1.

Understanding of Case
a. Key Issues at hand
Arjun Dhawan, the CEO of HCC Concessions, a toll road development firm which was
handling the construction (2-lane to 4-lane) of the NH-34 Project in West Bengal had a
few issues at hand which were as follows:

The project was expected to be completed within 36 months of concession

agreement i.e. by early 2014, but the project was running behind
schedule. In April 2014, the project was in danger of falling further behind
schedule as the construction of the toll plazas themselves behind schedule
and tolling could not be started.
The delay in the project resulted in a loss of $ 110,000 on a daily basis.
Being a fixed cost project, delays increased the risk of cost overruns,
which ultimately stressed the available working capital available with the
company. Additionally, 26 kms of land was still to be acquired and another
15 months were expected to for the project to be 100% completed. Till
then, HCON could begin tolling on a proportional basis only.
The government was responsible for paying HCON for its lost revenues
and additional construction costs in case of delays. But the payment
amount was likely to be disputed by bureaucrats who had no incentive to
compensate HCON at fair value and could take could take around 3 to 6
years to arrive. It would arrive at inflated interest rates of 11-13% to
account for time value of money while the cost of capital for HCON was
way above that to around 18%.
A big challenge was the process of land acquisition, where a large number
of land owners were creating obstructions by not giving away land for
development. Though HCON had tried to settle disputes and provide fair
compensation/rehabilitation to the people concerned, but the process was
causing delays. Operational, financial and political risk could make
government interventions in toll fee, capping of charges and even force
companies to exit investments at a loss.
The project was financed by a $213 million loan and interest payments
were expected to be floating throughout the concession period, and rising
interest rates could hamper project economics.
HCON was a subsidiary of HCC. HCC was planning to invest in hydropower
and water assets but liquidity constraints were limiting funds available for
investment. By selling an equity stake in the project, they could solve this
problem to an extent.

b. Key Stakeholders

HCON: HCC Concessions, the wholly owned subsidiary of HCC, existed to

expand HCCs presence in PPP space. It not only utilized the construction
expertise of its parent company, but also contracted with them on a fixedcost basis.
HCC: Hindustan Construction Company, the parent company of HCC
Concessions, was responsible for providing the construction expertise and
manpower to HCON. It signed fixed cost contracts to avoid financial impact of
potential cost overruns.
1

2.
a.
b.

c.

d.

Lenders: The project was funded by a $213 million loan facility which had
floating interest rate payments and higher rates could impact project
economics. The debt service was based on a forecasted 10.75% interest rate
and 13-year amortization schedule.
Government: The Government had provided grants of $135 million, which
was 32% of estimated project cost. Also, the government was supposed to
provide for land acquisition and extra costs due to delays or revenue losses.
But bureaucratic processes delayed payments by 3 to 6 years.
Land Owners: The highest stake holders were the land owners whose
properties had to be acquired for project completion purposes. Though some
people cooperated and gave away land easily, many land owners asked for
higher compensation or created obstructions. Though HCON took land on a
rented basis from them, but legal course had to be taken to provide final
compensations.
Customers: An important stakeholder was the customer. The people using
NH-34 could increase average travel speed from 30 km/h to 60 km/h. It would
ease congestion and facilitate greater connectivity between Kolkata and
countrys interior, the north-eastern states and neighbouring countries of
Nepal, Bhutan and Bangladesh.
Analysis of available options
Pros/Cons
Option 1: An American Investment Bank had proposed to purchase 50% of
the project equity for $85 million. The merits of the deal included immediate
and complete payment on deal closure, sharing of construction/traffic risks,
retention of ownership could help HCON use the project as an evidence of its
technical capabilities in future project bids and HCON subsidiary would
continue as O&M contractor. Demerits included sharing of future equity cash
flows and revenues and only a 50% say in operating and ownership decisions,
thus leading to less control.
Option 2: A major global infrastructure owner had offered to purchase 74% of
the project equity for $133 million. Though a 26% stake would reduce
construction and traffic risks for HCON to the same amount, reduce its O&M
contract to 50% and also let it retain NH-34 as an evidence of technical
capabilities,
HCON
would
lose
influence
in
future
decision
making.Additionally, it would have reduced flow of revenue and equity cash
flows and the 26% stake would be a hard sell in the market in the future.
Option 3: An Indian investment firm had offered to purchase 100% equity
at$185 million. HCON retained all downside risk due to construction, delays
and otherwise. HCON would have to pay it to buyer upon completion. HCON
would also not able to use the project in future bids. Additionally, the
payment of $185 million would be done in two tranches. While the first
tranche gave out $93 million, the second tranche would be reduced by $4.5
million for 15 reduction in base traffic. Only visible upside was that HCON
would get additional value accrued due to higher traffic growth up to $23
million

Financial analysis

Final recommendations
FINAL RECOMMENDATION:
Expected cash flow from keeping the entire project with the company itself yields highest expected cash
flows of 220m$ (in present value terms) as compared to ____ , ____ and _____ . 100% ownership allows
the firm to keep complete control of all decisions of the project. Moreover, owning and operating one of the
most successful infrastructure projects in India would add a lot of credibility to HCCs brand name when it
comes to bidding for future projects

3. Understanding of Case
b. Key Issues at hand
Arjun Dhawan, the CEO of HCC Concessions, a toll road development firm which was
handling the construction (2-lane to 4-lane) of the NH-34 Project in West Bengal had a
few issues at hand which were as follows:

The project was expected to be completed within 36 months of concession

agreement i.e. by early 2014, but the project was running behind
schedule. In April 2014, the project was in danger of falling further behind
schedule as the construction of the toll plazas themselves behind schedule
and tolling could not be started.
The delay in the project resulted in a loss of $ 110,000 on a daily basis.
Being a fixed cost project, delays increased the risk of cost overruns,
which ultimately stressed the available working capital available with the
company. Additionally, 26 kms of land was still to be acquired and another
15 months were expected to for the project to be 100% completed. Till
then, HCON could begin tolling on a proportional basis only.
The government was responsible for paying HCON for its lost revenues
and additional construction costs in case of delays. But the payment
amount was likely to be disputed by bureaucrats who had no incentive to
compensate HCON at fair value and could take could take around 3 to 6
years to arrive. It would arrive at inflated interest rates of 11-13% to
account for time value of money while the cost of capital for HCON was
way above that to around 18%.
A big challenge was the process of land acquisition, where a large number
of land owners were creating obstructions by not giving away land for
development. Though HCON had tried to settle disputes and provide fair
compensation/rehabilitation to the people concerned, but the process was
causing delays. Operational, financial and political risk could make
government interventions in toll fee, capping of charges and even force
companies to exit investments at a loss.

The project was financed by a $213 million loan and interest payments
were expected to be floating throughout the concession period, and rising
interest rates could hamper project economics.
HCON was a subsidiary of HCC. HCC was planning to invest in hydropower
and water assets but liquidity constraints were limiting funds available for
investment. By selling an equity stake in the project, they could solve this
problem to an extent.

b. Key Stakeholders

HCON: HCC Concessions, the wholly owned subsidiary of HCC, existed to

expand HCCs presence in PPP space. It not only utilized the construction
expertise of its parent company, but also contracted with them on a fixedcost basis.
HCC: Hindustan Construction Company, the parent company of HCC
Concessions, was responsible for providing the construction expertise and
manpower to HCON. It signed fixed cost contracts to avoid financial impact of
potential cost overruns.
Lenders: The project was funded by a $213 million loan facility which had
floating interest rate payments and higher rates could impact project
economics. The debt service was based on a forecasted 10.75% interest rate
and 13-year amortization schedule.
Government: The Government had provided grants of $135 million, which
was 32% of estimated project cost. Also, the government was supposed to
provide for land acquisition and extra costs due to delays or revenue losses.
But bureaucratic processes delayed payments by 3 to 6 years.
Land Owners: The highest stake holders were the land owners whose
properties had to be acquired for project completion purposes. Though some
people cooperated and gave away land easily, many land owners asked for
higher compensation or created obstructions. Though HCON took land on a
rented basis from them, but legal course had to be taken to provide final
compensations.
Customers: An important stakeholder was the customer. The people using
NH-34 could increase average travel speed from 30 km/h to 60 km/h. It would
ease congestion and facilitate greater connectivity between Kolkata and
countrys interior, the north-eastern states and neighbouring countries of
Nepal, Bhutan and Bangladesh.
4. Analysis of available options
e. Pros/Cons
f. Option 1: An American Investment Bank had proposed to purchase 50% of
the project equity for $85 million. The merits of the deal included immediate
and complete payment on deal closure, sharing of construction/traffic risks,
retention of ownership could help HCON use the project as an evidence of its
technical capabilities in future project bids and HCON subsidiary would
continue as O&M contractor. Demerits included sharing of future equity cash
flows and revenues and only a 50% say in operating and ownership decisions,
thus leading to less control.
g. Option 2: A major global infrastructure owner had offered to purchase 74% of
the project equity for $133 million. Though a 26% stake would reduce
construction and traffic risks for HCON to the same amount, reduce its O&M
4

contract to 50% and also let it retain NH-34 as an evidence of technical

capabilities,
HCON
would
lose
influence
in
future
decision
making.Additionally, it would have reduced flow of revenue and equity cash
flows and the 26% stake would be a hard sell in the market in the future.
h. Option 3: An Indian investment firm had offered to purchase 100% equity
at$185 million. HCON retained all downside risk due to construction, delays
and otherwise. HCON would have to pay it to buyer upon completion. HCON
would also not able to use the project in future bids. Additionally, the
payment of $185 million would be done in two tranches. While the first
tranche gave out $93 million, the second tranche would be reduced by $4.5
million for 15 reduction in base traffic. Only visible upside was that HCON
would get additional value accrued due to higher traffic growth up to $23
million

Financial analysis

Final recommendations
FINAL RECOMMENDATION:
Expected cash flow from keeping the entire project with the company itself yields highest expected cash
flows of 220m$ (in present value terms) as compared to ____ , ____ and _____ . 100% ownership allows
the firm to keep complete control of all decisions of the project. Moreover, owning and operating one of the
most successful infrastructure projects in India would add a lot of credibility to HCCs brand name when it
comes to bidding for future projects