funding gap isabout Rs.1, 048 billion over
the next ten years. Into thisgap, private funds
have already started approxi mately Rs.
6, 500 Crore on NHs and a further few
thousand crore of Rupees f or SHs.
6. PRINCIPLES OF PRIVATE FINANCE
Furthermore, expectati ons are hi gh that
consi derable addi ti onal pri vate funds wi ll
come in the future. While the Tenth Plan
indicates a further 10, 000 km of NH to be
four laned, GOI budget allocations are only
providing for 40% ; hence; roughly Rs. 24, 000
Crore asbalance isbeing expected to come
form the private sector through toll based BOTs.
3. However, it is critical to remember that
the flow of private capital only helpspostpone
the capital coststo the tax payer and/or road
user unti l future years. Insofar as di rect
payment of tollsto a private operator detracts
from the Governments capacity to charge,
indirectly or directly, for road use, whether
new construction isfunded by the public or
privatessectorsdoesnot in of itself make any
difference from an economic perspective.
4. Achieving efficiency gains. A second
common argument in favor of private funding
of roads is to achieve efficiency gains. This
argument contends that gai ns can be
attributed to the following.
A system of incentives and
sanctions: moti vati on at company
level to earn a good return and
fear of bank ruptcy are passed on
t o i ndi vi duals wi t hi n t he f i rm
t hrough wage i ncreases and
career development opportuni ti es
encouraging them to work harder and
smarter.
Flexibility: the private sector has
greater flexi bi li ty i n adj usti ng i ts
resources(personnel, equipment and
materials) to a constantly changing
situation.
Comprehensive approach: when
entrusted with a long-term contract
and a wi der scope of work, pri vate
fi rms have an i ncenti ve to balance
expenditure over a projects life and
make effecti ve trade-offs between
i nvest ment , mai nt enance and
operat i on cost s subj ect t o
37
India. WhyFiscal Adjustment Now, World Bank, Forthcoming
Principlesof Private Finance
l 29
environmental, social and economic
considerations.
Access to technology: large firms
have greater incentive to invest in
research and development to
improve the quality and efficiency of
construction techniques, processes
and equipment.
5. Note however, that these potenti al
efficiency gains do not require the private
sector to assume traffic risk through their
revenuesbeing dependent on real or shadow
tolls.
6. Broadening the revenue base where
there is direct tolling. Common sense
suggests that private investors will have an
incentive to maximize toll receiptswhen they
rely on toll receipts in whole or in part for
returns. There are several reasons why this
may be the case. Fi rst, a normal profi t
maximizing firm will seek to reduce leakage
and ensure efficient collection. Second, there
is an incentive on an agency that relies on
tollsfor itsrevenue to set itspricesat a level
that maximizesrevenue i.e. to manage the
demand and supply curvesin a more rigorous
way than the public sector that might have
other objectives in mind. Third, given that
neither usersnor the government hasprima
faci e any i ncenti ve to rai se toll levels to
financially sustainable levels, private financiers
will be the only party clamoring for upward
revision of tolls. Highwayshave in the past
suffered from inadequate funding due to free
ride usersand politicians. Having an interested
party argue for a sustainable approach isbetter
than all partiescolluding in an unsustainable
system that postponestoo much payment to
future generations. Already, about 1, 400 km
and 500 km of national and state highways
respectively are tolled raising about Rs. 1500
Crore per year
38
.
7. Unbundling and Reallocating Risk.
M ore generally, the potential benefitsnoted
above can be described as unbundling and
shi fti ng the ri sk and rewards of a new
investment from the public to the private
sectorswith the expectation that thiswill lower
overall costs to soci ety. Li ke any human
activity, building a road isinherently risky not
just because estimated construction costsmay
escalate but more significantly also due to the
uncertainty of itsuse in the future. In a normal
Engineering Procurement Construction (EPC)
cash contract, road agencies share some of
the construction risk with the private sector
but retai n all the ri sk associ ated wi th
i nsuffi ci ent use or mi suse i n future ( for
example overloadi ng leadi ng to hi gh
mai ntenance costs) . There i s nothi ng
inherently wrong in thistraditional allocation
of ri sk after all, demand for a faci li ty
providing potential benefitsfar into the future
isat least significantly dependent on factors
well outside the control of the private sector;
for example, country and regional economic
growth, inter-modal competition and inflation.
Even governmentsstruggle to manage such
factors. M oreover, on the one hand, if a road
built at public expense exceedsthe forecasts
of traffic made prior to construction, then
society in general islikely to be rewarded more
by that ri sk havi ng been assumed by the
public sector than in the case of private funding
where shareholdersmay corner the majority
of the benefit. On the other hand, if the public
sector doesnot assume a risk then society in
general may not reap the full rewards.
8. However, road agenciesmay determine
that they prefer to manage the overall risk of
the investment by asking other partiesto take
on some risks, at a price of course, while
keeping some risksunder their own control.
Other partiesmay be better placed to control
risksdue to the prevailing incentive system or
some informational advantage. Overall costs
of the investment to society may therefore be
lowered. The choice to reallocate risksshould,
however, be based on a sound analysis of
alternatives.
9. As wi ll be argued below, the debate
today on private funding of highways does
not often go back to the first principles of
whether it makessense to use private funds
to manage a particular risk for societysoverall
benefi t on a hi ghway i nvestment. The
decision isdriven purely by the mistaken belief
that only private funding can make up the
funding gap.
38
World Bank estimates
30 l
Enabling Environment for PSP
10. International best practice shows that a
sound legal, i nsti tuti onal and procurement
framework form part of the necessary
foundation to enable and encourage private
i nvestment i n the sector. Indeed, provi di ng
an enabling environment and improving the
exi sti ng framework wi thi n whi ch PSP can
be implemented is a key factor in mobilizing
pri vate parti ci pati on and leveragi ng publi c
funds to meet the fi nanci ng needs of the
road sector.
11. Legislative Environment. A fai r and
i mparti al legi slati ve regi me i s an essenti al
prerequisite for sustainable development of
hi ghways proj ects wi th pri vate sector
parti ci pati on. Exi sti ng laws and regulati ons
can impose constraintsfor execution of such
proj ect s. A f ai r, i mpart i al, and non-
di scri mi natory legal regi me helps allay
investors apprehensionsabout discriminatory
treatment under law. Investors wi sh to be
reassured that the legal provi si ons i n force
and applicable in relevant spheres like land,
contract, property, corporate functi ons,
taxati on, labor relati ons wi ll be appli ed i n a
fai r, equi table and obj ecti ve manner and
would allow, i nter-ali a:
G rant of concessi on i . e. transfer by
G overnment of t he ri ght of
constructi on and mai ntenance of
roads to a pri vate party;
Levy and collecti on of tolls for use
of roads and faci li ti es by pri vate
investors;
St at ut ory back i ng f or t he
Concessi on Agreement speci fyi ng
the rights, duties and obligations of
the parti es i nvolved;
Repatri ati on of i nvestment and net
profitsafter expiry of the Concession
peri od; and
Safeguarding of investors interests
i n case of change of G overnment/
G overnment poli cy.
12. Regulatory Environment. Coupled
wi th a sound legal envi ronment i s the need
for fai r and i ndependent regulati on. Thi s
plays a significant role in dispute resolution,
fixation and revision of tolls and monitoring
of construction and maintenance contracts.
Broadly, a regulator needs to stri ke a fi ne
balance between i nvestors legi ti mate
concerns in getting a reasonable return, the
genui ne needs and requi rements of users
and governmental concernsof getting value
for money. Regulati on can be achi eved
ei ther through regulati on by contract
where each contract speci fi es the roles and
obli gati ons of the parti es i nvolved, and/or
by setti ng up a regulator to regulate sector
wi de acti vi ti es. Where a large pri vate
f i nance program i s planned, t he
establi shment of a regulator would be a
preferable opti on to mai ntai n a consi stent
regulatory regime and ensure a level playing
fi eld for all stakeholders. An autonomous
and independent regulatory authority is the
preferred opti on where a G overnment i s
seri ous about f aci li t at i ng PSP. To be
effective, such a Regulatory Authority would
i deally be a statutory, autonomous and
impartial body with appropriate powersand
functions.
13. Institutional arrangements for
facilitating PSP. Fragmented j uri sdi cti on,
multi ple authori ti es, complex procedural
requi rements and lack of capaci ty are si ted
asamongst the key deterrentsfor facilitating
PSP in infrastructure. Cumbersome approval
processesleave many important and routine
deci si ons to admi ni strati ve authori ti es.
Responsi bi li ti es should be clearly delegated
bet ween cent ral and local approval
authori ti es and rules and regulati ons for
approval process should be made
transparent. Standardized processessuch as
i nqui ry and submi ssi on forms, concessi on
contracts and O & M contracts faci li tate PSP
by i ntroduci ng effi ci ency and transparency
i n procedures. O ne- stop- shops are
usually successful i f there i s support from
the highest levelsof governments. Providing
all relevant approvals under a si ngle statute
i s one way to si mpli fy the approval process.
The Public/Private Risk Regime
14. Ef f i ci ent pri vate parti ci pati on and
successful private-public funding of a project
depend upon an appropriate identification,
measurement, distribution and management
of all ri sk s associ ated wi th a proj ect.
Theoreti cally, ri sk should be properly
l31
quantified and allocated to the party that is
best able to either control or bear that risk.
However, the di ffi culty i n predi cti ng and
subsequent management of ri sks makes
negoti ati on and contracti ng of pri vately
funded highwayscomplicated, intense, and
challenging. For both the private investor and
the Government, thisrepresentsa balancing
act of ri sks and rewards. A typi cal broad
allocation of risk isindicated in Table 6.1.
15. The Risk-Return Relationship A
government can reduce overall project costs
by di rectly assumi ng the ri sks than cannot
be assumed by the pri vate sector at a lower
premi um. Thi s may sti ll result i n resi dual
conti ngent li abi li ti es for the government. A
government should be clear about the types
and quantum of risks it wishes to transfer to
the pri vate sector. To the extent possi ble, i t
i s i n the hands of the government to: (i ) use
Table 6.1: Indicative Allocation of Risks in a Road Concession Project
Type of Risk Government Private Sector
Political Risks
Expropriation of the company
General modifications of the law and tax system
Specific modifications of the laws and tax system
Poli ti cal events
Termination of the contract by the government
Limitation of currency convertibility
M ateri ally adverse forei gn acti on
Construction Risks
Land acquisition
Cost overrun (excluding change of project)
Cost overrun (change of project)
Increase of financial costs
Risk on schedule and quality of works
Risk on administrative procedures delay time
Damages incurred by the works
Bankruptcy of the pri vate company
Operation Risks
Impact on the environment
Force maj eure
Technology ri sk
Cost overrun
Change in specifications
Commercial Risks
Traffi c shortfall ( to reference case)
Price control policy (tolls)
O ther revenues
Construction of competing facilities
Financial Risks
Inflati on
Interest rate
Exchange rate
Legal Risks
Permits and licenses
Li ti gati on
Source: PIARC Committee on Financing and Economic Evaluation, Financing of Road Infrastructures Guide for New M ethodsof
Financing and Public/Private Partnerships, 1999.
32 l
fi nanci al engi neeri ng techni ques to reduce
proj ect f i nanci ng cost s; ( i i ) reduce
systemati c ri sks
39
wi th a vi ew to mi ni mi zi ng
associ ated conti ngent li abi li ti es; and ( i i i )
manage all the non-systemati c ri sks that
cannot be avoi ded through fai r allocati on
of these ri sks between the publi c and the
pri vate sector. Thi s exerci se should be done
wi th a vi ew to mi ni mi zi ng the per capi ta
cost to soci ety. M any non-systemati c ri sks
can be controlled i n theory by the pri vate
sector and systemati c ri sks can be parti ally
managed by the government. In theory, only
those ri sks where the pri vate sector has an
i nformati onal or other advantage over the
publi c sector should be transf erred
otherwise society may end up paying more.
From an i nvest or s perspect i ve, non-
systematic risk must be adequately rewarded
and systemati c ri sk i n i ts i nvestment must
be reasonably ci rcumscri bed.
16. Managing Highways Main Risk -
Traffic Risk. O ne risk bears special mention
and wi ll be returned to i n later secti ons
volati li ty i n toll sales, where they form a
si gni fi cant porti on of total concessi onai re
revenue. T hi s i s f requent ly t he most
si gni fi cant ri sk for tolled road proj ects, due
to the price-elasticity of demand (the higher
the toll the fewer the users and vi ce versa)
i mpacti ng traffi c levels. Unfortunately,
forecasts of current and future demand are
seldom exact and are often i ncorrect by
orders of magni tude. Natural bi ases and a
principal/agent problem arise in forecasting
whereby the host government could be
more optimistic than private operators; and
wi th the protecti on of li mi ted li abi li ty,
i nvestors could be more opti mi sti c than
lenders in their expectations. M oreover, the
availability of alternative roadsand potential
constructi on of competi ng routes by other
part i es, as well as det eri orat i on of
connecti ng roads, are also maj or ri sk s
affecti ng revenue forecast for pri vately
funded toll road projects. Although toll road
projects frequently assume that one or both
parti es to the contract can si gni fi cantly
control thi s ri sk, thi s assumpti on may prove
a fatal flaw i n the logi c of many proj ects
unless there i s a capti ve market such as for
a bypass, tunnel or bri dge.
Additional Support by the Public Sector
17. Road concessi ons often requi re varyi ng
forms of government support, i f only as
i nt eri m f i nanci ng unt i l t he proj ect s
performance has been demonstrated to
i ncrease the possi bi li ty of rai si ng long-term
capi tal ( see Annex 9 for a li st of examples) .
Thissupport contributesto the management
of ri sk s. O ne tool that i s avai lable to
governments to adj ust and fi ne tune the
di stri buti on of ri sks between the parti es i s
the payment mechani sm. Thi s may take
many forms of revenue support, revenue
sharing, subsidies/ grants, and subordinated
loans. Further public support to the financing
of PSP programs could i nclude ri sk
i denti fi cati on and allocati on i n a proj ect.
Thiscould include risk mitigation instruments
such as soverei gn ri sk guarantees. Parti al
Ri sk G uarantees provi ded by multi lateral
banks, for example, could faci li tate pri vate
proj ect fi nanci ng, by coveri ng debt servi ce
def ault due t o non-perf ormance of
contractual obli gati ons undertaken by the
government or thei r agenci es i n road
proj ects. These guarantees would catalyze
f urther pri vate f i nance by assi sti ng i n
allocating the risksof a project to the parties
best able to bear those ri sks.
18. The Risk-Return Relationship. A
government can reduce overall project costs
by di rectly assumi ng the ri sks than cannot
be assumed by the pri vate sector at a lower
premi um. Thi s may sti ll result i n resi dual
contingent liabilities for the Government. A
Government should be clear about the types
and quantum of risks it wishes to transfer to
the pri vate sector. To the extent possi ble, i t
i s i n the hands of the government to: (i ) use
fi nanci al engi neeri ng techni ques to reduce
proj ect f i nanci ng cost s; ( i i ) reduce
systemati c ri sks
40
wi th a vi ew to mi ni mi zi ng
associ ated conti ngent li abi li ti es; and ( i i i )
manage all the non-systemati c ri sks that
cannot be avoi ded through fai r allocati on
39
Systemic risksare exogenousfactorsoutside the control of the investor that reflect the sensitivityof the expected return of the project in relation to
the market and overall economy. These risksare measured byBeta factors(covariance between the return of the project and the overall market, divided
bythe variance of the overall market). Non-systematic risksare endogenousand specific factorsto the project.
40
Systemic risksare exogenousfactorsoutside the control of the investor that reflect the sensitivityof the expected return of the project in relation to
the market and overall economy. These risksare measured byBeta factors(covariance between the return of the project and the overall market, divided
bythe variance of the overall market). Non-systematic risksare endogenousand specific factorsto the project.
l 33
of these ri sks between the publi c and the
pri vate sector. Thi s exerci se should be done
wi th a vi ew to mi ni mi zi ng the per capi ta
cost to soci ety. M any non-systemati c ri sks
can be controlled i n theory by the pri vate
sector and systemati c ri sks can be parti ally
managed by the government. In theory, only
those ri sks where the pri vate sector has an
i nformati onal or other advantage over the
publi c sector should be transf erred
otherwise society may end up paying more.
From an i nvest or s perspect i ve, non-
systematic risk must be adequately rewarded
and systemati c ri sk i n i ts i nvestment must
be reasonably ci rcumscri bed.
19. Managing Highways Main Risk -
Traffic Risk. O ne risk bears special mention
and wi ll be returned to i n later secti ons
volati li ty i n toll sales, where they form a
si gni fi cant porti on of total concessi onai re
revenue. T hi s i s f requent ly t he most
si gni fi cant ri sk for tolled road proj ects, due
to the price-elasticity of demand (the higher
the toll the fewer the users and vi ce versa)
i mpacti ng traffi c levels. Unfortunately,
forecasts of current and future demand are
seldom exact and are often i ncorrect by
orders of magni tude. Natural bi ases and a
principal/agent problem arise in forecasting
whereby the host government could be
more optimistic than private operators; and
wi th the protecti on of li mi ted li abi li ty,
i nvestors could be more opti mi sti c than
lenders in their expectations. M oreover, the
availability of alternative roadsand potential
constructi on of competi ng routes by other
part i es, as well as det eri orat i on of
connecti ng roads, are also maj or ri sk s
affecti ng revenue forecast for pri vately
funded toll road projects. Although toll road
projects frequently assume that one or both
parti es to the contract can si gni fi cantly
control thi s ri sk, thi s assumpti on may prove
a fatal flaw i n the logi c of many proj ects
unless there i s a capti ve market such as for
a bypass, tunnel or bri dge.
Additional Support by the Public Sector
20. Road concessi ons often requi re varyi ng
forms of government support, i f only as
i nt eri m f i nanci ng unt i l t he proj ect s
performance has been demonstrated to
i ncrease the possi bi li ty of rai si ng long-term
capi tal ( see Annex 9 for a consoli dated li st
of examples). Thissupport contributesto the
management of ri sk s. O ne tool that i s
available to Governments to adjust and fine
tune the di stri buti on of ri sks between the
parties is the payment mechanism. This may
tak e many f orms of revenue support,
revenue shari ng, subsi di es/ grants, and
subordi nated loans. Further publi c support
to the fi nanci ng of PSP programs could
i nclude ri sk i denti fi cati on and allocati on i n
a project. Thi s could i nclude ri sk mi ti gati on
i nst rument s such as soverei gn ri sk
guarantees. Parti al Ri sk G uarantees, for
example, could faci li tate pri vate proj ect
fi nanci ng, by coveri ng debt servi ce default
due to non-performance of contractual
obli gati ons undertaken by the government
or thei r agenci es i n road proj ects. These
guarantees would catalyze further pri vate
fi nance by assi sti ng i n allocati ng the ri sks
of a proj ect to the parti es best able to bear
those ri sks.
34 l
Introduction
1. Internationally, there isa spectrum of risk
transfer to the private sector with construction
contractstransferring the least risk, and toll
based Design-Build-Finance-Operate (DBFO)
transferring the most risk (see Figure 7. 1).
Although the overall rationale for choosing a
particular arrangement isto promote efficiency
(including reducing the overall coststo society
of management of the inherent risk in road
constructi on), fai rness and accountabi li ty,
di fferent arrangements address di fferent
needs. A projects speci fi c objecti ves may
determi ne to a large extent the type of
arrangement to use. Specific objectives can
include, for example: (i) to reduce public sector
maintenance responsibility; (ii) to reduce costs
to the public sector through use of innovative
construction or design techniquesand tighter
risk control; and (iii) to improve incentivesfor
revenue collecti on and reduce revenue
leakage. Thischapter seeksbriefly to identify
how some governments have applied the
theory noted above, most especially in those
areaswhere it isbelieved that India can most
benefi t from such experi ence. I t i s not
intended asa full account of thisexperience
which can be accessed elsewhere
41
.
7. INTERNATIONAL EXPERIENCE WITH PRIVATE FINANCE
Overview
2. Privately funded road projects typically
form only a small percentage of the total
highway network of a country and overall
private funding flows have been modest in
comparison with total flows to the sector.
From 1992 to 2003, globally pri vate
investment in highwayshad a median value
of $4. 2 bi lli on/year representi ng a small
fraction of total expenditure on the Worlds
highway network
42
. Except for Argentina and
Chile, the countrieswith the most active PSP
road programs, most countrieshave entrusted
lessthan one-tenth of their main road network
to the private sector
43
. Indeed, Latin American
countrieshave had the highest share of their
national roadway funded and operated by the
private sector the region accounted for 53%
of private highway investment from 1992 to
2002
44
. For example, two-fifthsof the main
roadsin Chile, and about a third in Argentina
are toll roadswith private participation. China,
Indonesia, M exico and M alaysia are other
developing economieswhere there hasbeen
significant private investment in highways.
Elsewhere, private investment hasbeen more
modest. Nevertheless a large number of
41
Far wider coverage of thisissue isavailable at
http://rru.worldbank.org/Toolkits/highways/documents/start.HTM
http://www.worldbank.org/html/fpd/guarantees/assets/images/120.pdf
Asian Toll Road Development Program Assessment Report, M inistryof Construction Japan and World Bank, 2001
42
http://rru.worldbank.org/ppi/
43
Toll Roads- PublicPolicyfor the Private Sector, No 224, World Bank, 2000
44
Source, ibid
International Experience with Private Finance
Figure 7.1
Public-Private Partnerships and the Risk-transfer Continuum
l35
countrieshave experimented with contracts
that allow di fferent degrees of pri vate
participation in the road sector, transferring
di fferent ri sks and to di fferent degrees,
particularly for maintenance.
3. A review of recent experience in some of
the Asian countriese.g. Indonesia, Thailand,
Philippines, Hong Kong, and India ishelpful in
understanding how a government can promote
PSP in the road sector and identifying some of
the favorable/inhibiting factors. These factors
are explored below.
4. In the context of significant inhibiting
factors, asdescribed above, the Governments
need to be sure that the motivation for using
private finance is properly considered and
justified. PSP projectsrequire considerable due
diligence on the clients side as well as the
investors side both in order to establish
whether value for money is being obtained
when providing public support and to protect
consumersfrom monopolistic pricing over what
is generally a very long time horizon. Some
governments, such as Canada, the State of
Vi ctori a i n A ustrali a and the UK , have
prescribed a detailed processto undertake this
due diligence (see Box 7.1). In the absence of
such a process, governments can expect a
higher probability of failure in PSP.
The Enabling Environment
5. Legislative and Regulatory
Environment. Where governments have
been seriousabout facilitating PSP in the sector,
they have been wi lli ng to provi de a new
enabling legal framework asnecessary. Where
the legal framework has been weak, PSP
programshave often faltered. For example, in
M exico the 6, 000 km long privately financed
toll road program hascome unstuck. Part of
the reason for thisisthe lack of a clear legal
and regulatoryinstitutional arrangement which
di scouraged lenders and i nvestors from
respecti ng agreements. The i ndependent
regulatory authority also lacked sufficient
capacity so disputes were resolved in local
courts which discouraged foreign investors
wary of local biases. The conflicting dual role
of Secretari at for Communi cati ons and
Transport as part regulator part concession
partner sent conf li cti ng si gnals to
concessi onai res
45
. In compari son, Box 7. 2
shows an example of the key legal actions
taken by Chile.
6. Public Sector Planning and
Implementing Capacity. O ne cri t i cal
success factor i denti fi ed i n a revi ew of a
number of concessi on proj ects i n seven
countri es was the establi shment of a
dedi cated proj ect team on the cli ent si de
made up of experienced professionalsin the
areas of engi neeri ng, fi nanci ng, market
analysi s, revenue forecasti ng and legal
matters
46
. The team would need to have the
sk i lls and aut onomy t o prepare and
supervi se PSP proj ects and should not rely
heavily on external technical assistance. This
approach i s used in some Australian states
45
Asian Toll Road Development Program Assessment Report , M inistryof Construction Japan and World Bank, 2001
46
Bidding for Private Concessions. RM C Discussion Paper 120, 2001, World Bank
Favorable factors Inhibiting factors
Firm political will and commitment to the PSP Lack of an integrated institutional policy and
approach framework for proj ect i denti fi cati on, feasi bi li ty
studies, project approval, etc.
Sound and growing economy, as well as a low Lack of coordination between various government
and stable exchange rate agencies involved with road sector projects
Developed/developing capital market, capable of Absence of a statutory, autonomous, regulatory
handling project financing through innovative authority (at arms length from government) for
procedures. di spute resoluti on, toll fi xati on/revi si on and for
ensuring a level playing field for all participants
Delays in decisions regarding government support-
both in kind (land for example) and/or investment
delay i n land acqui si ti on i s a bottleneck i n many
countri es
A bsence of transparency and competi ti on i n
procurement and award processes-competi ti ve
bidding procedures not followed in many cases.
36 l
Box 7.2 Legal and Regulatory Provisions: Chile
K ey legal provi si ons put i n place through Decree i n 1991 and then laws of 1993 and 1996,
together wi th associ ated regulati ons i n 1991 and 1997.
Legi slati on created system of competi ti ve bi ddi ng based on flexi ble arrangements for awardi ng
concessi ons, establi shi ng mutual ri ghts and setti ng up confli ct resoluti on mechani sm.
Bi -lateral sole source agreements not permi tted though unsoli ci ted bi ds acceptable provi ded
there i s competi ti on i n actual procurement.
Cri teri a for awardi ng bi ds expli ci tly stated i n law and regulati ons. Bi d documents to speci fy
evaluati on cri teri a.
Three person conci li ati on commi ssi on to settle all di sputes ori gi nati ng from the i nterpretati on
and i mplementati on of the concessi on contract consi sti ng of one government nomi nee, one
concessi onai re nomi nee and one agreeable to both parti es who acts as chai rman. The
commi ssi on can also act as an arbi trati on tri bunal i n the event that conci li ati on i s not successful
wi thi n 30 days
Source: Toll Road Concessi ons, the Chi lean Experi ence, PFG Di scussi on Paper 124, World Bank, 2003
Box 7.1 The Public Sector Comparator
In early 1990s, the UK government enacted legi slati on to gui de, faci li tate and fi nance the development
of Compulsory Competi ti ve Tenderi ng, Pri vate Fi nance Ini ti ati ves ( PFIs) and Publi c-Pri vate Partnershi ps
( PPP) . Under thi s legi slati on, the UK Treasury ensures that any i ni ti ati ve contemplati ng a PFI or a PPP
develops a Publi c Sector Comparator ( PSC) based on a hi ghly prescri bed process. The moti vati on for
enforci ng the use of a PSC was poor performance i n earli er PFI/PPP proj ects, uni on pressure and a strong
Treasury commi tment to accountabi li ty and transparency i n publi c spendi ng.
The PSC i s a method used to calculate the i n-house cost of deli veri ng a proj ect and/ or servi ce and
compari ng thi s wi th a pri vate fi nance opti on. It serves the followi ng purposes: to determi ne i f the proj ect
i s affordable to government by ensuri ng full li fe cycle costi ng at an early stage; to test whether a PPP i s
vi able and demonstrates value for money; to communi cate wi th partners on such key aspects as output
speci fi cati ons and ri sk allocati on; and to encourage broader competi ti on by creati ng greater confi dence
i n the bi ddi ng process.
A typi cal PSC i ncludes:
A n esti mati on of the basi c costi ng i ncludi ng capi tal and operati ng costs;
The approach taken i n relati on to thi rd party revenues;
The approach taken on asset values on transfer, di sposal and termi nati on of the contract;
A ri sk matri x, showi ng the vari ous sources of ri sk, thei r costs, the li keli hood of thei r occurrence,
and the consequences for the proj ect;
A di scounted cash flow forecast; and
Sensi ti vi ty analyses, showi ng the consequences of varyi ng key assumpti ons.
The PSC commences as a hi gh level document to gauge i nternal acceptance and then evolves i nto a
detai led assessment. The responsi bi li ty of desi gni ng and i mplementi ng the PSC remai ns wi th the publi c
sector agency i nvolved i n the parti cular proj ect, although pri vate sector advi sors can provi de support.
The si gni ng authori ty for a PPP has to sati sfy hi m/herself that the PSC has been properly conducted and
the PPP opti on found preferable.
Source : http: //www. ogc. gov. uk/sdtoolki t/reference/ogc_li brary/PFI/seri es_3/technote5/5tech_contents. html
47
Designing Toll Road ConcessionsLesson from Argentina, PublicPolicyfor the Private Sector, World Bank, 1996
and wasused in some early transport projects
in the UK. The Philippinesestablished a One
Stop-A cti on C enter to help i nvestors
understand the processof obtaining consents
and permits. One analysisof the mixed success
in Argentina stated that a key lesson learned
was that institution building must be taken
seriously if poor and slow decision making was
not to plague the process
47
.
7. Project Procurement. Experience has
shown that to maximize interest from qualified
bidders, governmentsneed to adopt a strategy
designed to reduce the costsof tendering and
restrict the number of biddersin the final round
l 37
48
Source. Bidding for Private Concessions. RM C Discussion Paper 120, 2001, World Bank
to only three or four. The tender procedure
also needs to be undertaken openly and
swi ftly and bi dders should have to respond
t o a clear set of requi rement s and
speci fi cati ons coveri ng the commerci al,
f i nanci al and techni cal aspects of the
project
48
. A number of different criteria have
been used to evaluate proposals i ncludi ng
lowest toll rates, shortest concession period,
lowest subsi dy to be provi ded by the state,
hi ghest payment t o be made by t he
concessi onai re and least present value of
revenue levels. Experi ence demonstrates
that evaluati on of bi ds should i deally be on
the basi s of a si ngle cri teri on to provi de
t ransparency and prevent subj ect i ve
tradeoffs duri ng evaluati on.
The Management of Risks
8. Volatility of Toll Sales. In formulati ng
the procurement system and associ ated
preferred risk allocation, the risk associated
wi th traffi c demand i s the most di ffi cult to
deal wi th. Some countri es i ntroduced tolls
for publi cly fi nanced roads fi rst, pavi ng the
way for a toll paying culture amongst users,
i n order to faci li tate the later development
of pri vate sector funded toll roads wi th full
transfer of traffic risk (see Box 7. 3 on Korea).
Revenue risks could be mitigated for private
fi nanci ers of tolled proj ects by the host
government through the use of mi ni mum
revenue guarantees (which may be coupled
wi th upsi de revenue shari ng) .
9. Pri vat e f i nanci ers can be more
effecti vely shi elded from publi c resi stance
to tolli ng yet made accountable for thei r
operational performance through the use of
shadow tolls . In earlier UK DBFO projects
and i n countri es such as Holland, Norway,
Portugal, Poland and the Czech Republi c,
payments have been made by the state to
concessi onai res based on traffi c levels
( shadow tolls) or avai labi li ty of the road.
These payment mechani sms reduce the
demand ri sk that otherwi se exi sts on real
toll roads. Shadow tolls may be set i n
bands so that at low traffi c levels the toll
(government payment) per vehicle is higher,
and the average toll (government payment)
decreasesasthe number of vehiclesincrease
(one version with a fixed minimum payment
is shown in Figure 7. 2). This enables bidders
to develop expectati ons of revenue whi ch
are more robust compared wi th real toll
roadsfor a number of reasons. First revenues
are not subj ect di rectly to elasti ci ty of
demand. As the government i s maki ng the
payment per vehi cle rather than the user,
there i s no overt di si ncenti ve for the user
not to use the faci li ty (they are not payi ng a
toll at the poi nt of use) . Second, downsi de
ri sk , where traffi c volumes are low, i s
parti ally mi ti gated by bandi ng of rates wi th
hi gher rates at lower traffi c levels. Thus, a
shadow toll mechani sm i s more attracti ve
to lenders as thi s reduces the volati li ty
caused by real tolls.
10. Protection from competing facilitiesand
i nadequat e connect i ng roads vari es
between countri es and road programs, but
i t i s consi dered equi table for thi s ri sk to be
Figure 7.2: Two Tier Shadow Toll Variations
38 l
pri nci pally borne by the state and only
i nci dentally by the pri vate sector. The
contracti ng authori ty may not have di rect
responsi bi li ty for the competi ng route or
connecti ng road ( often a local authori ty
asset), but clearly it has more influence over
the local authori ty than the concessi onai re
and therefore i s best placed to manage thi s
risk. The outcome of transferring this risk to
the private sector is, at best, higher financing
cost s and/or lower concessi on f ees
recei vable by the government, and, at
worst, a deal that i s not bankable.
11. For real tolled facilities, financiersneed to
anti ci pate the revenue volati li ty and
uncertainty caused by real tollsand base their
financial projections on some of the worst
downside characteristics. Experience shows
financiersare not alwaysadept at managing
the demand ri sk , as evi denced by the
conclusions of a recent review of cancelled
private infrastructure projectsbetween 1990
and 2001 from around the globe
49
. About 6%
of toll roads(mostly in M exico and Hungary)
were cancelled during thisperiod representing
about 16% by value of the private investment
in the sector. The one factor that contributed
most significantly to these cancellationsof toll
road projectswasthat roadscould not attract
enough users to meet opti mi sti c traffi c
forecasts. Further, the authorsconjectured that
where governments were willing to assume
some or all traffic risks, investorsdue diligence
on demand forecasts may have been less
thorough.
12. Overall, it isdebatable whether it makes
sense to transfer traffic risk substantially to the
private sector apart from in cases such as
bridges, tunnels and bypasses where traffic
demand can be better assessed and managed.
The Public AccountsCommittee that scrutinizes
all public expenditure in the UK had this to
say about four DBFO projectsprocured during
the early 1990swhere shadow tollswere the
payment mechanism.
Departments should consider carefully the
implicationsof basing paymentsto operators
on volumesof activity over which neither the
publi c sector nor the operators have any
effective control. In the case of these four
contracts, payments to operators are based
pri mari ly on traffi c volumes whi ch are,
however, notoriously difficult to forecast. In
other words, the Agency have created a risk
which is borne by the operators and which
can be expected to have increased their costs.
PFI can deliver better value than traditional
methodsof procurement if risksare transferred
to the partiesbest able to handle them. But it
isa mistake to confuse risk transfer with risk
creation, which issimply likely to increase costs
to the taxpayer.
49
Infrastructure Projects A Review of Cancelled Private Projects, Public Policyfor the Private Sector, Note No 252, World Bank, January2003
50
O f course, anyrevenuesaccruing to Government from indirect road user chargeswill add to the total burden on road users.
Box 7.3 Toll Pooling
Japan: Si nce 1972, tolls from expressways and other regi onal hi ghways have been pooled through the
Japan Hi ghway Constructi on Corporati on. The tolls are set accordi ng to the followi ng pri nci ples: ( i )
redempti on - toll roads must pay off thei r debts; ( i i ) benefi t - toll rates must not exceed the benefi t the
users recei ve; and ( i i i ) j ust-and-fai r pri nci ple - toll rates charged must be set at j ust and fai r levels.
K orea: The K orea Hi ghway Corporati on, 82% G overnment owned, was establi shed i n 1969 and i s
responsi ble for the development, mai ntenance and operati on, i ncludi ng tolli ng, of about 2, 100 km of the
K orean hi ghway network. The roads constructed by the Corporati on were funded i ni ti ally by G overnment
support and debt on the Corporati ons balance sheet. Tolls were earli er set to cover the anti ci pated O & M
costs. Now toll rates are determi ned on the basi s of the benefi t to user pri nci ple. In 2000, the Corporati on
rai sed $1. 43 bi lli on i n tolls. O ver the peri od from 1995 to 2006, i t i s expected that tolls wi ll rai se about
31% of total agency revenues, loans/bonds about 42% , G overnment support 22% and other revenues
5% . O f thi s 36% , 22% and 42% wi ll go towards debt repayment, mai ntenance and new constructi on
respecti vely. Thi s means that toll recei pts are coveri ng not only O & M but also constructi on, ei ther by way
of repayment of exi sti ng debt or i n actual new i nvestments
50
. A bout 25% of i ts staff are devoted to toll
collecti on. M ore recently, K orea has started to concessi on some more heavi ly traffi cked exi sti ng and new
hi ghways.
Source:
Kengo M izuno, Lessons Learned: Public-Private Partnerships on Japans M ega-projects, PW Financing,
January1996, pp. 1-7
http://www. freeway. co. kr/eng/html/Corporation/sub01_01. html
l 39
51
http://www.macquarie.com/uk/about_macquarie/media/20030113.htm
13. In more recent DBFO projects, the UK no
longer uses shadow tolls as the payment
mechanism, but rather paysaccording to lane
avai labi li ty and acti ve congesti on/safety
management.
14. A Possible Solution - Toll Pooling. One
option that hasbeen practiced in a number of
countri es wi th some success i s the
establishment of a uniform publicly managed
toll system (see Box 7.3). The pooling of toll
revenues allows for cross-subsi di zati on of
lower traffi cked routes, effi ci enci es i n toll
collecti on, a more gradual i ncrease i n the
level of tolls to bui ld user acceptance and
diversification of traffic risks. It also removes
a large porti on of the poli ti cal ri sk of
i nterference i n a toll rate that had earli er
been agreed between a government and a
concessionaire. The government isthen free
to choose between a more or less di rect
user chargi ng regi me to meet publi c poli cy
obj ecti ves at the same ti me as manage
publi c opi ni on. M any European countri es
seem to movi ng towards thi s concept. For
example, Swi tzerland and A ustri a have
recently i mplemented addi ti onal network
wide weight distance toll systemsrecovering
new fundsfrom the trucking industry. The toll
receipts are pooled and then hypothecated
towards hi ghway i mprovements and
maintenance. A Global Positioning System
(GPS) based wei ght/di stance toll system i n
Germany isalso to be made operational next
year. Thi s i s desi gned to rai se dedi cated
revenue from truckers for si x-lani ng the
majority four-lane motorway network.
15. A Portfolio Approach for Risk
Diversification. Si mi lar to the publi cly
managed toll pooling approach mentioned
above, the private sector can also diversify risks
through adoption of a portfolio investment
approach adopted. A n example of thi s
approach isRoad King Infrastructure Limited
(RKI) of Hong Kong (RKI). Asof 2002, RKI had
a portfolio of 22 toll road projectsin mainland
Chi na coveri ng about 1, 000 km, mai nly
operating with joint venture partnersfor specific
projects. RKI leveragesthe creditworthinessand
the track record of its portfolio of highway
proj ects i n Chi na, thereby di versi fyi ng i ts
investment portfolio into variousregions(high
growth centers) and risk profiles. A similar
approach i s bei ng appli ed by A ustrali as
M acquari e Bank and the K orean lender
Shinhan Financial Group, joint managers of
the Korean Road Infrastructure Fund (KRIF).
KRIF wasset up asa 10-year closed fund by
M acquari e and Shi nhan i n January 2003,
raising 247 billion won (about $200 million)
from Korean institutional investors. It hassince
raised a further 120 billion won. It made its
first purchase in M arch 2003, spending 177.8
billion won on a toll road in the southern city
of Kwangju and isplanning to invest in another
six toll roadsin Korea. In future, the intention
is to list the KRIF and thereby tap the retail
investor market
51
.
16. Because the useful lives of most road
assets are quite long, the most appropriate
long-term capital is provided by insurance
compani es, pensi on f unds and si mi lar
institutional investors. Listed companiesthat
invest in a portfolio of highwayswith proven
traffic trendscan provide the required interim
fi nanci ng for hi ghway proj ects unti l the
operating performance of these highwayshave
been sufficiently demonstrated for the project
to receive an investment grade rating and to
obtain long-term capital.
Additional Public Support
17. Loansare the most common form of public
funding. Generally, these are low-cost funds,
rai sed by the i ssuance of government-
guaranteed bondsor long-term, low interest
or interest-free loanssupplied from general or
earmarked accounts. In the US, public toll road
authoritiesissue debt instrumentsknown as
revenue bonds , which are serviced entirely
by the toll revenues collected by the issuing
authori ty. The tax-exempt status of these
instrumentshasbeen a key consideration for
enhancing investor interest in such instruments.
Initially, the respective US state governments
guaranteed toll road bonds. However, external
credit enhancement measures are generally
not required, asthe credit worthinessof the
issuing authoritiesisnow established.
18. In France, limited access, grade-separated
i nter-urban expressways, k nown as
Autoroutes , have been developed over the
40 l
last 30 years. Such expressways account for
only 4% of the national road network, and
carry 40% of the road traffic. Asof 1997, the
toll road network in France wasaround 6, 700
km, involving an investment of about $28
billion. 72% of the total motorway network in
France is tolled. In the initial stages, the
Government extended concessional finance up
to 70% of the proj ect costs to pri vate
concessi onai res; 52% from the Central
Government and 18% from local governments.
The balance was met through equi ty
contribution of private concessionaires. In the
second phase of development, government
assistance was less than the 1960s, with
construction advances (interest-free loans)
being offered only for segments that the
Government deemed unprofitable
52
.
52
Source: a. Caisse Nationale desAutoroutes, Annual Report of the Board of Directors, 2001.
b. http://www.unescap.org/tctd/pubs/files/econreg_chII.pdf
53
Kengo M izuno, LessonsLearned: Public-Private Partnershipson JapansM ega-projects, PW Financing, January1996, pp. 1-7
19. Japan has one of the longest toll-road
networksin the world (9, 200 km). Nearly two-
thirds of the 12, 700 km of trunk roads and
expressways(of the total road network of more
than 1 million km) are tolled. Roads were
i ni ti ally f unded through publi c means
dependent on a Road Improvement Special
Account. Thisdrew resourcesfrom tolls, central
and local taxeson fuel and freight transport.
Later, highwayprojectswere promoted bylarge
construction companieswith subsidized debt.
Such companiesinject the equity, usually about
10% of the funding requirement. Senior debt
has been provided by Japanese commercial
banks, regional banks, or trust companies,
with some participation by the Development
Bank of Japan. Debt has been underwritten
by Government. There isno sign yet of pure
financial investorsor of bond issues
53
l 41
Policy and Legal Environment
1. Government Policy for PSP. The
overall obj ecti ves for the development of
roads i n I ndi a are lai d down i n the Tenth
Plan ( Box 8. 1) . Thi s plan recogni zes that
8. INDIAN EXPERIENCE WITH PRIVATE FINANCE
to achi eve the proj ected G DP growth, the
i ndustri al sector needs to grow at more
than 10% per annum wi th a resultant
i ncreased demand for transport servi ces.
A n i ncreased role for the pri vate sector i n
meeti ng thi s demand i s expli ci tly sought.
54
Amended in 1977, 1992, 1995 and 1997.
Box 8.1 Transport Policy Goals in the 10th Plan
The following goals are made in the Tenth Plan:
M eeting the transport demand generated by higher rate of GDP growth;
Ensuring transport development is balanced, with special attention to remote regions such as the
North-East;
Capacity augmentation, quality and productivity improvements through technology upgradation;
Higher maintenance standards to reduce the need for frequent reconstruction;
Hi gher generati on of i nternal resources and i ncreased pri vate sector parti ci pati on i n provi di ng
transport servi ces;
Increase efficiency by bringing competition in the provision and maintenance of infrastructure and
servi ces wherever possi ble;
Higher emphasis on safety, energy efficiency, environmental conservation and social impacts; and
Developi ng an opti mal i nter-modal mi x where each mode operates effi ci ently, accordi ng to i ts
comparative advantage, and complements services provided by other modes.
Source: Para 8. 3. 18 of Draft 10
th
FYP, Planning Commission
2. National Legislative Changes. The
1956 Nati onal Hi ghways A ct has been
amended
54
to permi t pri vate entrepreneurs
to undertak e NH proj ects on a BO T basi s
and recover thei r i nvestments through
t ol l s. U nder t hi s A ct , a si mpl i f i ed
procedure was prescri bed for acqui si ti on
of land for the bui ldi ng, mai ntenance,
management or operati on of a Nati onal
Hi ghway, and separate provi si ons were
made for the levy and collecti on of fees
i n respect of both publi c and pri vate
funded proj ects. The G O I has framed a
supporti ng poli cy ( Box 8. 2) .
3. State Legal Framework for PSP.
The 1851 Indi an Toll A ct makes i t possi ble
for State G overnments ( SG ) to levy and
collect tolls on any road or bri dge whi ch
has been made or repai red at the expense
of the central government or any SG .
However, the A ct needs to be amended
by respecti ve SG s to allow the pri vate
sector to levy and collect tolls on State
roads and bri dges. Some SG s have i ndeed
amended the A ct for example Uttar
Pradesh and M adhya Pradesh - or
otherwi se tak en legal steps i n order to
promote PSP ( see Table 8. 1) .
4. I n addi ti on to amendi ng the I ndi an
Toll A ct, another avenue bei ng followed
by some States i s to enact a uni form law
for i nfrastructure development. Enacted
laws i nclude the 2001 A ndhra Pradesh
I nfrastructure Development Enabli ng A ct
42 l
Indian Experience with Private Finance
Box 8.2 Main Features of GOI Policy for PSP in the Roads Sector
Foreign Direct Investments up to 100% is permitted.
NHAI can participate with up to 30% of the total equity of a company floated to develop a road project.
NHAI can provide capital grants to the developers of a road project on a case by case basis.
Suitable traffic support/guarantee is provided on a case to case basis.
Real estate development can be made an i ntegral part of BO T proj ects to enhance thei r fi nanci al
viability.
Entrepreneurs to be protected agai nst force maj eure si tuati ons i ncludi ng poli ti cal, non-poli ti cal and
legislative changes.
Di spute resoluti on of arbi trati on would be under the 1996 Indi an Arbi trati on and Conci li ati on Act,
incorporating United Nations Commission on International Trade Law (UNCITRAL) provisions.
The ownershi p of the land for hi ghway constructi on and roadsi de faci li ti es conti nues to vest i n
Government. M ortgaging of such land is not allowed. However, land can be leased to entrepreneurs.
Unified check barriers at the inter-state borders to be provided. Such barriers would be located outside
the right-of-way with proper entry/exist layout.
Source: Road Development Report Vision 2021, M O RTH, Government of India (asamended)
55
See http://www. aproads. com/html/salient. htm for more details
56
See http://www. gsrdc. com/htmls/index3. htm for an extract of the full Act
( IDEA) and the 1999 G uj arat Infrastructure
Development A ct ( G I DA )
56
. The latter i s a
good example of how SG s are seeki ng to
ci rcumscri be ri sks for pri vate parti es. The
Act isvery detailed and providesfor several
private sector participation options. The Act
also provi des f or the use of an open
competitive bidding process based on pre-
qualification, a technical evaluation, and a
financial evaluation, and laysdown the criteria
Table 8.1: Legal Provisions to Encourage PSP in Six Selected States
State Legal Provisions
Andhra Pradesh The SGspublication Private Investment in Road projectsin Andhra Pradesh , proposes
to amend the AP State M otor VehiclesAct along linessimilar to the National Highways
Act to enable private partiesto levy tollsand regulate traffic on the facility constructed
by them.
55
Issued a poli cy framework for pri vate parti ci pati on i n Roads Sector through a
Government O rder i n September 1997.
K arnatak a Not defined
M adhya Pradesh 1992 Amendment to Indian Toll Act allows the SG to lease the levy tolls on roads or
bridges, at prescribed rates, by public auction or private contract for up to 15 years.
M aharashtra Amended Secti on 20 of the 1958 State M otor Vehi cle Tax Act to enable pri vate
parties to levy tolls on any motor vehicle on bridges and tunnels through a BO T
agreement. Section 17(4) of the 1975 M M RDA Act providesfor charging tollsfor the
use of amenities provided by M M RDA.
Uttar Pradesh 1974 Indi an Toll Amendment Act transfers State responsi bi li ti es to the U. P. State
Bridge Corporation Ltd. , a State Government Company under the Companies Act
with the right to manage and collect the tolls levied on roads and bridges. Section 2
of the same Act permits the SG and the U. P. State Bridge Corporation Ltd. to lease
the right to collect tolls to any third party.
West Bengal Legal provisionsrelating to levy of tolls: (i) on heavy trucksand busesunder the 1993
West Bengal M unicipal Act, asamended in 1997; (ii) on roadsand vehiclesunder the
1980 Calcutta M unicipal Corporation Act; (iii) on the Howrah Bridge under the 1926
Howrah Bridge Act; and (iv) on all types of vehicles and animals passing over or
through any bridge constructed under the 1969 Hooghly River Bridge Act.
l 43
for financial evaluation. It allows: (i) the project
developer to charge fees as specified in the
concession agreement which can be revised,
based on criteria specified in the agreement;
and ( i i ) i nflati on and vari ati on i n forei gn
exchange ratesto be taken into account for
such revision of fees. The Act identifiesseveral
ways for the State Government to provide
assistance for a project aswell asa framework
for termination of a concession.
5. Securitization. Infrastructure financing,
being highly capital intensive, doesnot often
permit the possibility of a security structure that
allows lenders full recourse to the assets of
the promoters. Hence, a non-recourse or
limited recourse arrangement ismore likely
to be adopted, involving the creation of a
legally independent project company financed
with debt that issecured by the assetsof that
company (e.g. land, industrial assets, licenses,
and contractual rights). In India, the immovable
assets(e.g. land, machinery, buildings) of the
project company are usually secured in favor
of the lender by way of a mortgage while the
movable assets are hypothecated . The
creation of security by leasing out land for road
projectsisnot possible asitsownership rests
with the Government. In casesof default by
borrowers, the 2002 Securi ti zati on A ct
57
enables a bank or a fi nanci al i nsti tuti on
whi ch i s a secured credi tor under a securi ty
agreement wi th a borrower to enforce any
secured interest created in its favor without
the intervention of any court or tribunal. This
representsan important step forward which
allows lenders to avoi d lengthy and ti me
consuming litigation thereby reducing credit
ri sk f or lenders. Si mi larly, a provi si on
i ncorporated i nto the standard Concessi on
Agreement used i n Indi a allows the lender,
i n the event of a default, to conti nue the
i mplementati on of a proj ect.
6. Environmental Clearances. A cti ons
have also been taken to reduce the ri sk of
delay from environmental clearances. Under
the 1986 Environment (Protection) Rules, the
M i ni stry of Envi ronment and Forestry
(M O EF), via Notification from January 1994,
states that hi ghway proj ects shall not be
undertak en anywhere i n I ndi a unless
envi ronmental clearance has been granted
by the Central Government. In view of the
pronouncements by the Supreme Court in
certain public interest litigation casesinvolving
envi ronmental i ssues, the Nati onal
Environment Appellate Authority wasset up
under the 1997 Nati onal Envi ronment
Appellate Authority Act. This serves as an
i ndependent body to deal wi th peti ti ons,
complai nts, representati ons and appeals
against the decisionsof competent authorities
granti ng envi ronmental clearances to
development projectsunder the provisionsof
the 1986 Environment (Protection) Act. By
providing for a focusof independent decision
maki ng on the i ssue, the creati on of the
Authorityrepresentsan important step forward
in facilitating private participation in road
development.
7. Arbitration and Conciliation. The 1996
Arbitration and Conciliation Act brought about
major changes in Indian Arbitration law by
increasing investor confidence in the system
of commerci al di spute resoluti on and
enforcement of foreign awardsin India. This
wasdone by removing obstaclesto commercial
dispute resolution outside of a court and
creating an environment with minimum court
interference.
8. Fiscal Incentives. The Government of
India announced varioustax exemptionsand
fi scal i ncenti ves to faci li tate PSP i n several
sectors i ncludi ng roads and hi ghways ( Box
8. 3).
Progress with Private Sector Participation
at the National Level
9. Nearly 80% of all the projectsexecuted
under the NHDP are still EPC cash contracts
whereby the contractor builds the road and
handsit over to NHAI. The remainder are being
funded through a mixture of PSP models. The
different modelsdemonstrate a sliding scale
of risk management by the NHAI asshown in
Figure 8.1 below. In general terms, high-density
stretches wi th more assured returns are
normallyawarded under toll concessions, while
SPVs and annuity concessions are used for
proj ects that have hi gher traffi c ri sk s.
Approximately 8% of the length
58
of the NHDP
may be i mplemented through annui ty
concessions. In tandem, NHAI has awarded
57
2002 Securitization and Reconstruction of Financial Assetsand Enforcement of SecurityInterest Act (previouslyO rdinance).
58
The actual stretch of NHDP Phase I & II commissioned under annuityscheme is8% .
44 l
around Rs. 3,400 Crore worth of projectsunder
tolled concessions.
10. BOT Toll Road Concessions. BOT Toll
Road Concessionsawarded by NHAI are based
on a model concessi on agreement wi th
modifications for each specific case
59
. The
broad risk allocation framework is, therefore,
common for NHAI toll road concessions, with
some slight differencesreflecting increased and
more equitable risk sharing between NHAI and
the private investors(see Annex 10). Generally,
there hasbeen an increasing amount of risk
and responsi bi li ty shari ng wi th the
Concessionaire (see Table 8.2 below).
11. On a pilot basis, NHAI hasalso proposed
to let a concession agreement which combines
the construction of a greenfield project with
the rehabilitation and upgrading of an existing
stretch
60
. Thiswould addressthe problem that
the new stretches have low traffic volumes
making them commercially unviable. Existing
stretchescould generate enough toll revenue
based on existing traffic patternsto improve
the cashflowsof the concessionaire, especially
during the construction stage. In addition,
overall riskswould be mitigated to some extent
because of pooling of projectsat variousstages
of risk profile.
12. The typical grant-based BOT model used
i n Indi a on Nati onal and State hi ghways
involves: partial funding of project cost through
a non-refundable grant di sbursed by the
government/ road agency to the
Concessionaire during construction; a fixed
concessi on peri od and toll rate structure;
grant required by biddersconstitutesthe bid
variable; grant contribution by the government
normally doesnot exceed the amount of equity
contribution by the private investor; and the
remai nder of project cost i s typi cally met
through non-recourse debt.
13. NHA I i s currently i n the process of
59
See http://www. nhai. org/concessionagreement. htm for copyof the standard form
60
The proposed project ispart of the Porbander-Deesa segment of the East-West Corridor. New construction refersto the Jetpur-Gondal section (26 Km
of four lane highway) and the Rajkot Bypasssection (10 km), and the rehabilitation component refersto a four-laned stretch of the 32 Km Gondal-Rajkot
section.
Box 8.3 Summary of Fiscal Incentives for Private Sector Participation in Roads
Exemption is given from import duty on identified high quality construction plant and equipment.
A ten year tax holiday isavailable and thisconcession can be accessed in any 10 consecutive yearsduring
the first 20 years of operation (Section 80 IA (12) (ca) of the 1961 Income Tax Act).
A maximum of 40% of the income derived by financial institutions from the finance they provide for
infrastructure projects may be excluded from Income Tax.
Exemption from Income Tax on the income from dividend and interest on long term capital gain derived
from investment in the form of sharesor long term finance to any enterprise set up to develop, maintain
and operate an i nfrastructure faci li ty.
Subscriptions to equity shares and debentures are eligible for deduction under Section 99 of the Income
Tax Act.
Source: Road Development Report Vision 2021, M O RTH, Government of India (asamended)
Figure 8.1: Risk Allocation in Different NHAI Models
l 45
concessi oni ng the four-lani ng of a further
10, 000 km of nati onal hi ghways outsi de of
the G Q and NS/EW networks. Ini ti ally these
roads had been under the charge of the
M O RTH but were transferred duri ng late
2003 to NHAI. The program i s sti ll under
preparati on and the detai ls of how thi s wi ll
work are not yet known. However, current
thinking isthat the majority of approximately
48 proj ects would be procured through a
toll based BO T mechani sm wi th less vi able
routesbeing procured through conventional
cash contracts or annui ti es. The process of
empanelment of sui table concessi onai res
has begun. Public support will be capped at
40% of proj ect cost , 25% duri ng
constructi on and 15% duri ng the O & M
peri od of approxi mately 15 years.
14. Annuity Concessions. The A nnui ty
scheme isa variant of a BOT Toll Concession
scheme whereby the concessionaire isnot left
to recover itscoststhrough collection of tolls
but isassured a fixed periodic payment by the
NHA I . The A nnui ty scheme of f ers the
advantage asa meansof borrowing from
the pri vate sector for road development
through bundling together construction and
long term O& M responsibilitiesonto a single
party. To date, NHAI has awarded a total of
467 km of annuity concessionsamounting to
about Rs.3, 000 Crore - five stretches(with a
total length of 373 k m) i n the G olden
Q uadri lateral and three other stretches ( 81
Km), with paymentspartly related to shadow
t olli ng ( D urg Bypass, Nandi gama-
Vi j ayawada Phase I I and Delhi -G urgaon
Expressway) see Table 8. 3.
15. Asalmost all projectsstructured asannuity
concessions have reached financial closure,
thiswould suggest that thismethod ispopular
with private investorsin India.
Table 8.2: Progression in Risk Sharing Arrangements in NHAI Toll Road Concessions over Time
Construction Related Delay Risk Progressi vely has been made the enti re responsi bi li ty of
Concessi onai re. Concessi onai re has choi ce of re-allocati on to
EPC contractor, but remai ns pri mari ly responsi ble to NHA I
through li qui dated damages. Li qui dated damages have replaced
earli er corporate guarantee of promoters for ti mely completi on,
maki ng the model more non-recourse i n nature.
Compulsory surveys and tests In latest models, left to the di screti on of Concessi onai re
Independent Consultant Concept i ntroduced i n later concessi on arrangements, wi th
selecti on process becomi ng more parti ci pati ve ( i . e. i nvolvi ng
Concessi onai re as well)
Traffic Risks Compulsory routi ng of traffi c through proj ect road not observed
i n latest concessi on, wi th traffi c retai ni ng full choi ce. A t the
same ti me, protecti on agai nst development of alternati ve
proj ects i s provi ded, wi th assurance of levyi ng hi gher tolls on
alternati ve competi ng faci li ti es.
Promoter lock-in G reater flexi bi li ty over ti me, wi th latest model allowi ng hi gher
levels of promoter di vestment.
Lender Protection Sli ght reducti on i n amount of debt protecti on i n case of
concessi onai re events of default, probably wi th the steady
i ncreasi ng lender comfort and appeti te related to these proj ects.
Change in Law In later models, compensati on for change i n law to be tri ggered
only i n case of adverse effect exceedi ng a certai n floor amount;
thi s i s an i ncremental i mprovement whi ch avoi ds compli cated
adj ustment procedures for mi nor i mpacts, although i t i mpli es
that Concessi onai re has to bear change i n law ri sk for small
amounts.
Termination Payments for Increasi ngly refi ned formula whi ch takes i nto account effects
Force Majeure of i nflati on and passage of ti me.
NHAI support in case of poor O ri gi nally, revenue shortfall loan envi saged to enable proj ect
project performance subsi stence i n case of revenue shortfall for any reason, however,
i n subsequent models, such loan i s provi ded only i n case of
severe shortfalls due to poli ti cal force maj eure.
46 l
61
The weighted average cost of debt for NHAI isestimated as11. 35% , using NHAIsdebt structure for 2002-03 (55, 930 million in market borrowingsat an
average cost of 8. 5% ; Rs. 78, 620 million asexternal assistance of which 20% wasat the cost of 13% ; the rest 80% asa grant; and Rs. 23, 540 million of
AnnuityProjectsat a cost of 17% ).
62
The sponsorstotal exposure would be a combination of equityinvested and contingent liabilityto the amount of guarantee issued.
16. Private Investment Premium for
Annuity Contract. The effecti ve cost of
annuity borrowing for NHAI ishigh (effective
rate of 17-18% p.a., compared to NHAIscost
of funds which are around 11% . p. a.
61
).
Individual factorsleading to higher costsare
discussed below.
Risk Premia for Risks passed on to
Private Investor. Under the annuity
scheme, the pri vate i nvestor i s
required to assume variousrisksthat
would normally remain with NHAI,
many of which can significantly affect
the i nvestors cashflows vi s--vi s
original projections. Hence, investors
usually factor in premia to price these
ri sks i n thei r fi nanci al proposals.
These risks include: (i) risks related
to price and quantity variations; (ii)
changesin financing rates; (iii) long-
term inflation; and (iv) construction
delays.
Cost of Debt. Thisishigher for non-
recourse lending to project companies
than the cost of a loan to NHAI, due
to i ts current credi tworthi ness. In
addition, the prevailing practice of
financial intermediariesin India isto
insist upon the creation of a Debt
Service Reserve (DSR) for additional
comfort during the tenure of their non-
recourse loans. Adding the DSR to
total project cost increasesthe capital
servi ci ng requi rements thereby
adding considerably to the annuity
pricing. In essence, the borrowing
company i s requi red to bui ld up
an i nvestment reserve, usually
equi valent to the next six months
worth of lendersdues, in an account
on which the lender has a lien. In
case of default on debt obligations
for any period, the lender would be
entitled to recover duesfor that period
from the debt service reserve. DSR
acts as a buffer to ensure smooth
payments of interest and principal
even during brief periods of cash
shortfall within the project company.
DSR can be created: (i) out of total
project cost, in which case it isfunded
through a combination of debt and
equity, raising the total project cost;
or (ii) through a guarantee provided
by the bank ers to the proj ect
promoters, increasing the sponsors
overall exposure to the project
62
.
Cost of private equity investment in
the project is naturally higher than
the NHAIscost of capital estimated
at around 11% .
17. Regulatory Inefficiencies in Annuity
Contracts. Although a project may show
healthy cash-flows, net return in the handsof
Table 8.3: Annuity Concessions Structured by NHAI
Road Annuity Amount, Rs. Million
Golden Quadrilateral
Panagarh Palsi t 5, 550
Palsit - Dankuni (Durgapur Expressway) 3, 998
M aharastra Border-Belgaum 5, 050
Ankapalli - Tuni 2, 948
Tuni Dharmavaram 2, 791
Dharmavaram Raj amundry 2, 962
Nellore Bypass 1, 296
Other Projects
Tambaram - Ti ndi vanam 4, 186
Total 28,781
l 47
equity holdersof the project company isoften
much lower than the profi tabi li ty of the
company may suggest, owi ng to a
combination of statutory reserves, deferred tax
liability and taxation inefficiencies.
Statutory Reserves. A ccordi ng to
Company law, corporate entitiesare
required to set aside a sum of up to
10% of book profitsevery year, into
a statutory reserve whi ch i s not
accessible for distribution to share or
equi ty holders. Thi s results i n
considerable cash sitting idle for a long
time.
Taxati on Ineffi ci enci es. From the
Governmentspoint of view, income
taxes and taxes on di vi dends
distributed raise the effective cost of
the annuity concession, because it has
the effect of increasing the effective
cost of annuity borrowing vis--vis
a conventional loan. Thisisdue to: (i)
a limited period of tax holiday for
i nfrastructure compani es under
Section 80 IA of the Income Tax Act
( 10 years duri ng operati ons) ; ( i i )
distribution tax on dividendspaid by
project companies with effect from
A pri l 2003; and ( i i i ) mi ni mum
Alternate Tax which forcescompanies
to pay tax even during the tax holiday
periods. Taxes paid by the project
company represent moniesthat are
sourced from the Central and State
Governments and paid back to the
Central Government.
18. Impact of Annuity Concessions on
Risk and Project Costs. For the pri vate
operator annui ty concessi ons reduce the
uncertai nty and ri sk associ ated wi th BO Ts
i n relati on to revenue generati on, but the
associ ated regulatory requi rements noted
above rai se the effecti ve cost of an annui ty
for NHAI. As all annuity concessions are still
under operati on, i t i s not possi ble to i nfer
the actual cost of these concessi ons.
Nevertheless, usi ng a fi nanci al model of a
typical annuity concession, it wasconcluded
t hat t he li k ely cost of t he annui t y
borrowi ng f rom t he government s
perspecti ve due to the factors noted above
would be around 17% per annum.
19. Special Purpose Vehicles (SPV). The SPV
route essentially involves setting up a joint
venture company between two or more
promotersto execute the project. These are
generally toll roads i mplemented i n
independent corporate entitiesowned byNHAI
i tself and are commonly used for port
connectivity where other user entities can
contribute to project funding. Appropriate long-
term capital isusually provided by insurance
compani es, pensi on f unds and si mi lar
institutional investors. These investorsusually
require the investment to have an investment
grade rating from at least one credit rating
agency. Participation by state governmentsis
also significant in these projects. M oradabad
expressway wasdeveloped through thisroute.
Other projectsunder implementation are Jaipur
Bypass Phase I I , A hmedabad-Vadodara
expressway and 10 port connectivity road
projects.
20. NHAI Debt. Based on itsrevenuesfrom
the Central Road Fund and increasingly from
tollsaswell ason an implied GOI guarantee,
NHAI hasitself raised substantial amountsof
fundsfrom the domestic debt marketswith a
nominal interest rate between 7-9% . The
credit rating of NHAI isAAA and stable but is
susceptible to the following factors fungibility
of cess i nflows and thei r conti nuati on,
prioritization of debt servicing, retention of tolls
and support from GOI
63
. The credit rating states
its assumption of stable revenues from the
Central Road Fund to NHAI.
21. To date, NHAI has raised Rs 656 Crore
from two bond issuesin 2000-01, Rs. 804 Crore
through one issue in 2001-02 and Rs. 5, 593
Crore in 2003. Investmentsin NHAI bondshave
been exempted from capital gainstax under
the Income Tax Act Section 54EC and have
been oversubscribed. In addition, NHAI has
applied for a Rs. 6, 000 Crore line of credit
from the Li fe Insurance Corporati on. The
agreement envisagessecuritization of cesson
petrol and diesel, put aside in the non-lapsable
Central Road Fund. The interest on the Life
Insurance Corporation (LIC) loan has been
proposed at a premium of 1% on 18 year
Government Securities(currently at 7.35% ) for
a loan duration of 25 yearswith repayments
starting after 5 years. This is the only NHAI
63
Source - http://www. crisil. com
48 l
debt instrument that isproposed to be explicitly
backed by the GOI at a fee of 0.25% per
annum.
Progress with Private Sector Participation
at the State level
22. There i s a wi de and growi ng di vi de
between some States that are maki ng real
progressin attracting PSP to the sector, while
the maj ori ty of States have li ttle or no
experi ence and seem unli kely to do so for
the foreseeable future ( see Table 8. 4) .
23. M adhya Pradesh, for example, has
made good progressconcerning PSP in roads
havi ng entered i nto a number of M ai ntai n
and Transfer concessi ons wi th the pri vate
sector. The States of A ndhra Pradesh,
G uj arat, M aharashtra, M adhya Pradesh,
Raj asthan and Tami l Nadu have already
entered into BO T concession arrangements,
each usi ng a fai rly standardi zed model for
BO T proj ects ( see A nnex 11 for the ri sk
allocation framework for small road projects
i n Andhra Pradesh) . As a typi cal example
of how these work at the state level take
M adhya Pradesh. T he M P Bri dge
Corporati on uses a grant-based BO T model
i n whi ch up to 50% of a BO T proj ects cost
isprovided by the Corporation in the form of a
grant to enhance commercial viability. The
grant amountsrequired for implementation of
14 key state highway stretcheson thisbasis
have been raised through borrowingslargely
from HUDCO. The amounts thus raised are
accordi ngly leveraged through i ndi vi dual
project companies.
24. Project Development. Some States
have set up Project Development Funds, such
as the A ndhra Pradesh I nf rastructure
Initiative Fund to finance the preparation of
road projects for private involvement. While
the concept isgood and should help facilitate
PSP, such funds have not yet played a
si gni fi cant role.
25. Identification and Award of Potential
PSP Projects at the State Level. Some states
identify road projects for development and
mai ntenance through Strategi c O pti ons
Studiescommissioned by the respective road
agencies. However, statesare yet to have a
poli cy setti ng the basi s for selecti on and
prioritization of projectsfor implementation
through PSP and in general, stateshave not
yet adopted a systematic procedure for project
identification and investment facilitation. In
practice, routeswith higher traffic density and
of general strategic importance are the ones
pri ori ti zed for development by pri vate
investors. Statesthat have attracted BOTshave
adopted a two-part bi ddi ng procedure,
involving invitation of technical and financial
proposals from bidders. After evaluation of
bidders technical proposals, partiesmeeting
the minimum technical requirementsare pre-
qualified . The project iseventually awarded
purely on the basis of the most attractive
f i nanci al proposal, as i s the norm f or
contracti ng by the C entral and State
Governmentsin India. Depending on the PSP
model bei ng adopted by the State
Government, the most attractive financial
proposal may i mply the lowest grant
requirement (such asin M adhya Pradesh), or
the shortest concession period (such as for
small projectsin Andhra Pradesh). Asthe tolls
for each State are pre-determined, there is
no case f or f i nanci al proposals bei ng
expressed i n terms of the requi red toll
structure.
26. Implementing Vehicles at the State
Level. At the state level, Road Development
Corporati ons have been created i n A P,
Gujarat, Karnataka, Kerala, M aharashtra, and
Tamil Nadu. Part of the objective of these new
agencies is to bring private sector funds to
the sector either through corporate borrowing
(AP, Karnataka M P, M aharashtra, ) or through
leveraging public subsidies against private
project finance (Tamil Nadu, Gujarat). Road
Development Corporations generally enjoy
more flexible human resource management
arrangements, clearer objectives as well as
more streamlined decision making structures
than typi cal Indi an road agenci es. These
characteristics are potentially important in
termsof improving the quality and timeliness
of the PSP project planning and procurement,
thereby reduci ng some ri sks to potenti al
sponsors.
27. Aggregate Status of States Enabling
Environment for PSP. M any states have
yet t o est abli sh t he basi c enabli ng
envi ronment ( see Table 8. 5 above) .
C onsi deri ng the current status of the
l 49
i nsti tuti onal and regulatory framework for
PSP, States may need to be reali sti c i n thei r
expectati ons for PSP and probably focus on
rehabi li tate, operate and mai ntai n
concessions, bypasses and/or bridges as the
most vi able PSP proj ects for the moment.
Financial Engineering on NHAI and State
Projects
28. Grant Supported BOTs. To date,
typi cally grants have been provi ded duri ng
construction only. There isnow some debate
as to whether movi ng towards parti ally
disbursing grantsduring operationsmay not
make sense. However, i gnori ng any tax
effects, there is less difference between the
two approaches than may fi rst appear. The
si ze of t he payment made by t he
government wi ll merely adj ust for the ti me
value of money. The mai n di fference would
be on who carri es the ri sk of default on the
concessi on contract terms. If the grant i s all
di sbursed up front, the government ri sks
havi ng no remai ni ng fi nanci al mechani sm
to enforce proper O & M i . e. default on
behalf of concessi onai re i n relati on to hi s
servi ce obli gati ons. If the grant i s di sbursed
over ti me, then the concessi onai re ri sks the
government not being willing or able to pay
the promi sed amount i n the future i . e.
default on behalf of the government.
29. Least Present Value of Revenue
(LPVR) based Bidding. The three road
concessi ons bei ng i mplement ed by
Infrastructure Leasi ng & Fi nanci al Servi ces
Ltd. ( IL& FS) i n Indi a are examples of Fi xed
IRR or Assured Return models. These
models provi de a guaranteed level of net
return on equi ty, taki ng the ti me value of
money into account. The concession period
lasts unti l the concessi onai re recovers i ts
investment, thus a concession is terminated
only upon the Concessi onai re achi evi ng a
predetermi ned level of IRR. However, si nce
the Fi xed IRR model takes i nto account the
returns over and above the costs of the toll
road operator, there i s no i ncenti ve for cost
effi ci enci es. All cost overruns, constructi on
or operati onal, are compensated for by the
regulatory authority.
30. In the Least Present Value of Revenue
aucti on ( LPVR) , the bi ddi ng vari able i s the
present value of revenue throughout the life
of the concessi on that fi rms are wi lli ng to
accept to undertake the project. The private
64
World Bank estimates
Table 8.4: Overview of Achievements in PSP at State Level
State Extent of Private Participation Agency and PSP Approx Value of
Mechanism Lenghth SH Private
Constructed Funding
Km
64
Rs Cr
Andhra Some, but in very small size Andhra Pradesh Road Bridges and 188
Pradesh proj ects Development Corporati on RO Bsplus
(APRDCL)Debt to APRDC and BO Ts 36 km
Gujarat Limited although many are under G uj arat Road Development 110
preparati on. Corporation SPVs and BO T
Karnataka Limited in new construction but K arnataka Road Nil Nil
maintenance of most of core Development Corporation Ltd.
network outsourced on term basis (KRDCL) Debt to KRDCL
Madhya Significant, but only a few of the M P Bridge Corporation Debt 2000
Pradesh projects envisaged have to M PBC and BO Ts ( Re-habi li tati on
progressed to financial only)
closure & construction
Maharashtra M any toll based projects being M aharashtra State Road
implemented but limited private Development Corporati on
i nvestment (M SRDC) Debt to M SRDC
and BO T
Tamil Nadu Significant but few projects have Tamil Nadu Road Development 180 300
reached financial closure Corporation TNRDCL
West Bengal None Under discussion Nil Nil
50 l
operator that bi ds the lowest present value
of revenue wi ns. The durati on of the
concessi on i s then flexi ble and depends on
the effective traffic levelsencountered. Both
f i xed I RR or LPVR models of f er some
advantages over alternati ve BO T schemes
i ncludi ng the fact that: ( i ) tolls can be
adj usted wi thout negoti ati on wi th the
concessi onai re, as long as the expected
investor return is maintained - this flexibility
i s i mportant i n urban road concessi ons
where it isdifficult to determine the optimal
tari ff ex-ante, especi ally duri ng congesti on
peri ods; ( i i ) these methods reduce the
uncertai nty of demand, as they transfer
political and demand-related risksto the user
i n the form of an endogenous concessi on
period; and (iii) calculation of compensation
payments on concessi on termi nati on i s
strai ghtforward at any poi nt i n ti me duri ng
65
World Bank assessment
66
Debt for which the borrower isnot personallyliable.
the concessi on peri od. In addi ti on to these
advantages, the LPVR method of BO T
proj ect i mplementati on manages certai n
risks better than the IRR fixed return model.
These are summari zed i n Table 8. 6.
31. National highway PSP projectsin India are
typically funded through a mix of conventional
non-recourse debt
66
and equi ty. Bankers
normally accept a maximum debt-equity ratio
of 70:30 for toll-based projects. The annuity
BOT projects awarded by NHAI have been
funded with debt-equity ratiosof 75:25 owing
to the much higher perceived certainty of
project cashflows. Typical loan duration varies
from 7 to 13 years, although only a few
projectsare able to secure debt of more than
10 years. Normally, there isno obligation for
repaymentsduring the construction period and
these only commence i mmedi ately after
Table 8.5: Comparison of State Fundamentals/Enabling Environment for PSP in Highways
65
Fundamental Factor A ndhra K erala K arna- G uj arat Tami l M adhya M ahara- NHAI
Pradesh tak a Nadu Pradesh shtra
Legal Framework X X
Regulatory Framework X X X X X
PPP Poli cy X
Contracti ng Transparency
Implementati on Capaci ty X X X
Semi autonomous road agency
History of tolling X X
Assured revenue stream for X X X X X X X
public contribution
Relative level of private finance Low Nil Nil High M edi um M edi um Low High
Table 8.6: Advantages of LPVR over Fixed Return Model
Item Conventional Fixed IRR Model LPVR Model
Return Assurance Investment on private equity pre- Investment on private equity pre-
determi ned and assured determi ned and assured
Capital Cost Efficiencies Does not encourage concessionaire to Encourages optimization of capital
optimize project capital cost, as benefits costs as concessionaire retains the
do not accrue to him, even though the benefits of capital cost efficiencies
financial risk is still borne by the sponsors
Operating Cost Does not encourage operating cost Encourages operati ng cost
Efficiencies efficiencies, as costs are essentially efficiencies as higher costs
passed on to government agency/ reduce concessionairesreturns and
users lower costs increase its returns
Monitoring Requirements M ore difficult, as it requires the employer M ore strai ghtforward as the
for assessment of return to know both actual revenues and costs employer needsto know only actual
at any point in time of the concessionaire concessi onai res revenues
l 51
project commissioning. Loan repayment is
typi cally on a quarterly basi s wi th equal
amorti zed repayments of pri nci pal and
interest.
32. The cli ent/demand si de i s dri vi ng PSP,
and so is the supply side, with market forces
encouragi ng the development of a number
of new fi nanci al i nstruments to help bri ng
in private financing for roads. For example,
the Infrastructure Leasi ng and Fi nanci ng
Services Ltd (IL& FS) created a deep discount
bond i nstrument (redeemable at the end of
17 years) for use i n i ts two BO T proj ects i n
G uj arat , combi ned wi t h a t ak eout
arrangement. IL& FS also pi oneered the use
of subordi nated debt i n fi nanci ng two BO T
proj ects i n G uj arat State ( Vadodara-Halol
and A hmedabad- M ehasana hi ghways) .
Bankers i n Indi a accept a parti al i nvestment
i n subordi nat ed debt by t he proj ect
promoters as equi ty for the purposes of
computi ng debt equi ty rati os. The use of
subordi nated debt i mproves the effecti ve
debt coverage avai lable to seni or lenders,
and helpsin overcoming statutory limitations
on di vi dend payment, i mprovi ng sponsor
returns. Si mi larly, the G M R G roup i s
i mplementi ng two NHA I annui ty BO T
projects i n Southern Indi a through pinpoint
equi ty. The group has made i ts equi ty
i nvestments i n the proj ect compani es
through a mi x of over 90% preference
equi ty, wi th the balance i nvestment as
ordi nary equi ty. Preference equi ty i s easi ly
redeemable under exi sti ng company law i n
India, while extinguishing of ordinary equity
i nvestment through a capi tal wri te down
requi res approval from the Hi gh Court. The
promoters of the Second Vi vek ananda
Bri dge Proj ect on an NH i n West Bengal are
proposing to place a convertible instrument
wi th fi nanci al i nvestors whi ch i s ori gi nally
rai sed as subordi nat ed debt and i s
eventually converti ble i nto equi ty. The
instrument createsa convenient mechanism
to offer lower ri sk wi th upsi de potenti al for
fi nanci al i nvestors.
33. O verall, t here appears t o be a
reasonable amount of i nterest among
potential lenders in taking debt exposure in
BO T road proj ects bei ng undertaken by a
creditworthy sponsor. Thismay partly be due
to the general hi gh avai labi li ty of funds i n
the banki ng system and a relati ve shortage
of attracti ve lendi ng opportuni ti es. I n
particular, lenders are: (i) willing to consider
attracti ve repayment terms, i ncludi ng
st epped up repayment s and post -
construction moratoria for projectsperceived
as generally bankable; and ( i i ) offeri ng
attractive interest rates for such projects, on
a non-recourse basi s. Thi s opens up further
opportuni ti es for the government to lower
ri sks and overall proj ect costs and i t i s i n
li ne wi th the current trend to adopt more
i nnovati ve fi nanci ng i nstruments i n Indi a.
Indicators of Remaining Constraints to
PSP
34. Limited Private Funds Raised. O ne
indicator of weaknessin the system isthat the
level of private investment isstill relatively low
in comparison with other countries that are
actively pursuing private funding of roads.
While a number of states are using Road
Development Corporationsto accessprivate
fundi ng, gi ven the i mpli ci t G overnment
guaranteesprovided, thisamountsto little more
than off budget borrowing. The number of
States that have actually seen BOT or other
models where more risks are transferred to
the private sector are very few in fact just
seven states
67
. M ore substantive programs
have not materi ali zed, for example, i n
Rajasthan
68
. M oreover, the majority of these
are short secti ons of bypasses or bri dges
amounting to just a few 100 km. NHAI has
been rather more successful about 450 km
worth Rs.3, 400 Crore under BOT and a further
470 km worth Rs.3, 000 Crore through Annuity
schemes. However, in comparison with some
other countriesthisislow in Chile, $3.3 billion
wasraised from the private market over the
1990s to upgrade the 2, 000 km highway
network
69
.
67
AP, Gujarat, M P, M aharashtra, Rajasthan, UP, Tamil Nadu
68
Rajasthan governmentsambitiousRs747-crore project for development of road network in the state under build operate and transfer basishasrun
aground with investorshaving slapped a not feasible, no interest notice in the first tranche of bidsfor such projects Reuters, 6 June2002.
69
Toll Road Concessions the Chilean Experience, PFG Discussion Paper No 124, World Bank, 2003. See also the PSP database for global information at http:/
/rru.worldbank.org/ppi/
52 l
70
Presentation byCEO of Noida Toll Bridge Co, November 2002
71
http://www.thehindubusinessline.com/bline/2003/01/28/stories/2003012800960600.htm
35. Long gestation of PSP Projects. A
second indication that there are constraintsin
the system isthat PSP projectsare generally
take a long time to prepare and procure
typically at least 24 months. A good example
of thisisthe Bangalore M ysore Infrastructure
Corridor Project. While the Government of
Karnataka and the proposed concessionaire
signed a M emorandum of Understanding in
1995, the project hasstill to come to financial
closure. The Delhi Noida took nearly nine years
between the si gni ng of the M O U and
commencement of operations
70
. However,
gi ven more recent events and addi ti onal
reforms, it isnot expected that these lengths
of delayswill be repeated in the future. The
concessioning of a further 10, 000 km of NH
isongoing and the actual timeframe of this
processwill provide an indicator of whether
thingsare improving.
36. High Rate of Restructuring. Another
indicator isthat quite a few PSP projectshave
had to be restructured or renegotiated. For
example, the Durg bypass on the NH6 in
M adhya Pradesh now requiresrenegotiation.
This 18km long bypass has suffered from a
double blow of escalated costs due to a
change in the scope of work imposed after
contract award by NHA I , f or whi ch
compensation hasnot been paid yet, together
with traffic volume being about 40% below
projections. Competing routesthat had not
been adequately factored by either party had
a role to play in reducing the traffic. The Delhi
Noida BOT has also had to be restructured
due to lower than expected commerci al
traffic, itself partly the result of the failure of
the government to provi de adequate
connecting routes
71
. The restructuring of the
Hubli Dharwad, Vadodara Halol BOT projects
are also understood to be currently under
negotiation.
37. Questionable Value for Money. A final
indicator that there are improvementsto be
achieved isthat there isskepticism over the
value for money that has been obtained in
some PSP models in India. In particular, the
Annuity model hascome under scrutiny asto
whether the ei ght agreements ( 474km)
reached wasa good use of taxpayers money.
This model provides for a concessionaire to
design, build, finance and operate a project
road f or a predetermi ned ti me. A f ter
commi ssi oni ng NHA I makes semi annual
payments until the end of the concession
peri od as the only revenue f or the
concessi onai re. NHAI retai ns the ri ght to
charge tollson the road. In an analysisdone
for thisstudy, the cashflow profile of the eight
concluded annuity projectshave been shown
to be equi valent to NHA I borrowi ng at
between 17-18% (derived asthe IRR of the
cashflow stream from NHAIs perspective).
Thiscompareswith a weighted average cost
of capital for NHAI of about 11.3% . Although
some design/survey change, operation and
mai ntenance ri sk s have i ndeed been
transferred to the private sector, and there
are some regulatory inefficiencies(statutory
reserve requirementsand taxes) thismay not
explain the spread between the two ratesor
whether the premi um bei ng pai d i s
appropriate for the riskstransferred. It isnot
clear what level of due di li gence was
undertaken prior to entering these contracts
however, with hindsight the annuity model
as i mplemented appear to provi de
questionable value for money.
Systemic Constraints To PSP In India
38. Absence of Reliable Information. In
making a decision to buy or sell, lend of borrow
any asset, people use information to determine
the relative price of the asset and how this
compareswith the expected future cashflows
from the transaction. The cashflowscan either
be inferred by comparison with current market
prices if there is a market for that asset or
they can be estimated through projecting
forward historical data of relevant factors. In
the case of highway projectsthat have their
own i ndi vi dual characteri sti cs, potenti al
investors must use a forecasting method to
determine the cashflows data on construction
uni t costs, traf f i c, and the hi story of
construction of any existing road or structure
that i s to be i ncorporated i n the
concessi onai res hi ghway. The problem
highway investorsand creditorsface in India
l 53
i s that such i nformati on generally i s not
avai lable even wi thi n the road agenci es, let
alone in a usable format or on a public basis.
Where there i s data avai lable, there are
concerns over the accuracy of the data,
especi ally i n relati on to traffi c counts ( see
A nnex 12 on pri vate sector concerns) .
Hence, i nvestors rely on thei r own li mi ted
i nvesti gati ons whi ch are unli kely to capture
a long history or wide breadth of experience.
Wi thout thi s, no probabi li ty di stri buti on of
costs and benefi ts can be constructed on
whi ch sensi ti vi ty or scenari o analysi s rely.
The resulti ng analysi s i s more li kely to be
i nadequate, subj ect to bi as and ulti mately
the conclusionsmay not hold. The perception
within the private sector isthat the estimates
of construction costs indicated to bidders at
the ti me of bi ddi ng may not enti rely reflect
costs of constructi on i n practi ce, as certai n
allowances for pri ce escalati ons may need
t o be made ( t he t i me gap bet ween
constructi on cost esti mates and the ti me of
actual bi ddi ng has been 1-2 years) .
39. High Price Elasticity of Demand for
Tolled Services. In many countri es, pri vate
fundi ng for roads depends heavi ly on toll
collecti on to provi de for revenue. In Indi a,
both Central and State G overnments are
seeki ng to i ncrease toll collecti on both for
publicly and privately funded roads. Yet, the
systemi c problem faced across the country
i s that, largely due to hi gh levels of exi sti ng
taxati on on road users, wi lli ngness to pay
for tolls i s rather low, despi te the fact that
Indi an toll levels are on average some of
the cheapest in the World roughly 15-25%
of the savi ngs i n vehi cle operati ng costs for
cars and 50-70% for commerci al vehi cles.
Where tolls are bei ng i mposed, expected
traffi c i s not materi ali zi ng due to di versi on
undermining the viability of existing projects
and deterri ng pri vate i nvestment i n future
proj ects. Thi s ri sk i s genui ne and can
threaten the fi nanci al sustai nabi li ty of a
proj ect. The M umbai -Pune expressway, for
example, isnot able to attract the estimated
traffi c levels due the presence of alternate
routes and the users reluctance to pay the
exi sti ng toll charges ( see Box 8. 4) . The
truck i ng i ndustry has already rai sed i ts
objection to the so called double dipping
of i ncreased cess and toll
72
.
40. A revealed pref erence survey
undertaken for thi s study looked at user
atti tudes and preferences on the tolled
M umbai Pune Expressway and the parallel
exi sti ng un-tolled route along the NH4. The
survey was taken from 600 pri vate and
commerci al users each on both routes. The
survey also collected traffi c data from the
two routes - the free route has three to four
Box 8.4 The Experience with the Mumbai-Pune Expressway in Maharashtra
The first phase of the project between Khandala and Lonavala was opened to traffic in M ay 2001 and the
entire expressway was ready by mid-February 2002. The expressway reduces travel time from Kalamboli to
Delhi Road to about one and a quarter hours as against 5 hours on existing NH-4. Despite its inherent appeal,
the road has failed to attract the estimated traffic levels, and hence raise the expected revenues, due to the
presence of alternate routes and the users reluctance to pay the exi sti ng toll charges. A fter a year of
operation, revenues fell short of its first year toll collection target of Rs. 1. 2 billion. Currently M aharashtra
State Road Development Corporation (M SRDC) is collecting an average of about Rs. 37 million a month as toll
charges from an average of 12, 000 vehicles per day plying on the expressway. This, coupled with higher than
expected construction costs due to delays in execution (over Rs. 16 billion versus Rs. 14 billion budgeted), is
threatening the sustainability of the agreement. M SRDC isoptimistic that there will be an upswing in revenues
once the entire stretch is complete and properly operational as two underpasses and a 10 km long Panvel
Bypass were completed recently.
To get out of this debt trap, M SRDC has recently handed over the expressway along with the parallel M umbai
Pune section of the NH-4, on a 15 year lease. The concessionaire has been granted the sole rights to collect
tolls on both these roads in lieu of an upfront payment. Under the deal, the concessionaire is required to (i)
upgrade the NH4 to 4 lanesby M arch 2006, after which it can start collecting tollson the NH4 and (ii) maintain
the expressway, ( however structural repai rs on the expressway wi ll conti nue to be the responsi bi li ty of
M SRDC). O pposition to this move has already begun with local residents demanding that at least one road
should be toll free.
72
There should not be anyimposition of tollson existing roadsafter their conversion from single lane to two-lanesand from two-lanesto four-lanes. If the
Government wantstolls, then it should stop collecting cesson diesel , the All India M otor Transport General Secretary, M r. J. M . Saxena, asreported in
The Hindu, September 23, 2002
54 l
73
Take the example of the East-Coast Highway(100km), the Government of Tamil Naduscontribution of Rs. 10 crore leveraged an investment of Rs. 51 Cr
from the private sector. It isexpected to save the Government in excessof Rs. 100 Cr bywayof savingson future maintenance expensesand ensure
sustained O & M for the entire concession period of 30 years.
ti mes as much traffi c as the tolled route.
The survey sought users vi ews on fi ve mai n
factors travel ti me, ri di ng comfort, cost,
reliability and traffic interference. While the
tolled route is preferred by cars, taxis, buses
and vans due to ti me savi ngs, heavy frei ght
users prefer the NH4, overwhelmi ngly due
to cost savi ngs. 50% of respondents usi ng
the NH4 stated that they were not usi ng
the expressway due to the toll, despi te the
rate being set at about 25% of VOCssavings
for cars and 60% for trucks i . e. every user
i s better off usi ng the expressway. O verall,
the survey suggests that the percepti on of
the value of benefi ts to hi gher class but
di rectly tolled roads i s relati vely low at
present.
41. Furthermore, private sector perceptions
are that total traffic estimatesin the bidding
documentsdo not necessarily the reflect the
total tollable traffic on these roads, which
i s somewhat lower than total traffi c. In
general, road projectshave often shown low
tollable traffi c, warranti ng, i n some cases,
grants as hi gh as 60-70% of constructi on
cost i n order to enthuse pri vate i nvestors.
The case for adopti ng a BO T at such hi gh
levels of subsi dy becomes very hard to
make.
42. Dispute Resolution. At present, the
standard concessi on agreement i n use by
NHAI, provi des for the followi ng levels of
di sput e resolut i on ( i ) medi at i on by
independent consultant appointed by NHAI
from panel of three fi rms i denti fi ed by
concessi onai re whi ch are to come from
panel of fi ve fi rms chosen by NHA I ( i i )
C hai rman of NHA I and C hai rman of
concessi onai re and ( i i i ) arbi trati on under
Rulesof the Arbitration Act. Those BO Tsthat
have been let at state level have generally
followed this same mechanism as they have
based the concessi on document on the
NHAIs. Whi le thi s mechani sm i s a step i n
the right direction, for more seriousdisputes
the probability of ending up in arbitration is
sti ll hi gh. The ti me and costs of arbi trati on
are, however, often high and a more certain
and swift dispute resolution mechanism may
reduce percei ved ri sks for pri vate i nvestors.
43. Indebtedness Levels. It is an accepted
practi ce i n Indi a to leverage i nfrastructure
proj ects wi th a large debt component.
Pri vate sector parti ci pati on and i nnovati ve
fi nanci al structures have someti mes been
implemented by increasing the indebtedness
of the publi c sector to levels beyond those
recommended for India. These high gearing
levels, when compounded wi th the need to
access long term debt of a maturi ty and
repayment profi le sui table to the proj ects
cashflows, subject the project to si gni fi cant
fi nanci al ri sk. For example, the M umbai -
Pune Expressway proj ect costi ng Rs. 12, 55
billion is highly leveraged with a debt equity
rati o of 4. 5: 1. The enti re debt amount of
Rs. 10, 30 bi lli on was rai sed i n the domesti c
capi tal market through bonds i ssued by the
M aharashtra State Road Development
Corporati on ( M SRDC) . Even the equi ty
i nvestment of Rs. 2, 25 bi lli on was recei ved
from the M umbai M etropoli tan Regi onal
Development A uthori ty ( M M RDA ) i n the
form of subordi nated debt. As the Indi an
capi tal markets are sti ll underdeveloped, a
debt to equi ty rati o i n the range of 2. 2: 1
and 1. 5: 1 are usually accepted by fi nanci al
institutionsand banksfor road infrastructure
proj ects, si gni fi cantly below that for the
M umbai -Pune Expressway. G ui deli nes to
assure gearing levels are kept at reasonable
levels are requi red.
44. Additional Weaknesses at State
Level. State governments face a more
di ffi cult task than the central government
i n securi ng PSP, although some States have
proved i t can be done on certai n proj ects
73
.
T he f ormer not only have lower
credi tworthi ness when concessi onai res are
considering the timelinessand completeness
of any publi c subsi di es, but also networks
generally wi th lower traffi c. Thi s puts a
premi um on state governments i mprovi ng
the enabli ng envi ronment and thei r own
l55
capaci ty to i mplement PSP proj ects. M any
states have yet to put the basi c bui ldi ng
block s i n place, i ncludi ng not only the
enabli ng framework but also procurement
and contracti ng capaci ty and certai nty of
revenue stream from publi c sector.
45. Summary. Whi le i t has been argued
above that i nternati onal experi ence has
demonstrated that pri vate fundi ng i s not
li kely to prove a panacea for the sector, and
that there are sti ll many constrai nts i n Indi a
to faci li tati ng more pri vate i nvestment,
acti ons should sti ll be taken. The pri vate
sector can bri ng funds and new techni ques
to improve the network, especially itsbusiest
li nk s. T he G O I i s clearly bank i ng on
substantial PSP in the next phase of National
Hi ghway development wi th 10, 000 km of
roads bei ng expect ed t o be f unded
substantially through BO T. M oreover, there
i s also opportuni ty at the state level. An
analysi s that was carri ed out for thi s study
sought to determi ne the li kely scope of PSP
by way of toll based BOT projectsin six states
(see Annex 13)
74
. This concluded that of the
37, 000 km state hi ghway network i n these
states, roughly 13, 000 km or 36% was
potenti ally vi able as a BO T proj ect, ei ther
as a rehabi li tati on or upgradi ng proj ect
dependi ng on t raf f i c levels. T he k ey
threshold for viability wasaround 5, 000 PCU,
below which more than 70% public support
would be required and a BO T was therefore
deemed unsui table. The range of publi c
support required for these 13, 000 km of BOT,
assumed at 40% di sbursed over t he
construction period, wasestimated asbeing
from Rs. 6 to Rs. 72 Crore per annum, sums
that are qui te feasi ble even for fi scally
constrai ned states.
74
AP, Karnataka, M P, M aharashtra, UP and West Bengal
56 l
The Foundations for Financial
Sustainability in the Sector
1. Previ ous chapters of thi s report have
outlined the large financing gap in the highway
sector, and the li keli hood that i ncreased
funding will have to be financed from the
hi ghway users themselves, i rrespecti ve of
whether investment isfinanced from public
or pri vate sources. I t i s clear that the
institutional arrangementsof the sector need
to change in order to improve the quality of
decision making, enhance the transparency
of financing arrangements and obtain the
acceptance and support of the road user
community for the proposed changesin the
level and structure of road charging. The
reformssuggested are designed to help tackle
the underlyi ng problems of i nadequate
information, fragmented decision making, and
lack of transparency.
2. The reliance on the road sector for general
tax revenue i s a systemi c problem whi ch
af f ects many developi ng countri es. A
broadening of Indias tax base may be very
desirable but may not be achievable in the
short-term. Consequently, road usersare likely
to have to pay more for better roads
75
. Several
countrieshave found that, in order to make
additional user charges acceptable to road
users, rather different institutional governance
structures are desirable; structures in which
representati ves of road users and other
stakeholders are brought into the decision-
making processand given some influence on
how their user chargesare spent.
3. Create and Disseminate Better
Information. The first step in strengthening
the deci si on-maki ng process i s i mproved
information and information dissemination.
M any governments regularly re-assess the
structure/level of road user chargesthrough
Road Cost Allocation and Road Cost Recovery
Studies
76
. Such studiesmay cover:
9. RECOMMENDATIONS
the road costsimposed by different
vehicleson each road category in the
network;
the total of taxes and fees paid by
each vehicle type and for different
categoriesof roads; and
the level of road user charges paid
by each vehicle type on each road
category.
4. I n I ndi a, a road user charge study
was undert ak en i n 1988-89, but i ts
recommendat i ons were gi ven li t t le
consi derati on and the study has not been
repeated. When road usersare expected to
fund the road network, such studi es are
essential. The allocation of costs between
vehiclesneedsto be kept under continuous
review to ensure that no vehicle group is
paying lessthan itsroad damage costs. Road
cost allocation reviewsshould be undertaken
biannually and, astaxesand chargesare raised
by both GOI and the States, they should be
commissioned by a central agency with the
Statesproviding whatever data on costsand
taxes are necessary. These cost allocati on
studiesshould be made public and form the
basisfor determining user charges.
5. Furthermore, the nature and quality of the
financial information collected and reported
by road agenciesshould be greatly improved,
especially if the road agenciesare hoping to
raise funding from the private sector. Globally,
road agenciesare adopting a businessoriented
approach to managing the road network and
shi f ti ng f rom tradi ti onal government
accounting to quasi-commercial accountsin
which:
accrual rather than cash accounting
isemployed
77
;
road/bridge assetsare capitalized and
depreciated; and
the cost of maintenance isreported
asan expense
78
.
75
O f course, the benefitsof the better roadsto road usersshould more than offset the additional charges, but maynot be immediatelyperceived.
76
See for example the resultsof such a studiesin the USA at http://www. fhwa. dot. gov/ohim/hwytaxes/2001/
77
See Transition to the Accrual Basisof Accounting: Guidance for Government and Government Entities(2
nd
Edn. ) IFAC, December 2003, available from
http://ifac. org
78
See Asset M anagement for the Road Sector, O ECD, 2001
Recommendations
l 57
6. Thisfollowsthe accounting conventions
used by the private sector firm, showing fixed
assets on its balance sheet and accounting
f or depreci ati on through the i ncome
statement. Road agenci es are thus
demonstrating more coherent and transparent
accounting for the very considerable assets
they manage: NHAI, itself, would be high in
any ranking of Indian companiesby balance
sheet size if road assetswere properly valued
79
.
In the USA for example, the Government
Accounting Standards Board promulgated
Statement 34 in 1999 requiring all government
bodiesto calculate, audit and disclose the cost
of infrastructure and the associated annual
depreci ati on/mai ntenance expense. The
introduction of the requirement being phased
in by 2006 islikely to have profound effects
on the bond market which road authorities
rely on for a considerable portion of their
financing
80
.
7. Audited financial statements (balance
sheet and income and cash-flow statements),
that reflect the reality of the sector, would
send a clear message to taxpayers, bond
holdersand underwritersof the road agencies
stewardship of the road network and their
financial capacitiesto repay future liabilities.
If NHAI and/or the state Road Development
Corporationswant to reduce the cost of their
borrowing; facilitate private funding of the
sector; and meet the growing public demand
for clearer accountability, adopting a modern
commercial accounting system will be a critical
building block.
8. If public and private finance isto be used
cost effectively in the improvement of Indias
highway network, there is also a pressing
need for i mproved road and traffi c data.
Potenti al i nvestors i n the network must
forecast their cash flows and need data on
constructi on uni t costs, traffi c, and the
engineering history of those roads/structures.
Unfortunately, such information isgenerally
not available even within the road agencies,
let alone in a usable format or on a public
basis. The likely consequence isthat investors
incorporate much higher risk premiumsinto
their bidsthan might be justified. Contracting
out, using more automated methods and
independently auditing data collection may
help inspire greater confidence in the quality
of the data. By having a longer and wider
history of traffic, tendered ratesfor BOQ items,
asset condition and traffic, clientscan expect
private parties to be more accurate in their
tendering with benefitsaccruing to all sides.
9. Create a Coordinating Mechanism to
Harmonize User Charges. Whi le the
constitutional responsibilitiesfor setting and
collecting taxes and charges need not be
modified, there would be major advantages
in a more coordinated approach to setting road
user charges. A t present, there i s li ttle
coherence in either the methodsor levelsof
charges and, in some instances, conflicting
incentives are being given. There are two
broad optionsfor establishing a harmonized
road user charge regime: a strategic road
authority or a looser affiliation of the center
and state governments.
10. A Strategic RoadsAuthority (SRA) would
be responsible for the planning, coordinating
and fi nanci ng of the overall hi ghways
program. The Central Road Fund already
offers a source of fi nance for nati onal and
state hi ghways, as well as local roads; but
i t cannot i nfluence the allocati on of funds
between acti vi ti es ( set by statute) , and has
no powers over the road-user taxati on
policiesadopted by the individual states. The
SRA could recei ve the cess, and all other
desi gnated nati onal road user charges and
then channel thi s fundi ng to develop a
coordi nated approach to hi ghway fundi ng
across all the states. It would be charged
wi th undertaki ng studi es of road costs and
revenues and developi ng, wi th the relevant
state agenci es, an i ntegrated approach to
effecti ve road user chargi ng.
11. T he SRA should be gi ven t he
responsi bi li ty for desi gni ng an approach to
t he f i nanci ng of capi t al i nvest ment ,
consi stent wi th budget li mi tati ons and the
capaci ty to rai se new sources of revenues,
over the next two Fi ve Year Plan peri ods. It
i s perhaps i nevi table that the present heavy
fi nanci al burden of developi ng a modern
highway network will be spread more evenly
over ti me. The SRA would, therefore, need
powers to rai se medi um term ( 5-10 years)
79
Australia, UK, USA and Canada are all moving in thisdirection
80
Primer GASB 34, US Federal HighwayAdministration, 2000
58 l
debt, to be held on its balance sheet, to be
repaid by a secure revenue flow from the fuel
cessand highway tolls.
12. If the SRA is to facilitate co-ordination
between central and state functions, there
would need to be a governi ng counci l
comprising representativesfrom the central and
state governments. In addi ti on, to help
generate support for increased charges, the
governi ng counci l should also i nclude
representativesfrom road usersand other road
sector stakeholders. The SRA would need to
be staffed by engineersand, more particularly,
by expertsin economicsand finance.
13. A powerful SRA may be too radical. In
the short term, it may be more feasible to
develop a council of transport ministersor some
similar body whose mandate would be to
encourage dialogue between the statesto help
harmonize policies toward the road sector,
including road user charging and expenditure
allocations. Such a body could perhaps be
created asa sub-committee of the Council of
C hi ef M i ni sters. I t mi ght well be the
appropriate body to commission the proposed
studies on Road Costs and Cost Allocation;
there would then be common ownership of
the resulti ng product by all the relevant
governments.
14. Internationally, two similar institutions
already exist: the European Conference of
M i ni sters of Transport ( ECM T) , and the
International Fuel Tax Association in the USA
and Canada. (see Annex 14). The ECM T has
a much broader mandate than the
International Fuel Tax Association which is
desi gned purely to reduce and i mprove
administration of fuel taxation. Both examples
demonstrate that there can be considerable
benefit in joint action on common issues,
without compromising sovereignty. To establish
a similar organization for India, with substantial
potential benefit, only requirespolitical will and
some limited secretariat support.
15. Create and Maintain National and
State Road Funds. Differentiating implicit
road user chargesfrom general taxesalways
requires assumptions and consequently the
conclusi ons are speculati ve; there are no
unambiguous criteria for what constitutes a
normal tax. However, if responsibility for
setting road user chargeswere separated from
general revenue taxes, and the user charge
revenue accrued to a commercially managed
Road Fund, then there would be clearer lines
of responsibility and accountability. Several
such road fundshave now been established
and are worki ng sati sfactori ly. The mai n
characteristicsof such a road fund include the
following
81
.
A separate, quasi-autonomousRoad
Fund, should managed by a Roads
Board.
T he Roads Board i ncl udes
representatives from private road-
usersand other stakeholdersaswell
asthe Government. Preferably, there
should be a majority of private sector
members wi th a pri vate sector
chairperson.
Road user charges are specific and
separated from general taxation.
Revenuesare paid automatically and
directly to the Road Fund, rather than
through the Consolidated Fund.
Strict proceduresare established for
the allocati on of funds between
activities and the approval of work
programs submitted by the various
road agencies.
Independent financial and technical
auditsare undertaken and all reports
are published.
16. India already has a national Road Fund,
financed by the road cess. The allocationsof
the receipts are statutorily predetermined
(national, state, rural, and urban), with 50%
allocated to rural road development. A few
states have also establi shed thei r own
dedicated road fundsto increase road sector
funding. The Indian Central Road Fund differs
from the recommended second-generation
road funds
82
in two principal aspects:
the emphasis on road development
rather than road maintenance with
the revenue from the fuel cess is
largely used f or new road
i nvestment; and
81
See Commercial M anagement and Financing of Roads, World Bank, 1998 http://www.worldbank.org/afr/ssatp/techpaper/tp409.pdf
82
First generation road fundswere simplyrevenue raising from dedicated taxes. In manycountries, such fundsdeveloped a verypoor reputation with
high levelsof corruption and the diversion of the fundsto other uses.
Recommendations
l 59
the complete domi nance of the
publi c sector i n the management/
governance of the Fund
83
.
17. Rational management of the road sector
requi res a coordi nated and i ntegrated
approach to i nvestment and mai ntenance.
Unfortunately, poli ti ci ans often take a very
shortsi ghted vi ew of road mai ntenance,
when faced by resource constraints, and give
priority to investment. In India, thisisa major
problem and there i s a huge shortfall on
road mai ntenance. Thi s could be addressed
by legi slati ng that the Central Road Fund,
or a successor Strategic RoadsAuthority, and
State Road Funds must adequately maintain
the core nati onal and state hi ghway
networks, and that mai ntenance should be
the fi rst charge on resources.
18. The conti nued i nvolvement by the
M i ni stry of Fi nance and Roads has not
undermined the effectiveness of road funds
elsewhere. In Indi a, i t i s perhaps i nevi table
that road funds wi ll have mi xed publi c/
pri vate boards, and consi derable i nfluence
wi ll be ret ai ned by t he M i ni st ri es/
departments of Fi nance. Such i nvolvement
would probably i nclude M oF agreement to
the level of any cess or other speci fi c road
user charge. Thi s, however, should not be
an i mpedi ment to the development of a
busi ness ori ented and user responsi ve
process for the rai si ng of revenues, and
allocati on and i mplementati on of road
expenditure.
Options in Financing the Highway
Program
19. Assumi ng that the hi ghway network i s
fully maintained and improved to meet the
needsof a rapidly growing economy, there is
likely to be a cumulative funding gap, during
the next ten years, in excessof Rs1, 000 billion,
or more than US$2 billion per year. Indeed,
the funding gap would be much greater (Rs
1, 760 billion) if the present proportion of
highway user chargescontinuesto be used in
other sectors. The Government of India and
the State Governments have a number of
possible optionsto fill, bridge, or reduce the
financing gap:
i ) Increase the proportion of road
related revenuesreturned to the
sector, i . e. reduce the
importance of road users as a
source of general tax revenue;
ii) Raise the levelsof existing taxes
and user charges;
iii) I ntroduce more di rect road
pri ci ng, such as road tolls or
weight-distance charges;
iv) R educe publ i c sect or
commitmentsby concessioning
highwaysto the private sector for
construction and/or maintenance
and then require concessionaires
to recover some/all of their costs
through tolls;
v) Bridge the immediate financing
gap by increased borrowing, thus
spreading the financing burden;
and
vi) Reduce investment expenditure
by greater prioritization of works
and loweri ng uni t costs by
systematic value analysisat every
stage of the project cycle.
20. Reducing the role of the road sector asa
sources of general revenue (option i), may
simply not be feasible where there are high
demands for publi c fi nance and li mi ted
opportunities for efficiently increasing tax
revenues. Concessioning highways, with the
private sector assuming the traffic/revenue
risks, (option iv), may have some role but a
network wide approach, with a public road
agency assuming the traffic risksand setting
uniform tolls, may provide greater overall
benefits.
21. Resolving the financing issue thusappears
to revolve around either borrowing (option v)
or increasing road user charges, raising existing
charges and/or i ntroduci ng new charges
(optionsii and iii). Prioritization of worksand
obtai ni ng better value from expendi ture
( opti on vi ) should apply to all publi c
investment, asit doesin the private sector. A
combi nati on of borrowi ng and i ncreased
chargesseemsalmost inevitable, the balance
83
The publicsector dominance of the governance of road fundsisalso found at the state level, except in UP.
60 l
between them isessentially a policy decision
for the central and State Governments.
22. The very high financing needsin the road
sector reflectsnot only growing traffic levels
but also the relative neglect of the sector over
an extended period. It can argued that the
present road i nvestment needs are much
higher than the longer term equilibrium level,
once the back-log of rehabi li tati on and
capacity expansion hasbeen rectified. To fund
the proposed expenditure from present users
alone, will either require a very substantial
increase in user chargesor the allocation of
more general tax revenue to the road sector
which may be difficult to achieve.
23. The benefitsof the proposed investment
will extend to future road users and thus it
would be appropriate to recognize that thisis
essentially a long term investment issue and
spread the capital financing burden of the
highway network expansion/improvement to
future road users, through borrowing. Such
borrowing could be through the public sector
or through various forms of private sector
financing. The extent of generational cost
sharing isessentially a political decision, and
one which needsto be made in order to define
the funding required from existing road users.
Recommended Changes to Charging
Instruments
24. The levelsand structure of road taxeshave
evolved without any underlying economic
rationale and/or specific objectivesother than
revenue generation. The present tax structure
provi des nei ther economi c effi ci ency nor
equity. Any efficiency or equity achieved has
been incidental and not the result of deliberate
poli cy deci si ons. The absence of a well
defi ned, rati onal and coherent road user
charge policy at the National and the State
levels has contributed to the multiplicity of
taxesand the pricing distortions.
25. Therefore, it is strongly recommended
that a national taxation policy be developed,
for the entire land transport sector, that would:
promote ef f i ci ent competi ti on
between alternative modes;
encourage market oriented solutions
that reduce subsidies;
help develop optimal pricing policies
for different land transport modes;
acknowledge the desi re to shi ft
towardsmore direct charging for road
use; and
differentiate road user chargesfrom
general taxesand define the shares
for road constructi on and road
maintenance.
26. Road transport and road infrastructure are
vital for accelerating the rate of economic
growth i n Indi a, and a well-defi ned and
coherent financing structure for the road
network should have very high priority.
27. Increasing the general fuel cess. The
use of highwaysdiffersfrom the purchase of
most other servicesasthere israrely a direct
price. There is, however, a strong case for
using a proxy charge for the use of the road
network. Such a charge is often levied on
automotive fuels
84
. M any countries, facing the
same fundi ng constrai nts as Indi a, have
imposed a fuel levy/cess, with the revenue
dedicated to the road sector (often specifically
road maintenance). While dedicated taxesare
generally anathema to finance ministriesand
the IM F, there isgrowing acceptance of the
benef i ts of a reli able source of road
maintenance funding, within a well structured
and accountable road fund.
28. In 1998, the GOI introduced a new fuel
cess, dedicated to expenditures in the road
sector, which was subsequently formalized
through the Central Road Fund Act, 2001. The
cess was initially set at Rs. 1/liter, for both
gasoline and diesel, and then increased to
Rs.1.50/liter (US3/liter) in 2003. This has
substantially increased the resourcesfor the
highway sector: Rs20 billion/year for national
highways and about Rs 11 billion for state
hi ghways. Some states have i ntroduced
addi ti onal fuel cesses; Uttar Pradesh, for
example, imposed an additional salestax of
4% on diesel, and 6% on gasoline, raising
about Rs. 2.5 billion/year for the road sector.
29. Financing the funding gap from the fuel
cess would require a cess rate of about Rs.
7.5/liter; such a massive increase is unlikely
to be politically acceptable. The fuel cesslevy
in India is relatively low in comparison with
84
Chargeson vehicle tiresmight perhapsgive a greater correlation to road costsbut high chargeson tirescould have seriousroad safetyissues.
Recommendations
l 61
similar levies in other countries (they range
from US4.5 10/liter but most are US 6
7/liter) and some increase would probably be
acceptable, especi ally i f accompani ed by
institutional reformsto the management of
the Central Road Fund. It is recommended
that the GOI considersdoubling the fuel cess
to Rs 3/liter, and dedicating the additional
revenue entirely to road maintenance. It is
also recommended that the State
governments establish dedicated cesses to
fund the maintenance of the state highways;
thismight require fuel cessesof Rs. 0.5-1.0/
litre on both diesel and petrol. The current
high international oil prices complicate this
course of action somewhat but do not make
it impossible.
30. Higher diesel cess . There is a strong
economic case for a higher cesson diesel as
the vari able costs i mposed by heavy
commercial vehicles are about 7-10 times
higher than those by passenger cars
85
. Heavy
trucksare undercharged for their road damage
costsand raising the cesson diesel would be
one way of recovering these costs. The danger
of a higher cess on diesel is that it would
increase the price differential with kerosene
and encourage fuel adulteration.
31. Increasi ng the di esel cess could have
negative impactson non-road usersof diesel,
who consume about 46% of diesel
86
. It is
relatively easy to exempt large individual users
(railwaysand power), but much more difficult
to give exemptionsto small usersin agriculture
and industry. The measuresthat governments
have used to addressthisissue are outlined in
Annex 15, but some governmentshave simply
accepted the i nequi ty and provi ded no
excepti ons. It i s recommended that G O I
commission a detailed study to review the
case for hi gher di esel cess and the li kely
impactson other sectors.
32. Purchase and ownership taxes.
Purchase and ownership taxes on vehicles
(fixed taxes and charges) can and often are
used aspart of a road user charge strategy.
Whi le i t i s generally preferable to relate
chargesto the use of the vehicles, thisisnot
always practi cable. There are also good
argumentsfor having a fixed charge to cover
the fixed costsof providing and maintaining
the network. The annual fixed charge should
be structured to reflect not only the non-
attributable costsof the network but also those
attributable costs which are not adequately
recovered by use related charges. For freight
vehicles, this would suggest annual license
feesbased on a combination of grossvehicle
weight and the number of axles. The annual
license fee can thusprovide incentivesto road
usersto employ lessdamaging vehicles.
33. M ost states already charge annual fees
on motor vehiclesbut it isclear that there is
no standard approach to the level or structure
of these fees. I t i s recommended that,
following a study of road user costs, all state
governmentsshould be encouraged to adopt
a uniform approach to the establishment of
annual fees for freight vehicles in order to
ensure that the road transport industry is
provided with consistent incentivesto adopt
the most economically efficient vehicle fleet
configuration.
34. Tolling the National and State
Highways. Road tolls generate a small
fraction of the total revenue from road users,
possibly around one percent. However, both
in India and internationally, there isgrowing
interest in directly pricing for road use both to
raise revenue and to relate user chargesmore
directly to user costs(including congestion).
35. In the light of the present low willingness
to pay tolls and the limited value of time
savings for freight vehicles, the appropriate
policy isto keep tollslow but apply them more
wi dely. Thi s i s NHAIs i ntenti on, once the
Golden Quadrilateral and North/South East/
West corridorsare completed. The NHAI draft
Corporate Plan indicates that tolls on this
network will generate Rs. 20 billion annually,
by 2007, sufficient for corridor management
and maintenance plus 50% of interest on
outstanding debt, excluding annuity schemes
and SPVs/BOTs.
36. It seems probable that Indi a wi ll rely
increasingly on tollsfor highway finance and
the real issue isthe speed of their introduction.
The NHDP isan ideal opportunity to implement
a systematic toll policy for major interstate
85
Where differential fuel leviesare used, it isoften gasoline which isa higher rate
86
Agriculture: 20% ; power generation: 7% ; industry: 8% ; railways: 4% ; and other: 7% . Source: M inistryof Petroleum and Natural Gas, 2000-01
62 l
highways. Except on high cost bridges, where
hi gher tolls may be both necessary and
feasible, it would seem sensible to have a
national toll schedule, designed to finance
construction and maintenance over a 20 - 25
year period. Thiscould be introduced over 3
- 7 years. It is recommended that the GOI
designates the new routes on the Golden
Quadrilateral and on the North-South and East-
West corridorsasa national toll network. The
toll network would be controlled by, and the
toll receiptswould accrue to, NHAI asgeneral
income rather than specifically to individual
li nk s, except where exi sti ng toll based
concessionshave already been let. The actual
operation of the linkscould be outsourced to
private operators. Thisinitial toll network could
grow asthe remaining 44, 000 km of national
highwaysare upgraded.
37. I t i s also recommended that State
governments implement a uniform tolling
system on their core highway networks, once
individual linksare improved to a reasonable
two lane standard with traffic levelssufficient
to justify the cost of tolling. The tollsshould
be set to recover, at least, the cost of operating
and maintaining the roads and should be
commensurate with the national system. In
the longer term, the levels of tolls may be
increased to cover the costsof strengthening
or rehabilitating further links on the core
highway network.
38. A study, undertaken in preparing this
report, assessed the potential for toll based
BOTs on state highways in six states with a
total state highway network of 37, 000km;
such schemesmay be feasible on about 35%
of the network, assuming relatively low levels
of investment. M oreover, new technologies
are reducing tolling costs and the levels of
evasion and revenue leakage. Even adopting
a cautiousapproach, it may be feasible to toll
about one quarter of the state hi ghway
network.
39. Weight/distance charges. One of the
most serious deficiencies of the road user
charging regime in India isthe under-charging
of heavy commercial vehicles for their road
damage costs. This undercharging can be
partly compensated by annual charges but
these are a rather blunt instrument and do
not di scri mi nate between vehi cles wi th
different levels of utilization. M oreover, a
simple charge, based solely on grossvehicle
weight, can give distorted signalswith respect
to vehicle choice.
40. In India, a weight/distance charge could
be introduced for national/state highways
through the methodsused elsewhere, or by
stopping vehicles at toll plazas for manual
collection of tollsrelated to the vehicle weight/
axle category. An Expert Group should be
established to elicit the viewsof the trucking
industry and then consider the proposal in
detail.
41. Urban congestion charges. I t i s
recommended that urban road pricing should
be consi dered to address the i ncreasi ng
congestion problemsin major urban centers.
However, thisshould be viewed asa separate
exercise to general road user charging and
should be initiated and managed by the cities
as part of i ntegrated urban transport
strategies. This will require a definition of
urban boundariesfor the purposesof inter-
urban toll and chargi ng purposes; i t i s
suggested that these are established early in
the development of the national and state
highway programs.
42. Enhancing Equity. M ovi ng towards
greater reliance on differentiated fuel cesses
and road tollswill, in the longer term, help to
allocate more directly the costs of different
vehicle categories and make the charging
structure more equitable between users. In
the short term, it would be prudent also to
rationalize the current tax regime. In a country
of sub-continental size like India, effortsshould
be made to harmoni ze the methods of
calculating levelsof user chargesso that the
current wide variation between states and
between different userscan be reduced. This
type of exercise iscurrently being undertaken
by the 25 countriesof the EU.
43. The exi sti ng tax structure should be
simplified first, by minimizing the ambiguities
i n vehi cle classi fi cati on and the basi s of
charges. Certain taxes, which are difficult to
administer, like passenger tax and goodstax
might be merged with road tax (the principal
tax levied by the State Governments) and a
single consolidated charge levied. Rajasthan
and A ndhra Pradesh have already
amalgamated various taxes without loss of
Recommendations
l63
revenue. Another form of simplification, now
in use, isan one-time tax on private personal
transport, i.e. private carsand 2-wheelers. This
would reduce admi ni strati ve as well as
compliance costs. However, some form of
annual registration may still be desirable for
vehicle control purposes, such asfor vehicle
road-worthiness.
44. States also need to review whether the
current charging of buses and commercial
trucks is equitable or whether it should be
revi sed. The overchargi ng of buses and
undercharging of freight vehicleshasnegative
i mpli cati ons for both transport effi ci ency
(leading to inter-modal traffic distortions) and
equity. It appearsto be the result of the heavy
financial dependence of states on bus and
passenger taxation. The solution to thismay
need to be partly i nsti tuti onal wi th some
compensation, possibly through a re-allocation
of fuel tax and other central funding, if the
statesforgo the excessive taxation on buses.
Additional Reforms to Help Spur Private
Finance
45. Establishment of a Highway
Regulatory Authority. While thisaspect is
already fairly well developed at the national
level, the GO I can consider the following
opti ons ( i ) do nothi ng; ( i i ) i ncrementally
strengthen the standard concession document
asisalready being done; or (iii) establish an
independent regulatory authority under law.
The third option may be sensible in the longer
run to help standardi ze process thereby
providing greater predictability to investorsand
allow for shorter concession contracts that
easier to develop and conclude. Authorities
have become functi onal i n the Telecom,
Insurance and Energy sectorsin India and are
playing an important role in opening up these
sectors to competition. Establishment of a
Highway Regulatory Authority on similar lines
for the road sector would certainly provide an
i mpetus to pri vate sector parti ci pati on i n
vari ous modali ti es i n road proj ects, thus
quickening the pace of growth by removing/
mitigating infrastructural hurdles. Typically,
such an Authority should consist of not less
than three membershaving a minimum of 20
years experience each drawn from the:
Engineering profession preferably
with expertise in road construction/
traffic engineering;
Legal profession one who hasbeen
or iseligible for being a High Court
Judge; and
Industry and/or financial analyst cum
economist familiar with the sector
and road freight industry.
46. From amongst the members, the
G overnment could nomi nate one as the
Chairman and another asthe Vice chairman.
The tenure of a M ember would be three years,
renewable for one more term of three years,
but not beyond the age of say sixty five. They
should be empowered to act i n an
autonomous, independent manner through a
legi slati ve enactment whi ch would also
provide for itscomposition, qualification of
members, powers and functions and other
relevant details.
47. At the State level, putting in place a full
time regulator may not make sense until a
sufficiently large program of PSP isin place in
which case regulation through the contract
by a di spute resoluti on board may be
appropri ate. However, such a mechani sm
would need to have sufficient powersto ensure
that any ruling wasimplemented quickly.
48. Institutional Framework. Reform of
sector institutions from old fashioned PWD
systems to a more effecti ve and effi ci ent
system isa key building block. Alternatively,
establi shi ng a State Road Development
Corporation with improved governance and
more ni mble procedures may be gi ven
responsibility to act as a nodal agency for
induction of private investment in the sector
by commissioning project preparation and
procurement activitieson behalf of states.
49. Adoption a PSP framework and
enactment of accompanying laws.
Formulati ng a comprehensi ve road
development poli cy and arti culati ng an
associ ated PSP framework for the state,
defining public contribution/participation, risk
shari ng, and regulati on of contracts. The
existence of a legal framework or specific
guidelines for inducting private investment
64 l
help provide comfort to investorsand lay down
processes for adopti on by the PWD/Road
Development Corporation. The existence of
an established policy and guidelinesassumes
specific importance in ensuring consistency
and transparency.
50. Increase Incentives for PSP through
Reduction of Existing Inefficiencies.
Despite the incentivesin place for PSP, more
remainsto be done concerning whether: (i)
the provisionsregarding income deductions
for tax purposesin the 1961 Income Tax Act
could be applied to all bank financing, not
just specialized financial institutions; (ii) the
provisionsregarding the deduction of 20% ,
for tax purposes, of equity sharessubscribed
or debenturesissued, could be extended to
all financing partiesto a PSP project and not
just the infrastructure company; (iii) Company
Lawsstatutory reserve requirementsof 10%
could be reduced in line with international
experi ence appli cable i n I ndi a; ( i v) the
depreciation method to estimate deferred tax
liabilities could be left unspecified; and (v)
other taxati on i nef f i ci enci es could be
addressed. These include, for example: (i) the
limited period of tax holiday for infrastructure
companiesunder Section 80 IA of the Income
Tax Act (10 yearsduring operations); (ii) the
distribution tax on dividendspaid by project
companieswith effect from April 2003; and
(iii) the minimum Alternate Tax which forces
companies to pay tax even during the tax
holiday periods.
51. Improve Project Planning,
Prioritization and Justification. By
strengtheni ng the process of planni ng,
pri ori ti zi ng and procuri ng PSP proj ects, all
road agenci es can help promote more
pri vate fundi ng to the sector. Thi s requi res
the preparation and implementation of clear
gui deli nes to i denti fy the range of PSP
models to be applied and the circumstances
under whi ch each would be used. Further
proj ects should be pri ori ti zed usi ng well
defi ned selecti on cri teri a such as type of
vehicular traffic, traffic volumes, connectivity
wi th maj or roads, present road condi ti ons,
and deci de on the form of pri vate sector
engagement. Fi nally, all PSP proj ects
i nvolvi ng the outlay of publi c funds or the
granti ng of ri ghts to collect tolls i n a
monopolistic manner for an extended period
should be subj ect to detai led value for
money assessment by the road agency. The
onus should be on t hat agency t o
demonstrate obj ecti vely the advantages to
be achi eved from the proposed PSP. Thi s
assessment should be revi ewed and
approved by a sui table G overnment body
unconnected wi th the promoti ng agency
the Publi c Investment Board i n the case of
NHs and t he relevant uni t wi t h t he
Department of Fi nance for SHs. The Publi c
Sector Comparator system used i n the UK
and Australia as described in Chapter 7 may
provi de a sui table model for adaptati on to
the Indi an envi ronment. Applyi ng a more
ri gorous proj ect planni ng and preparati on
procedure wi ll also entai l bui ldi ng ski lls
wi thi n road agenci es and approvi ng bodi es
to undertake such analysi s.
52. Network Finance and Project
Finance Approach. Whi le putti ng i n place
a stronger regulatory framework, improving
the level of i nformati on and strengtheni ng
the planni ng and procurement process wi ll
faci li tate PSP, thi s paper also explores
whether for the NH network , tak i ng a
project by project approach as well as trying
to shi ft a si gni fi cant porti on of the traffi c
ri sk to the pri vate sector bri ngs the best
results. Thi s may result i n concentrati ng
t raf f i c ri sk result i ng i n t he need t o
restructure proj ects, i ncreasi ng costs to
society as a whole and leaving more remote
sections of the network behind. In addition,
the progress made under the PSP approach,
t o bri dge t he f i nanci ng gap f or t he
development and mai ntenance of roads,
has been achi eved at a relati vely hi gh ri sk
and cost to the G overnment.
53. Wi th the excepti on of li nk s havi ng
capti ve traf f i c, f or whi ch the proj ect
fi nanci ng approach i s sui ted, i t i s worth
explori ng whether corporate fi nanci ng,
based on statutory hypothecated cess and
uni form tolls (establi shed for each category
of vehi cle on a per ki lometer basi s) , would
attract the required funds and minimize the
hi gh traffi c ri sk premi um normally charged
under PSP. C orporate f i nanci ng could
provide fundsfor lesstrafficked sectionsthat
are not attractive to the private sector. With
a securi ti zed revenue stream from the cess
and completed toll roads, NHAI could rai se
Recommendations
l 65
87
BO Tscould still be used for linkswith high traffic and limited traffic risk, such asmajor bridges
88
Latter assumesthat NHAI wasto have more financial autonomyand concomitant financial accountability.
89
Recent line of credit that wasproposed but yet to reach closure from Life Insurance Corporation offered at 100bp over 18 year treasurybond rate
further debt or enter i nto non toll based
Desi gn Bui ld Fi nance and O perate ( DBFO )
agreements without GOI guarantee
87
. The
total revenuesaccruing through fuel cessand
tollsand the relative weighting between the
two can be subject to periodic review by the
NHAI Board, subject to the obligation to justify
proposed changesin front of an independent
review panel of interested partiesestablished
by the GOI. The justification would clearly
demonstrate the operational and financial
impact of failure to adopt the proposed revised
rates. The panel would have the right to veto
proposed changes in the charging regime.
Alternatively, the private sector could also be
successfully utilized through maintenance
concessionsor long-term performance based
maintenance contracts.
54. The advantages of thi s approach as
opposed to a project by project concession
approach are asfollows: (i) diversification of
traffic risk to whole of network; (ii) capacity to
crosssubsidize between linkson the network;
(iii) greater transparency for road userson road
charges, revenues and expendi ture and
theref ore i ncreased li k eli hood of user
acceptance of system; (iv) economiesof scale
in establishing national highway tolling system;
(v) greater uniformity of service standards; (vi)
allow for more incremental introduction of
tolling; and (vii) greater incentive on NHAI to
manage efficiently all items of work on the
whole of the network so asto minimize total
costsand maximize total revenues
88
. GOI may
still be free to provide concessional or grant
funding for specific projects that are clearly
demonstrated not to be financially viable but
which the GOI wish to see completed to meet
other public policy objectivessuch asregional
i ntegrati on or strategi c requi rements.
M oreover, for specific linkswhere traffic can
be more accurately forecast - bridges and
bypasses BOTs may still be employed on
standalone basisusing real tolls.
55. In this structure, where current cess/toll
revenuesfall short of funding for O& M , debt
servicing and desired new investment, NHAI
would have two options. First, it could issue
non GOI guaranteed debt on the strength of
itsfuture anticipated revenuesalone. Such debt
would be expected to be a rai sed at a
significant but not large premium to GOI debt
of equivalent maturity
89
, reflecting investor
perceptions of the operational risks of cost
overruns and revenue shortfalls. NHAI can
manage its financial risks through further
developing itsTreasury function and using the
derivativesmarket to hedge unwanted risks.
Second, NHAI could also enter into non toll
based DBFO contracts, using either straight
annuity, lane availability or active management
payments. If NHAI sti ll consi dered that a
concessionaire has some but limited control
of the levelsof traffic, a hybrid option of using
both annuity and incremental shadow toll can
be adopted - a base payment which isassured
regardlessof actual traffic combined with an
additional payment per vehicle that actually
usesthe road. Implementing either financing
option would be subject to the approval of the
Finance M inistry. Further strengthening the
O& M implementation system, accounting and
the corporate governance arrangementswould
all be expected to have positive impacts on
reducing the cost of NHAI borrowing, either
through debt or concessions, by reducing
creditor perceptions of the likelihood and
severity of operational risks.
56. In fact the choice between using corporate
debt on NHAIsbalance sheet or procuring long
term DBFO contractsto elicit private funding
may not be so relevant asit first appears. In a
world without tax, without transaction costs
and with equal skillsin the private and public
sectors, the economic realityof the two options
i s substanti ally the same i . e. a li abi li ty
requi ri ng a peri odi c entry i n the i ncome
statement either asan interest payment to a
creditor and/or depreciation of an asset. In
accounting termsalso, the two may also be
equivalent when the DBFO contract isviewed
as a lease by NHAI from the DBFO partner.
I nternati onal A ccounti ng Standards 17
stipulatesthat a lease should be classified as
a capital lease and held/amortized asa liability
on the lesseesbalance sheet if any one of the
following conditionsprevail: (i) when the term
of the lease isthe major portion of the assets
life; (ii) the present value of the lease payments
66 l
isequal or greater than the fair value of the
asset; (iii) where the asset ownership reverts
to the lessee at the expiry of the lease; or (iv)
where the lease containsa bargain purchase
option
90
. These conditionswould likely prevail
in a DBFO contract in India, ashasbeen the
case with Annuity contracts. NHAI isrequired
to operate and account along commercial lines
and i s i ncrementally adopti ng I CA I /I A S
standards.
57. With these observations in mind, it is
recommended that a broad public debate be
undertaken - to be informed by a special
Comptroller and Auditor General efficiency/
performance appraisal of the value for money
that has been obtained through the various
PSP modelsin use by NHAI - prior to finalizing
the ongoing procurement process for the
concessi oni ng of 10, 000 km of nati onal
highways. Of special interest in this review,
should be the impact that NHAI and the states
current creditworthinesshashad on the cost
of private sector financing and overall on the
successof PSP projectsand the suitability of
the i nsti tuti onal, legal and regulatory
framework of the Central Road Fund for
securitization.
58. A corporate approach to PSP could also
be explored at the state level. Corporate
financing could be implemented through the
establi shment of semi autonomous Road
Development Corporations. These would be
coupled with dedicated road fundsusing road
user charges, largely fuel cess, and publicly
i mposed uni form tolls to assure fundi ng
streamsinto the future against which private
capital markets can provide debt or debt/
equity through DBFO contracts. Statesshould
nevertheless guard agai nst creati ng new
contingent liabilities without due regard to
strengthening associated revenue capacity to
fund new debts(see box 9.1).
59. Incorporating road users into road
capital structures. Certain national and state
highway stretches directly serve individual
project beneficiariesin urban agglomerations.
The involvement of direct project beneficiaries
as part financiers of the capital structure of
such BOT projectsmay benefit such projects
through: ( i ) faci li tati on of greater publi c
acceptability of such projects, with possible
benefitsof increased acceptance of the user
pays principle; (ii) creation of a more direct
linkage between the costsand benefitsof such
projects; and (iii) creation of an additional
source of strategic road equityfor such projects.
For example, road usersmay be included into
the capital structure of a project through sale
(during project construction period) of long term
passes
91
entitling the user to an unlimited
number of tripson the project road for a limited
period of time. As opposed to the existing
practice of issuing monthly passesto frequent
users(after commissioning of the project), the
alternative measure would sell larger value
90
The Analysisand Use of Financial Statements, White et al 1997. The same definition isused bythe Accounting Standard 19 of Council of Chartered
Accountantsof India
91
If maybe noted that variousBO T roadsalreadyoffer a monthly passsystem with discounted pricing for frequent users
Box 9.1 Managing Fiscal Risks of Off Budget Liabilities
The following voluntary standards have been recommended for governments to better manage off budget liabilities.
Before it accepts a new contingent liability, a government should assess the risk to its fiscal condition,
including the probability of future payouts. The assessment should be conducted by an independent entity.
The government should periodically compile an inventory of outstanding contingent liabilitiesand report on
the volume of these liabilities, their legal basis, and the probability of losses.
Government fiscal analysispublished in the annual budget or other documentsshould discussthe major risk
factorsaffecting revenuesand expendituresfor the next fiscal year or beyond.
The government should establish a risk management strategy to guide public organizationswhen they take
actionsthat expose them to financial liability.
The government should promote cost-and risk-sharing to discourage moral hazard, ensure the economic
viability of guarantees, and reduce the probability and amount of loss.
The budget should set aside funds , within an overall fiscal constraint, for expected losses during the year
The budget should limit the amount of guarantee and other contingent liabilitiesto be tendered during the
year, aswell asthe total amount that each institution authorized to issue guaranteesmayhave outstanding.
Source Government at Risk - Contingent Liabilities and Fiscal Risk, H. Polackova Brixi and A. Schick, World Bank, 2002
Recommendations
l 67
passesto such usersduring the construction
period, thereby raising part of the capital
requi red for proj ect i mplementati on. The
effective cost of thisinstrument would be the
total value of toll unpaid during the operations
period by a portion of frequent usersholding
such passes. The choice and responsibility for
issue of such road users equity lieswith the
private sponsors of BOT projects. However,
NHA I or state governments could play a
promotional role in realizing such objectives
by: (i) stipulating that a certain portion of
specific projects should attempt to tap this
potential market on a pilot basis; and (ii)
educating road userson the attractivenessand
rationale of such schemes.
60. Corporatization/ Securitization.
Securi ti zati on techni ques can be used to
structure securitiesdesigned to maximize their
investor appeal and the benefitsof portfolio
diversification and secondary liquidity. This
entailscorporatization and public offeringsof
road packages. In India, significant portionsof
roads to be tolled are being implemented
through contracts on a cash payment basis.
The responsibilityfor operating and maintaining
these stretcheslieswith the government. As
an alternati ve, government agenci es can
consi der transfer of long-term operati on,
maintenance, capacity augmentation and user
toll levying rights on these roads to newly
created and wholly owned corporate entities
(SPVs).
61. I ndi an government agenci es have
accessed the retail equity market to a limited
extent. The development of a vibrant market
in road equitiescould result in two key benefits
for the sector in India: (i) possibility of accessing
additional funding sourcesfor the sector; and
(ii) creation of investment exit possibilitiesfor
the exi sti ng i nvestors, who are pri mari ly
construction contractors, therebyenabling such
strategic investorsto channel existing locked
investmentsinto new projects.
68 l
Annexures
ANNEXURES
l 69
Annex 1 Pump Prices For Super Gasoline And Diesel
(In US CentsPer Liter) 1991-2000
Country Super Gasoline Diesel
1993 1995 1998 2000* 2002 1991 1993 1995 1998 2000
Australi a 46 57 50 45 57
Bangladesh 36 47 46 52 31 26 29
Belgium 118 112 96 104 82 85 78
China 27 28 40 42 24 25 45
France 117 111 99 105 78 77 82
India * 48 56 60 66 19 21 39
Italy 118 119 97 105 86 93 83
New Zealand 61 64 48 55 32 39 34
Paki stan 47 46 53 52 20 19 27
Si ngapore 72 84 85 36 38
Sri Lanka 75 84 66 54 23 30 27
Uganda 79 98 86 86 83 55 71 85 68 75
United Kingdom 92 111 117 118 84 111 122
Zambi a 72 60 53 72 24 66 57 49
South Africa 52 51 43 50 43 52 46 39 50
Brazi l 53 63 80 92 55 38 39 34 34
Canada 47 45 41 58 51 39 36 39 47
Uni ted St. (average) 32 34 32 47 40 28 33 27 48
M xi co 39 32 36 61 62 28 25 28 45
A rgenti na 79 60 94 107 30 29 28 42 52
* 2000 Price for Regular Gasoline
Source: Fuel Prices and Vehicle Taxation with comparative tables for more than 160 countries; Pricing Policies for Diesel Fuel,
Gasoline, and Vehicle Taxation in Developing Countries by Gerhard P. M etschies
Annex 2 Excise Duty Rates, 2003
Item Excise Duty (%)
M otor Spirit 30%
High Speed Diesel (HSD) O il 14%
M otor Vehi cles* -
2-wheelers 16%
-Cars 24% (including 8 percent special excise duty)
-Bus & Freight Vehicles 16%
Tyres & Tubes 24%
Parts and accessori es 16%
* In addition, motor vehiclesattract a cessof 0. 125%
70 l
Annexures
Annex 3 Motor Vehicle Tax in Selected States
Basis of Tax and Periodicity of Payment
Vehicle Type Andhra Karnataka Madhya Maharashtra West Uttar
Pradesh Pradesh Bengal Pradesh
For di fferent
CC categories Fixed or % of For di fferent Fi xed-li fe
fixed or % of cost % of cost of % of cost of CC categories, ti me
Two-Wheeler cost whichever is vehicle - life vehi cle-li fe fi xed-li fe
whichever is hi gher-li fe ti me ti me ti me
higher-life ti me ti me
Related to Fixed or % of For di fferent
Car weight, fixed cost % of cost of % of cost of wei ghts, % of cost-
or % of cost whichever is vehi cle-li fe vechi le-li fe fi xed-li fe ti me life time
whichever is hi gher-li fe ti me ti me for 5 year
hi gher ti me
Seati ng Seati ng Seati ng
capaci ty and Seati ng capaci ty for Seati ng Seati ng capaci ty
Bus di stance capaci ty - di fferent capaci ty- capaci ty- and Route
covered in a quarterly route km annual annual Category
day - quarterly range - monthly quarterly
RLW - annual
Goods Vehicles Laden wei ght- Laden weight RLW - or 7 times G VW- G VW-
quarterly quarterly quarterly annual rate for annual quarterly
one time tax
Note: In Uttar Pradesh, additional tax on passenger vehicles is charged quarterly on the basis of km run and
additional tax on goodsvehiclesischarged quarterly based on GVW
RLW = Registered Laden Weight; GVW = GrossVehicle Weight
Annex 4 Rates of Sales Tax
Item Andhra Karnataka Madhya Maharashtra West Uttar
Pradesh Pradesh Bengal Pradesh
M otor 12% 12% 12% + 15% surcharge 12% 12% 12%
Vehi cles = 13. 8%
Spare 12% 12% 12% + 15% surcharge 12% = 10% sales 8% 8%
parts = 13. 8% tax + 1% turnover
tax +1% surcharge
Tyres & 10% 8% 8% + 15% surcharge 12% = 10% sales tax 8% 8%
Tubes = 9. 2% + 1% turnover tax
1% surcharge
Petrol 30. 55% 28% 25% + 15% surcharge 30% plus cess @ 20. 00%
= 28. 75% Re 1 per litre plus cess @ 20% *
Re. 1 per
litre
Di esel 19. 33% 17. 50% 25% + 15% surcharge 34. % plus cess @ 12. 55% plus 20% *
= 28. 75% Re 1 per litre cess @ Re 1
per litre
Lubri cants 16% 15% 12% + 15% surcharge 13% 15% 20%
= 13. 8%
* including additional salestax of 4% on diesel and 6% on petrol, the proceedsof which are credited to State Road Fund
Annual Incidence of Motor Vehicle Tax
(in Rs per annum)
Vehicle Andhra Karnataka Madhya Maharashtra Uttar West
Pradesh Pradesh Pradesh Bengal*
Two-wheeler (100 CC) 210 208 150 210 125 80
Car ( Santro) 2042 2625 1458 1167 729 1172
M ini Bus (35 Seater) 101500 70000 48300 2485 68580* 72555
Bus (55 Seater) 159500 110000 75900 3905 132360* 113355
LCV (4. 5 ton GVW) 2796 4800 3728 2190 3510* 3365
HCV (16. 2 tonne GVW) 9675 10240 12100 9360 12636* 11160
M AV (28 Tonne GVW) 19304 18800 20108 18790 21840* 25610
* including additional motor vehicle tax.
Note: 1. In case of life-time tax, annual tax isworked out assuming a life of 12 years. In case of West Bengal, life-
time tax is collected for 5 years.
2. In case of M aharashtra in addition to motor vehicle tax, stage carriages are charged passenger tax
l 71
Annex 5 Assumptions behind the Assessment of Road Sector Revenue
by Vehicle type (2001-2002)
Category Method of estimation
Central Government
Excise on motor spirit An assessment of vehicle wise consumption of fuel ismade by using
fuel consumption norms (km/litre), annual vehicle utilization (in km)
and number of vehicles on road. The number of vehicles on road is
estimated by adjusting rexgistered vehicle fleet in light of the vehicle-
wise production figures over a period of time.
Source: Indian Petroleum and Natural Gas Statistics published by
the M inistry of Petroleum and Natural Gas
Excise on motor vehicles Di stri buted amongst vehi cle type on the basi s of i ts assessed
share i n exci se collecti on related to vehi cle producti on i n the
year 2001-02
Excise on tyres vehicle purchase Distributed amongst vehicle type in proportion to the vehicle wise
producti on data
Excise on tyres use Use related excise is distributed on the basis of fuel consumption
shares
Excise on motor parts vehicle 10 % of total excise collectionsisassigned for vehicle purchase and
purchase balance 90% for use
Excise on motor parts vehicle use The vehi cle purchase related component of exci se collecti on i s
distributed amongst vehicle types on the basis on assessed share in
excise related to motor vehicle purchaseThe use related component
i s di stri buted amongst di fferent vehi cles usi ng share i n fuel
consumption
Cess on fuel Di stri buted amongst vehi cle types usi ng the share i n f uel
consumption. (Diesel is adjusted for road sector consumption)
State Government
Sales tax on motor spirit Salestax wasestimated using fuel consumption by vehicle type and
Sales tax on diesel average sales tax rate.
An average all-India sales tax rate was calculated using the sales
tax rates i n the di fferent states and uni on terri tori es. Si mi lar
procedure was followed for the fuel consumption.
Sales tax on motor vehicles Distributed amongst vehicle typeson the basison production figures
of each vehicle type
Sales tax on tyres Estimated using sales tax amount per tyre and the number of tyres
being used.
Sales tax on motor parts Estimated by applying the ratio of spare parts cost and tyre cost in
vehicle operation cost of each vehicle type to the salestax collection
of tyres
Taxes on vehicles (incl. fees, fines, Total revenues under these head for all the states is obtained from
penalties, passenger and goods taxes) the RBI Study on State Fi nances. As vehi cles i n Uni on terri tori es
amount to 9. 7 % of motor vehiclesin States, an additional 9. 7% of
revenue on motor vehi cle tax revenue i s added f or uni on
territories. This total figure is distributed amongst different vehicles
based on the assessed share of revenue resulting from vehicles on
road and average charge per vehicle type obtained from six study
states.
Excise on diesel
72 l
Annex 7 Revenue - Cost Comparison at Vehicle Level
Item 2- wheelers Cars Jeep/taxi Bus LCV HCV MAV
All Roads excluding Urban Roads
a) Revenue and cost in Rs. per vehicle-km
Revenue 0.44 2.39 1.03 5.69 1.48 2.03 2.51
Capital Cost 0. 13 0. 25 0. 25 0. 84 0. 41 1. 34 1. 88
M ai ntenance Cost (total) 0.04 0.08 0.08 0.30 0.14 0.69 0.93
M ai ntenance Cost (vari able) 0.02 0.04 0.04 0.19 0.09 0.58 0.78
b) Revenue-Cost Ratio
With total cost 2. 7 7. 2 3. 1 5. 0 2. 7 1. 0 0. 9
With maintenance cost 11. 3 30. 8 13. 3 19. 2 10. 4 3. 0 2. 7
With variable maintenance cost 20. 5 55. 8 24. 0 29. 5 16. 5 3. 5 3. 2
c) Revenue-Cost ratio with revenue contribution and cost share
With total cost 1. 4 3. 7 1. 6 2. 6 1. 4 0. 5 0. 5
NH & SH Network
a) Revenue and cost in Rs. per vehicle-km
Revenue 0.44 2.39 1.03 5.69 1.48 2.03 2.51
Capital Cost 0. 06 0. 11 0. 11 0. 36 0. 18 0. 57 0. 80
M ai ntenance Cost (total) 0.02 0.04 0.04 0.16 0.08 0.36 0.48
M ai ntenance Cost (vari able) 0.01 0.02 0.02 0.10 0.05 0.30 0.40
b) Revenue-Cost Ratio
With total cost 5. 7 15. 5 6. 7 10. 9 5. 7 2. 2 2. 0
c) Revenue-Cost ratio with revenue contribution and cost share
With total cost 1. 4 3. 8 1. 7 2. 7 1. 4 0. 5 0. 5
Annex 6 Revenue Contribution by Road Network, 2001-2002
(Rsmillion)
Road Category Total 2- wheelers Cars Jeep/taxi Bus LCV HCV MAV
National Highways & 253680 11369 28951 12113 73494 30377 92236 5140
State Hi ghways
All other state roads 77641 7580 5790 8479 28267 10126 17294 105
(District and Village
roads)
Urban Roads 168740 56847 81062 3634 11307 10126 5765 0
Total 500061 75796 115803 24226 113068 50628 115295 5245
Road User Charges Contribution by Road Network, 2001-2002
(Rsmillion)
Road Category Total 2- wheelers Cars Jeep/taxi Bus LCV HCV MAV
National Highways & 112332 3119 7681 2749 57297 9025 30379 2082
State Hi ghways
All other state roads 36324 2079 1536 1924 22037 3008 5696 42
(M DR, O DR & VR)
Urban roads 51648 15594 21507 825 8815 3008 1899 0
Total 200303 20792 30724 5498 88149 15041 37974 2125
Annexures
l 73
Annex 8 Vision 2021 Capital Investment
on Expressway, National and State Highway Network, 2001-2021 (at 1999 prices)
Scheme Period 2001-2011 Period 2011-2021
Length (km) Amount Length (km) Amount
(Rs. million) (Rs. million)
A. Expressways 3000 300, 000 7000 700, 000
B. National Highways
i) Four Laning/Six Laning 16, 000 640, 000 19, 000 760. 000
ii) Two-Laning with hard shoulders 15, 000 187, 500 7, 000 87, 500
iii) Strengtheni ng Weak Pavements 20, 000 150, 000 24, 000 180, 000
iv) Bypasses, bridges, over bridges, safety Lump sum 72, 500 Lump sum 92, 500
and drai nage measures
v) Expansion of NH System 10, 000 150, 000 12, 000 180, 000
Total for National Highways 1,200,000 1,300,000
C. State Highways
i) Four Laning/Six Laning 3, 000 100, 000 7, 000 250, 000
ii) Two-Laning with hard shoulders 35, 000 280, 000 60, 000 500, 000
iii) Strengtheni ng Weak Pavements. 30, 000 220, 000 40, 000 300, 000
iv) Bypasses, bridges, over bridges, safety Lump sum 100, 000 Lump sum 100, 000
and drai nage measures
v) Expansion of SH System 10, 000 50, 000 20, 000 100, 000
Total of State Highways 750,000 1,250,000
74 l
Annex 9 Forms of Government Support for Road Concessions
Support Measures Description
Comfort Letter The Chinese government commonly issues a legally non-binding letter to give
support to certain actions not clearly stated in contractual agreement such as
performance of a public corporation as a grantor of concession. These letters
can provi de fi nanci ers and sponsors a mi ni mum level of assurance when no
i mpli ci t government support i s attai nable. However, the di sadvantage i s that
the letter is not legally binding.
Land Acquisition Expropriation of right of way for toll road construction. Cost of land acquired
maybe borne either by the government or the concessionaire. This is common
in China, Thailand and United Statesand ishelpful to the concessionaire because
the ri ght of expropri ati on usually resi des wi th the government. Thi s support
usually improves project economics to a great extent when implemented at
no cost to the sponsorsasland acquisition measurestend to cause delaysin the
proj ects.
Extension of Concession The Indonesian government takes measures to provide compensation for the
Period loss of profit due to circumstances caused by the government. Although this
resultsin improved project economics, itseffect on current cash flow isnegligible.
Construction of Related The British and the Thai governments commonly provide for the construction of
Facilities connecting roads, access ramp, etc. This contributes significantly to the project
si nce connecti ng roads and other f aci li ti es are cri ti cal elements f or
commencement of operation. However, construction delays may critically impair
the commencement of operati on.
Revenue Support Revenue support is usually done with a minimum threshold for compensation
paid by the governmentsin M alaysia and China (including Hong Kong SAR). This
provi des faci li tati on for the fi nanci al closi ng and proj ect completi on. Weak
design may impose a large contingent liability on the government.
Revenue Sharing with In M alaysia, Thailand and the United Kingdom, deriving revenue from an existing
Existing Facilities toll road facility can take the form of taking over the complete facility including
employees and assets as well as debts. Hence, there is a possibility of mitigation
of revenue shortfall risk in the startup years. O n the other hand, the revenue
sharing formula requires careful design.
Shadow Toll The Dutch and Argentine government pay toll to the concessionaires according
to the vehicle- kilometers of the traffic counted automatically. This provides for
a meansof introducing private financing without stimulating resistance to tolling.
Possible financial burden/ fiscal inflexibility in later yearsmay hinder transition to
real tolling.
Provision of Development This measure involves the transfer of right of commercial development along
Rights and Third-Party the toll road to supplement project economics. The advantage is that this
Revenue enhances project economi cs but excessi ve dependence on thi s measure may
have just the reverse effect.
Subordinated Loan A type of loan for which repayment is subordinated to the senior loan (ordinary
loan). Government, parent company and, in some cases, institutional investors
are providers of the loan. The interest rate is higher than that for a senior debt.
Thisisa common measure in M alaysia for facilitation of financial closing because
it istreated asequity. It could also be used asa stand-by facility to mitigate risks
such as cost overrun and revenue shortfall. The disadvantage associated with
this form of government support is possible deterioration of project economics
due to higher interest cost.
Foreign Exchange In Indonesia, the Philippines, and Spain, government provides compensation for
Guarantees the impact of the devaluation of local currency. Such a provision isbuilt into the
tari ff formula, and i s i nstrumental i n faci li tati ng fi nanci al closure. The
di sadvantages are:
Possible large contingent liability on the government;
M oral hazard for concessionaire and the lenders.
Loan (Bond) Guarantees The Chi nese government gi ves a guarantee on repayment of loan and on
redemption of bond for the facilitation of project proposalsand implementation.
This results in a large contingent liability for the government.
Equity Guarantees Guarantee of equity investment may be given for facilitation of financial closing
in foreign currency when country risk in this respect is high. Large contingent
liability for the government in the event of large currency devaluation ispossible.
Annexures
l75
Commercial Risk
Liquidated Damagesare a part of the Concession Agreement
and the responsibility for timely completion restsentirely on
the Concessionaire. Damages are linked to achieving each
Project M ilestone (asagainst Completing entire Project). The
damageswill be paid bythe Concessionaire at the rate of Rs.
1 lakh per day for each project milestone and an amount
calculated at the rate of 0. 01percent of the total Project Cost
per week for the entire Project.
No form of Corporate Guarantee provided.
Concessionaire hasthe right to commence construction at its
own risk.
Independent Consultant to be appointed in consultation with
the Concessionaire.
No such notification to be issued.
- do -
Consortium M embersto maintain minimum 26percent equity
stake in the SPV during the entire concession period.
In case of Concessi onai re event of default 90percent of
outstanding duesof the lenderswould be met by NHAI.
Terms of CA would be modi fi ed by NHA I to bri ng the
Concessi onai re i n substanti ally the same commerci al and
financial position asit wasprior to the change in law in case
the effect of the said change in law is greater than Rs. 10
million. In case NHAI does not do so it would be termed as
NHAI event of default and in terms of the CA, all lenders
outstanding dueswould be paid byNHAI.
All insurable Force M ajeure Eventswould be covered through
suitable insurance policies.
In case of other FM events, the compensation providesfor a)
senior lendersduesb) 1. 2 timesduesof subordinated lenders
c) Equitycompensation to protect nominal value of 1. 5 times
equity(but the actual return dependson inflation) d) negative
grant amount paid by the Concessionaire.
NHAI to provide Revenue Shortfall Loan to the Concessionaire
in case the shortfall isdue to an Indirect/Direct Political Event
of Force M ajeure.
- do -
- do -
- do -
Information not yet available.
- do -
Annex 10 Risk Framework of NHAI BOT Models
MORADABAD BYPASS DELHI GURGAON EXPRESSWAY
Project Completion Risk
Liquidated Damagesare a part of the Concession Agreement,
which stipulates that in case the delay is on account of the
Construction Contractor, the LDsshall be equal to the amount
received from the Construction Contractor, else the damages
will be paid bythe Concessionaire at the rate of Rs. 1 lakh per
day up to a delay of 90 days and Rs. 2 lakhs per day for a
delaybeyond 90 days, subject to maximum of 5percent of the
Capital Cost.
No form of Corporate Guarantee provided.
Concessionaire has access to carry out the tests and surveys
required.
Independent Consultant to be appoi nted by NHAI from a
shortlist of consultants.
Issue of a notification restricting the plying of Commercial
Traffic/HeavyVehicleson the existing stretch of NH-24 (through
M oradabad City) during the entire life of CA.
Development of any alternate road to the Bypass restricted
M ain Promoter (NHAI) to maintain minimum 51percent equity
stake in the SPV during entire concession period.
In case of Concessi onai re event of default 90percent of
outstanding duesof the lenderswould be met by NHAI.
Terms of CA would be modi fi ed by NHA I to bri ng the
Concessi onai re i n substanti ally the same commerci al and
financial position asit wasprior to the change in law in case
the effect of the said change in law is greater than Rs. 10
million. In case NHAI does not do so it would be termed as
NHAI event of default and in terms of the CA, all lenders
outstanding dueswould be paid byNHAI.
All insurable Force M ajeure Eventswould be covered through
suitable insurance policies.
In case of other FM events, the compensation provides for
lendersduesand equity. Equitycompensation essentiallyaims
to protect nominal value of 1. 5 times equity. But the actual
return dependson inflation.
NHAI to provide Revenue Shortfall Loan to the Concessionaire
in case the shortfall isdue to an Indirect/Direct Political Event
of Force M ajeure.
In case of termination due to Concessionairesdefault, all his
rights and obligations will automatically stand assigned to
NHAI (who may assign this to another Concessionaire).
For the purpose of financing, the concessionaire hasthe right
to transfer and assign itsrightsand interest in the Project and
to create security interest in the CA for the benefit of the
lenders.
No form of Revenue shortfall loan provided.
NHAI hasgiven an undertaking to provide subordinated loan
to the extent of Rs. 5 crores to meet the shortfall in debt
servi ci ng to bui ld debt servi ce of 6 months pri nci pal and
i nterest.
If CA is terminated due to NHAI event of default or due to
Force M ajeure Event the lender shall have the first charge on
such sums payable by NHAI to the Project.
Market Risk
Operating Risk
Legal Risk (Change in Law)
Force Majeure Risks
Political Risks
76 l
Annex 11 Risk Allocation Framework
in Model Concession Agreement for Small Road Projects in Andhra Pradesh State
Key Risks Treatment
Delays related to Concession Period is reckoned form the commencement date , which is the
Land Acquisition date on which physical possession of project site isdelivered to the Concessionaire;
all milestones and obligations of Concessionaire are reckoned from this date
(including, for example, financial close deadline), thereby avoiding placing this
risk on the concessionaire
Delays in Allocated to Concessionaire, with liquidated damages imposed for each day
Construction of delay
Delays beyond 180 days from scheduled completi on day li able to result i n
concession termination
Delays in Period for financial close is subsumed within the concession period and as such
Financial Close financial close is not a milestone or trigger event for any other event under the
concession
Delays i n fi nanci al close do not affect concessi onai res obli gati ons under the
agreement, and concessi onai re would therefore i n any case be requi red to
complete the project utilizing any other funding at its disposal
Delays in Approval Independent Engineer who is appointed for review of drawings & design is
of Designs & selected through a fair transparent process, with the Concessionaire having
Drawings some element of choice in the appointment process
Independent Engi neer i s requi red to submi t and comments or obj ecti ons to
submissions by the Concessionaire within a stipulated time period, failing which
the Concessionaire can proceed with its design proposals, thereby eliminating
risk of delays in such approvals beyond the control of the Concessionaire
Risks Related to Responsibility for arrangement of clearances and approvals from the M inistry
Permits of Railways lies with the Concessionaire, although GoAP commits to providing
necessary assistance to the concessionaire in this matter
GO AP commits to awarding, on a timely basis, such approvals or permits within
itsown jurisdiction
Changes in Scope Concessionaire required to bear risksof change in project scope up to a predefined
limit (typically 5 percent of estimated project cost ) at the behest of GoAP
Changesin scope having higher impact to be compensated through appropriate
extensions in concession agreement (calculated in such a manner as to maintain
the same project internal rate of return)
Force Majeure Distinctionsmade between Non-political , Indirect-political & Direct-political
FM events, as is NHAIs practice
Delays caused by FM events duri ng constructi on result i n extensi on of all
milestones by the period of delay
Cost sharing (as is standard NHAI practice):
1. Each party bears its own costs in case of non-political FM
2. Costs are shared 50:50 in case of indirect political FM
3. Costs borne by GoAP in case of direct political FM
Termination in FM subsistence for 120+ days can result in termination of concession at either
case of FM events partys option
Compensation payments by GoAP in case of Termination as follows:
1. Non-political FM event: compensation limited to 90 percent of debt due
2. Indirect political FM event: total debt due plus110 percent of equity subscribed
in cash with adjustments for inflation and passage of time
3. Direct political FM event: total debt due plus150 percent of equity subscribed
in cash with adjustments for inflation and passage of time
In all above, computations, compensation is reduced to the extent of pending
insurance claims; however 80 percent of claims not admitted will be payable as
compensation by GoAP
Annexures
l 77
Termination owing Various events of default defined
to Concessionaire Concessionaire given 60 day cure period to rectify defaults, failing which
Events of Default concession may be terminated by GoAP
Termi nati on payment by G oA P to Concessi onai re: 90 percent of debt less
insurance claims pending (80 percent of claims not admitted will be payable as
compensation by GoAP)
Termination owing Various events of default defined
to GoAP Events of Concessionaire given 60 day cure period to rectify defaults, failing which
Default concession may be terminated by GoAP
Termi nati on payment by G oAP to Concessi onai re: enti re debt due plus 150
percent of equity subscribed in cash with adjustments for inflation and passage
of time less insurance claims pending (80 percent of claims not admitted will be
payable as compensation by GoAP)
Traffic & Revenue Allocated entirely to Concessionaire
Risks No support by GoAP even in case of chronic revenue shortfalls
Competing Facility GoAP commits that any competing facility developed during the tenure of the
Risk Concession period will necessarily be a tolled facility with vehicle users on the
competing facility being charged user tolls of at least 133 percent the toll levels
on the Project
Change in Law C hanges i n Law resulti ng i n aggregate f i nanci al ef f ect exceedi ng a
predetermined amount shall result in adjustments to the Concession provisions
to as to put the Concessi onai re i n the same fi nanci al posi ti on as before the
Change in Law
Such adjustments to take the form of extension of Concession Period
Lender Protection Lenders protected through a Substitution Agreement (Direct Agreement) with
G O A P & the Concessi onai re, whereby events of default by Concessi onai re
under the Financing Documents are recognized as also constituting events of
default under the mai n concessi on agreement, and Lenders have ri ghts to
substi tute the Concessi onai re wi th another concessi onai re of thei r choi ce i n
such cases
78 l
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Annexures
l 79
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80 l
Annex 13 Practical Limits to Extent of Private Involvement
Table 1 provides a breakup of state highway length within the States under consideration, classified on the
basis of lanes and traffic density. This breakup does not include minor and village roads which are not under the
jurisdiction of the respective State Public Works Departments.
Roads with vehicular traffic of 15, 000 PCUs and above will need capacity augmentation to four lanes,
whereas, the rest can be rehabilitated and strengthened.
An analysis has been conducted to broadly assess the extent of private sector participation potential
in these States, using the following assumptions:
o The States adopt a PSP model based on fee recovery through user tolls, with a partial grant
di sbursed by the state to the concessi onai re duri ng the constructi on peri od to enhance
returns on equity and increase investment viability
o Projects with a traffic of 15, 000+ PCU are taken up for capacity augmentation (4-laning)
while projects with traffic lower than 15, 000 PCU are rehabilitated.
o In both cases, the concessionaire takes up long term O & M responsibility for the duration of
the concession period. For 4-laning projects, the total concession period istaken as25 years
and the concession period for other projects is taken as 17 years (the rehabilitation model
assumed is similar to the model used in M adhya Pradesh)
o Construction period in both these cases is taken as 2 years; concession period includes the
time required for construction
o Capital costs for 4-laning/ rehabilitation are assumed as follows:
- Cost for 4 laning: Rs. 35 mn per Km
- Cost of rehabilitation: Rs. 7. 5 mn per Km
- Cap on Grant of 40 percent of the Construction Cost
Table 1: Length of State Highways
(in km)
Traffic in PCUs
State <5000 5000-10000 10000-15000 15000-20000 >20000
Lane Type: 1. 5
Andhra Pradesh 70. 0 32. 6 137. 0 0. 0 0. 0
K arnatak a 4028. 5 2658. 6 1211. 2 6. 5 0. 0
M adhya Pradesh 1987. 6 21. 0 0. 0 0. 0 0. 0
M aharashtra 9967. 6 2742. 1 1193. 7 130. 8 26.3
Uttar Pradesh 4222. 7 216. 0 109. 5 0. 0 0. 0
West Bengal 1415. 7 431. 7 51. 7 0. 0 0. 0
Lane Type: 2. 0
Andhra Pradesh 234. 2 1347. 6 184. 6 38. 0 0. 0
K arnatak a 60. 3 20. 2 0. 0 0. 0 0. 0
M adhya Pradesh 217. 0 39. 0 0. 0 0. 0 0. 0
M aharashtra 1105. 7 1507. 9 370. 1 43. 1 32. 8
Uttar Pradesh 215. 5 693. 5 138. 7 0. 0 0. 0
West Bengal 0. 0 0. 0 105. 4 0. 0 0. 0
Annexures
l 81
o O ther Assumptions:
Traffi c G rowth 5 percent per annum
Toll rate per PCU 0. 50 Rs. per PCU (for 4 laned roads)
Toll rate per PCU 0. 25 Rs. per PCU (for 2 & 1. 5 lane roads)
Escalati on 3 percent per annum
Interest Rate 14 percent per annum
Routine O & M 1 percent of original capex per annum
Periodic O & M 5 percent of original capex every five years
Inflati on 3 percent p.a.
Tax rate 35 percent
For the purpose of this analysis, the threshold return requirement for a project to be taken up by a private
investor has been assumed as 20 percent Equity IRR.
The main observations are as follows:
Under the model assumptions indicated above, the grant requirement from government to enable the
private investor to achieve the required returns on equity investment in roads with traffic density below
5, 000 PCU is well in excess of 70 percent of the project construction cost. This leaves little room for fund
leveraging from commercial lenders. It is suggested that for this reason, this category of roads may not be
considered for PSP under a BO T model
The grant requi rement for development of the remai ni ng road network under a PSP framework i s
indicated in the Table 2 (grants are expressed in terms of Rs. mn per annum; disbursement is required at
this level per year for two years i. e. over the construction period of the projects)
The success of the PSP model considered here is contingent in part upon the confidence of private investors as
well as bankers/lenders in receiving the required grant disbursements over the construction period from the
State Government. In order to mitigate such concerns, the State Governments may consider ring-fencing an
identified revenue stream and disbursing the required grant amounts from this identified stream.
Table 2: Grant per Annum for Rehabilitation of State Highways (Rs. million)
Traffic in PCUs
State 5000-10000 10000-15000 15000-20000 >20000
Lane Type: 1. 5
Andhra Pradesh G rant per annum 4. 3 2. 6 0. 0 0. 0
K arnatak a G rant per annum 348. 9 22. 7 4. 6 0. 0
M adhya Pradesh G rant per annum 2. 8 0. 0 0. 0 0. 0
M aharashtra G rant per annum 359. 9 22. 4 91. 6 8. 3
Uttar Pradesh G rant per annum 28. 4 2. 1 0. 0 0. 0
West Bengal G rant per annum 56. 7 1. 0 0. 0 0. 0
Lane Type: 2
Andhra Pradesh G rant per annum 176. 9 3. 5 26. 6 0. 0
K arnatak a G rant per annum 2. 7 0. 0 0. 0 0. 0
M adhya Pradesh G rant per annum 5. 1 0. 0 0. 0 0. 0
M aharashtra G rant per annum 197. 9 6. 9 30.2 11.3
Uttar Pradesh G rant per annum 91. 0 2. 6 0. 0 0. 0
West Bengal Grant per annum 0. 0 2. 0 0. 0 0. 0
82 l
EUROPEAN CONFERENCE OF MINISTERS OF
TRANSPORT (ECMT)
92
History: The European Conference of M inisters of
Transport (ECM T) is an intergovernmental organization
establi shed by a protocol si gned i n Brussels on 17
O ctober 1953 by fi fteen European countri es. It i s a
forum in which M inistersresponsible for transport, and
more specifically inland transport, can co-operate on
policy. Within this forum, M inisters can openly discuss
current problems and agree upon joint approaches to
improve the utilization and rational development of
European transport systems of i nternati onal
i mportance. Today the ECM T compri ses of 43 full
member countries, 7 associate countriesand 1 observer
country.
Mission: the ECM Ts role primarily consists of:
Helpi ng to create an i ntegrated transport
system throughout the enlarged Europe that
i s economi cally and techni cally effi ci ent,
meets the hi ghest possi ble saf ety and
envi ronmental standards and tak es full
account of the social dimension.
Helpi ng to bui ld a bri dge between the
European Union and the rest of the continent
at a political level.
Providing a forum for analysisand discussion
on forward looking transport policy issues.
Structure: The Council of the Conference comprises
the M i ni sters of Transport, the mai n body of the
Conference. A Chairman is appointed annually from
the Council and is assisted by two Vice-Chairmen. An
annual M inisterial Session of the Conference is hosted
by the country holding the chairmanship. The main
f ormal deci si ons of M i ni sters are contai ned i n
Resolutions, Recommendations and other acts agreed
bythe Council. A Committee of Deputies, composed of
senior civil servants, preparesproposalsfor consideration
by the Council of M inisters. The Committee is assisted
by worki ng groups, each of whi ch has a speci fi c
mandate. The Secretary General heads the Secretariat
i n i ts role of assi sti ng the statutory bodi es. The
Secretari at consi sts of three uni ts: Transport Poli cy,
Economic Research and Statistics, and Communications
and Administration.
Recent Initiatives:
A t present, the ECM T has worki ng groups for the
following areas: Accessand Inclusion; Combating crime
and terrori sm i n transport; combi ned transport;
economi c research; fi scal and fi nanci al aspects of
t ransport ; i nt egrat i on of new member st at es;
rai lways; road saf ety; road transport; stati sti cs;
sust ai nable urban t ravel; t ransport and
envi ronment; trends i n traffi c; and i nfrastructure
i nvestment.
INTERNATIONAL FUEL TAX AGREEMENT (IFTA)
93
The Internati onal Fuel Tax A greement ( IFTA ) i s an
uni form system across all US states ( except A laska
& Hawai i ) and C anadi an provi nces ( except the
Northwest Terri tori es, Nunavut and Yuk on) f or
admi ni strati ng and collecti ng fuel consumpti on taxes
from i nter-j uri sdi cti onal motor carri ers ( IJCs)
History: In 1982 representati ves of the States of
A ri zona, I owa and Washi ngt on expanded t he
di scussi ons of uni formi ty for motor carri er fuel use
tax reporti ng to an experi mental agreement known
as the Internati onal Fuel Tax A greement ( IFTA ) . In
1986, 1987, and the early part of 1988 the states
of O klahoma, M i nnesota, Idaho, and South Dakota
j oi ned IFTA . Duri ng thi s peri od of ti me there was a
subcommi ttee of the worki ng group developi ng a
recommended M odel Base State Fuel Use Tax
Reporti ng A greement. In 1990 i t was deci ded that
IFTA should become an i ndependent organi zati on
havi ng legal status. I n 1991 the corporati on was
created as the Internati onal Fuel Tax A ssoci ati on,
I nc. ( A ssoci ati on) . C ongress passed the I STEA ,
mandati ng membershi p i n I FTA not later than
September 30, 1996. Today all 48 conti nental states
and 10 Canadi an provi nces are members of IFTA .
Benefits: The purpose of thi s agreement i s to
establi sh and mai ntai n the concept of one fuel
li cense and admi ni steri ng base j uri sdi cti on for each
li censee and to provi de that a li censee s base
j uri sdi cti on wi ll have the pri mary responsi bi li ty for
admi ni steri ng the Internati onal Fuel Tax A greement
and executi ng all i ts provi si ons wi th respect to such
a li censee.
IFTA reporti ng si gni fi cantly reduces the paperwork
and compli ance burdens f or f uel tax reporti ng.
Carri ers fi le a si ngle quarterly return wi th a si ngle
payment to thei r base j uri sdi cti on that covers all
thei r travel i n other IFTA member j uri sdi cti ons. The
base j uri sdi cti on processes the IFTA tax return and
forwards funds to, or requests funds from, each
j uri sdi cti on for net fuel taxes.
Annex 14 Examples of Inter-State Cooperation on Tax Instruments
92
http://www1.oecd.org/cem/
93
http://www.iftach.org/index4.htm
Annexures
l 83
Annex 15 Measures to Compensate Non-road Users for Levies on Diesel
Measures Countries Accepted Ways Adopted Remarks
Wei ght-Di stance New Zealand, Iceland Licenses issued for a certa For diesel vehicles only
charges in distance to be traveled
and graduated according to
the axle configuration and
gross vehicle weight
Diesel exemption Central African Republic, Users to file an exemption Evasion & leakage
certi fi cate Chad, Sierra Leone, US certi fi cate, certi fyi ng that unavoi dable
diesel will not be used to
power road vehicles
Colouring untaxed Fi nland France, Paki stan, Vehicles prohibited from having Penalties imposed in
di esel US, UK dyed diesel in their fuel tanks case of non-compliance
Rei mbursement of New Zealand, US A tax exemption card or Costly
taxes paid to non complete documentati on wi th
road users request for refund
Compensating Non Latvi a, M ozambi que Non road user groups In M ozambique, 20
Road users Ex-post compensated based on their percent of diesel
outputs and average diesel levy goes into a special
consumption per unit of fund for supporting
output farmers
Speci al Zambi a Concerns of farmers looked No exemption as such
arrangements into farmers as active
for farmers decision makers in fixing the
level of fuel levy and how
proceeds are to be spent
84 l

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