crisil road project
DESCRIPTION
Road ProjectTRANSCRIPT
Highway Projects in India FINANCING | PROFITABILITY & BIDDING INTEREST | CONTRACTING STRUCTURES
SAURABH SUNEJA
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Introductions
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Introductions
Infrastructure Advisory
This presentation
Suitable financing avenues vs. worthy projects: weighing
constraints
Contract arrangements in a PPP – risk management
An snapshot of PPP developers’ profitability
Discussion on modes of contracting beyond BOT – Toll
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Financing constraints vs. Bankability
…Not one or the other
In the news…
Liquidity crunch hits road sector | September 03, 2012
The Ministry of Finance recently suggested that all public sector banks
disburse loan for road projects only after ensuring that 100 percent ‘right-of-
way’ has been acquired by the National Highways Authority of India or state
governments.
Points of View…
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View: Article in The Economist, “Infra
Red”
Counterview: (letter published) 2
weeks after the article
•Ambitious infra development targets –
investment requirements
•Large proportion to come in as private
investments
•Pace of infrastructure development has
been slow – one reason is low pvt.
Investment
•There is a need to increase avenues of
debt financing available for pvt infra
investments
•Reduce risk factors that can derail or
slow down projects (land acq, govt
approvals etc.)
•It’s a myth that infra investments in India
have been hampered by dearth of
sufficient funds
•No observed example of a ‘bankable’
project that has not been taken up mainly
due to lack of equity or debt funds
•Fundamental issue with most projects is
lack of dependable revenue model
•Poor investment climate / governance
issues have hampered investments –
states with best infra are the ones with
efficient govts.
Points of view…
Large Commercial Bank:
“We are looking forward to evaluating toll road projects, but there
are few projects in the market right now”
“in the past 1 year we have assessed and turned down financing
for several road projects because of aggressive bidding /
viability issues”
Large NBCF:
“We keenly consider projects that would pass our risk
assessment criteria”
“We constantly watch out for potential risks – so we won’t
finance a power project without a robust fuel supply
arrangement, or a road project with land or environmental
issues”
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Risk management through contracts
a quick overview
Contracts reflect allocation & mitigation of risks -
Roads
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EPC Contract
NHAI
SPV
JV Partners
Lenders
Escrow Bank State
Government
Co
nce
ssio
n
Ag
ree
me
nt
EPC Contractor O&M Contractor
O&M Contract
Concession Agreement
• Risk Allocation b/w Govt.
& Concessionaire
• Mitigation for risks
transferred
SGSA
• Major implementation
risks that State Govts can
address
• Design Risks
• Construction Risks
• Traffic & Toll rate Risks
• Service Quality Risks
• Pre-construction risks
• Clearances
• Competing Facility Risk
• New taxation Risk
Escrow Agreement
• Risk of
misappropriation of
accruals
• Risk of debt not
being serviced
• O&M exp.not paid
• Under reporting of
revenues
Substitution Agreement
• Mitigating lender’s
risk
• Risk to lenders of
concessionaire
not performing
View on profitability of PPP developers
and a closer look at traffic forecasts
Developer profitability on a downturn…
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Downturn in profitability:
- Aggressive bidding
- Economic slowdown, further
dampening commercial prospects
- Financing more expensive than
anticipated
Present low bidding interest:
- High volume of projects at hand, high
debt: this limits capacity to take up
further projects; many developers
looking to exit assets to raise funds
Key faults in traffic estimates
WHY
High toll tariffs and
miscalculation regarding
willingness to pay
Recession / economic
downturn
Some expected
developments not
materializing
Time savings were lower
than expected
Improvements on
competing toll-free routes
Considerably lower usage
by trucks than expected
Lower off-peak / weekend
traffic
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WHAT -Study: Analysis of 32 toll road projects worldwide. In only 4 cases actual traffic > forecast traffic; at an average actual traffic volumes were around 73% of projections -points to general optimism in forecast exercises (including studies commissioned by banks)
Key Metric: Actual / Forecast Traffic
Traffic growth estimates | toll bridge in Tanzania
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
Estimated baseline
traffic for year 2009
Expected population
growth (based on
Kigamboni master plan)
Traffic growth based on:
Expected growth in trip
intensity (as per JICA
traffic master plan)
Adjustment in
traffic
composition to
mach
composition on
typical urban
roads
Projected traffic for
Kigamboni Bridge
TAZARA Railway
Bridge
Bridge on Nelson
Mandela Road
TAZARA Railway
Line
Proposed
Kigamboni Bridge
Contracting in case of non-tolled projects
examination of alternative models
Large opportunity in non-tolled road projects
Several instances where roads would not be developed on BOT-toll
basis
– Low traffic levels and therefore toll based concession not viable
– Low willingness to pay / or developers suspect so
– Low willingness to charge?
Close to two-thirds investment in roads development between 2012-
13 and 2016-17 to come from public funds
– While NHs would see majority of investments by private players, over 80%
investments in SHs expected to come from public funds
63%
37%
Public funds
Private funds
Contracting alternatives on the table
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Main contracting
alternatives Views Counter-views / remarks
BOT - Annuity
Allows efficiencies from pvt. players BUT, has been expensive (potentially due to private sector premium / cost differential for financing) Creates liability for the govt. akin to debt, this needs to be acknowledged
Expensiveness exaggerated since construction cost assessments by pvt. players anyway ~ +25% of CA Pvt, companies would take benefit of tax provisions and therefore would have a relative cost advantage
Traditional item
rates contract
Have always experienced huge cost and time overruns, therefore should be avoided
No counterview, don’t do it!
EPC – fixed cost
contracts
Appropriately shifts construction risks to EPC player BUT, does not make the developer responsible for long term maintenance
Concern of not creating long term commercial inventive for superior construction valid; EPC can be bundled with medium / long term maintenance contracts
AND
Variations with modifications or
hybrids of the above structures
Key motivations of the govt. and emerging
contracting modes
Key preferences / consideration of contracting authority (CA):
– Good quality and timely construction
– Contracting framework to have imbedded provision for long term
maintenance
– Value for money
[Example] Hybrid annuity model caters to motivations of CA while
mostly wishing away issues
– Here, a bulk of construction cost is paid to the project developer during
construction, thereby reducing the burden of financing on pvt. sector (and
consequently, financing cost)
– At the same time – substantial payments are allocated to future annuity
payments and developer remains responsible for long term O&M
• Framework ensures long term O&M
• Ongoing annuity payments creates commercial incentive for good quality
construction and maintenance
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