Overview of the framework

The highways sector in India is witnessing significant interest

from both domestic as well as foreign investors following the
policy initiatives taken by the Government of India to promote
Public Private Partnership (PPP) on Design, Build, Finance,
Operate and Transfer (DBFOT) basis. However, the inflow of
investment will depend on a comprehensive policy and regulatory
framework necessary for addressing the complexities of PPP,
and for balancing the interests of users and investors. Moreover,
the transformation of rules must be accompanied by a change in
the institutional mindset.
For sustaining investor interest in upgradation and
maintenance of highways on DBFOT basis, a precise policy and
regulatory framework is being spelt out in this Model Concession
Agreement (MCA). This framework addresses the issues which
are typically important for limited recourse financing of
infrastructure projects, such as mitigation and unbundling of
risks; allocation of risks and rewards; symmetry of obligations
between the principal parties; precision and predictability of costs
and obligations; reduction of transaction costs; force majeure;
and termination. It also addresses other important concerns such
as user protection, independent monitoring, dispute resolution
and financial support from the Government.

A comprehensive
framework
is a pre-requisite
for PPP

The MCA also elaborates on the basis for commercialising

highways in a planned and phased manner through optimal
utilisation of resources on the one hand and adoption of
international best practices on the other hand. The objective is
to secure value for public money and provide efficient and costeffective services to the users.
Rationale for cost-effective structuring
The four critical elements that determine the financial
viability of a highway project are traffic volumes, user fee,
concession period and capital costs. As the existing highways
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have dedicated traffic and the Government has prescribed the

user fee for uniform application across India, revenue streams
for a Project Highway can be assessed with a fair degree of
accuracy. The concession period, on the other hand, can be
extended only marginally for improving project viability as the
growth of traffic would not permit very long concession periods.
In any case, the present value of projected revenues, after say 15
years, is comparatively low from the Concessionaire's
perspective.
As three of the four above-stated parameters are
predetermined, capital cost is the variable that will determine
the financial viability of a project. Bidders would, therefore, seek
an appropriate capital grant/subsidy from the National Highways
Authority of India (Authority) in order to reduce the capital cost
for arriving at an acceptable rate of return.
In the given scenario, higher the capital cost, greater would
be the compulsion of project sponsors to seek larger grants from
the Authority. This, in turn, would restrict the ability of the
Government to leverage a larger pool of extra-budgetary
resources, including private investment, and would hence result
in a limited programme of highway development.
In view of the foregoing, it is important to rely on costeffective designs and to combine them with a phased investment
programme to enable a more efficient and sustainable programme
of highway development.
Phased development
will be affordable and
cost-effective

As a general principle, capacity augmentation of highways

should be based on the standards adopted by the Indian Roads
Congress for different bands of traffic volume. The emphasis
should be on phased development rather than on providing high
cost roads for catering to the projected growth in the long term.
Where traffic intensity is comparatively low, some of the
structures as well as service roads could be postponed by 7-12
years depending on projected traffic growth. Upgradation of
designs and standards, construction of bypasses in urban and

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semi-urban areas and other improvements may also be planned

in phases depending on traffic intensity. These issues should be
subjected to in-depth examination and reflected in a Manual of
Standards and Specifications that would form part of the standard
documents associated with the MCA.
Technical parameters
Unlike the normal practice of focussing on construction
specifications, the technical parameters proposed in the MCA
are based mainly on output specifications, as these have a direct
bearing on the level of service for users. Only the core
requirements of design, construction, operation and maintenance
of the Project Highway are to be specified, and enough room
would be left for the Concessionaire to innovate and add value.

Technical parameters
will focus on the level
of service for the users

In sum, the framework focuses on the 'what' rather than the

'how' in relation to the delivery of services by the Concessionaire.
This would provide the requisite flexibility to the Concessionaire
in evolving and adopting cost-effective designs without
compromising on the quality of service for users. Cost
efficiencies would occur because the shift to output-based
specifications would provide the private sector with a greater
opportunity to innovate and optimise designs in a way normally
denied to it under conventional input-based procurement
specifications.
Concession period
The guiding principle for determining project-specific
concession period is the carrying capacity of the respective
highway at the end of the proposed concession period. As such,
the concession period is proposed to be determined on a projectspecific basis depending on the volume of present and projected
traffic. Toll paying users should not be subjected to congested
highways and the Concession should, therefore, cease when full
capacity of the road is reached, unless further augmentation is
built into the MCA.

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Concession period will

be linked to projected
traffic

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The time required for construction (about two years) has

been included in the concession period so as to incentivise early
completion, implying greater toll revenues
Selection of Concessionaire
Competitive bidding
on single parameter
will be the norm

Selection of the Concessionaire will be based on open

competitive bidding. All project parameters such as the
concession period, toll rates, price indexation and technical
parameters are to be clearly stated upfront, and short-listed
bidders will be required to specify only the amount of grant
sought by them. The bidder who seeks the lowest grant should
win the contract. In some cases, instead of seeking a grant, a
bidder may offer to share the project revenues with the Authority.
Grant

Grants to bridge
viability gap

It is proposed that based on competitive bidding, the

Authority may provide a capital grant of up to a maximum of 20
per cent of the project cost. This would help in bridging the
viability gap of the PPP projects. Where such assistance is
inadequate for making a project commercially viable, an
additional grant not exceeding 20 per cent of the project costs
may be provided for O&M support during the period following
the commissioning of the Project Highway.
Concession fee

Concession fee should

be levied only if
revenue streams can
sustain it

Concession fee will be a fixed sum of Re. 1 per annum for

the concession period. Where bidders do not seek any grant and
are instead willing to make a financial offer to the Government,
they will be free to quote a premium on concession fee in the
form of a share in revenues from user fee. In addition, the revenue
share quoted for the initial year could be increased for each
subsequent year by an additional 1 per cent. The rationale for
the above fee structure is that in the initial years, debt service
obligations would entail substantial outflows. Over the years,
however, the Concessionaire will have an increasing surplus in
its hands on account of the declining debt service on the one
hand and rising revenues on the other. Recognising this cash
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flow pattern, the concession fee to be paid by the Concessionaire

will be on an ascending revenue-share.
Risk allocation
As an underlying principle, risks have been allocated to the
parties that are best suited to manage them. Project risks have,
therefore, been assigned to the private sector to the extent it is
capable of managing them. The transfer of such risks and
responsibilities to the private sector would increase the scope of
innovation leading to efficiencies in costs and services.

Risk allocation and

mitigation is critical
to private investment

The commercial and technical risks relating to construction,

operation and maintenance are being allocated to the
Concessionaire, as it is best suited to manage them. Other
commercial risks, such as the rate of growth of traffic, are also
being allocated to the Concessionaire. The traffic risk, however,
is significantly mitigated as the Project Highway is a natural
monopoly where existing traffic volumes can be measured with
reasonable accuracy. On the other hand, all direct and indirect
political risks are being assigned to the Authority.
It is generally recognised that economic growth will have a
direct influence on the growth of traffic and that the
Concessionaire cannot in any manner manage or control this
element. By way of risk mitigation, the MCA provides for
extension of the concession period in the event of a lower than
expected growth in traffic. Conversely, the concession period is
proposed to be reduced if the traffic growth exceeds the expected
level.
The MCA provides for a target traffic growth and stipulates
an increase of upto 20 per cent in the concession period if the
growth rate is lower than projected. For example, a shortfall of
5 per cent in the target traffic after 10 years would lead to
extension of the concession period by 7.5 per cent thereof. On
the other hand, an increase of 5 per cent in the target traffic would
reduce the concession period by 3.75 per cent thereof.

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Commercial Operation Date

COD at project
commencement

The four-lane highways, which are to be six-laned under the

MCA, are already being tolled by the Authority. As such, tolling
would not have to wait until six-laning is completed. The MCA
provides that the Concessionaire would collect tolls soon after
the Agreement becomes effective upon satisfaction of the
Conditions Precedent. Some additional safeguards have been
built for preventing any misuse of the toll revenues prior to project
completion.
Financial close

Project implementation
must commence as per
agreed timeframe

Unlike other agreements for private infrastructure projects

which neither define a time-frame for achieving financial
close, nor specify the penal consequences for failure to do so,
the MCA stipulates a time limit of 180 days (extendable up to
another 120 days on payment of a penalty), failing which the bid
security shall be forfeited. By prevalent standards, this is a tight
schedule, which is achievable only if all the parameters are
well defined and the requisite preparatory work has been
undertaken.
The MCA represents a comprehensive framework necessary
for enabling financial close within the stipulated period.
Adherence to such time schedules will usher in a significant
reduction in costs besides ensuring timely provision of the much
needed infrastructure. This approach would also address the
typical problem of infrastructure projects not achieving financial
close for long periods.
User fee
A balanced and precise mechanism for determination of user
fee has been specified for the entire concession period since this
would be of fundamental importance in estimating the revenue
streams of the project and, therefore, its viability. The user fee
shall be based on the rates notified by the Government in the
Fee Rules.

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The MCA provides for indexation of the user fee to the extent
of 40 per cent thereof linked to WPI. Since repayment of debt
would be virtually neutral to inflation, the said indexation of 40
per cent is considered adequate. A higher level of indexation is
not favoured, as that would require the users to pay more for a
declining (more congested) level of service when they should
be receiving the benefit of a depreciated fee. A higher indexation
would also add to uncertainties in the financial projections of
the project.
Local traffic
Owing to the absence of an alternative road, highways should
be open to use by local residents without any payment of tolls
until free service lanes are provided. This would ensure local
support for the project and avoid legal challenges or local
opposition arising out of easement rights.
Frequent users should be entitled to discounted rates, in
accordance with the tolling policy.
Construction
Handing over possession of at least 80 per cent of the required
land and obtaining of environmental clearances are being
proposed as conditions precedent to be satisfied by the Authority
before financial close.

Safety and quality of

service must be
ensured

The MCA defines the scope of the project with precision

and predictability in order to enable the Concessionaire to
determine its costs and obligations. Additional works may be
undertaken within a specified limit, only if the entire cost thereof
is borne by the Authority.
Before commencing the collection of user fee, the
Concessionaire will be required to subject the Project Highway
to specified tests for ensuring compliance with the specifications
relating to safety and quality of service for the users.

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Operation and maintenance

Maintenance standards
will be enforced strictly

Operation and maintenance of the Project Highway is

proposed to be governed by strict standards with a view to
ensuring a high level of service for the users, and any violations
thereof would attract stiff penalties. In sum, operational
performance would be the most important test of service delivery.
The MCA provides for an elaborate and dynamic mechanism
to evaluate and upgrade safety requirements on a continuing
basis. The MCA also provides for traffic regulation, police
assistance, emergency medical services and rescue operations.
Right of substitution

Lenders will have the

right of substitution

In the highways sector, project assets may not constitute

adequate security for lenders. It is project revenue streams that
constitute the mainstay of their security. Lenders would, therefore,
require assignment and substitution rights so that the concession
can be transferred to another company in the event of failure of
the Concessionaire to operate the project successfully. The MCA
accordingly provides for such substitution rights.
Force majeure

Concessionaire will be
protected against
political actions

The MCA contains the requisite provisions for dealing with

force majeure events. In particular, it affords protection to the
Concessionaire against political actions that may have a material
adverse effect on the project.
Termination
In the event of termination, the MCA provides for a
compulsory buy-out by the Authority, as neither the
Concessionaire nor the lenders can use the highway in any other
manner for recovering their investments.

Pre-determined
termination payments
should provide
predictability

Termination payments have been quantified precisely as

compared to the complex formulations in most agreements
relating to private infrastructure projects. Political force majeure
and defaults by the Authority are proposed to qualify for adequate

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compensatory payments to the Concessionaire and thus guard

against any discriminatory or arbitrary action by the Government
or the Authority. Further, the project debt would be fully protected
by the Authority in the event of termination, except for two
situations, namely, (a) when termination occurs as a result of
default by the Concessionaire, 90 per cent of the debt will be
protected, and (b) in the event of non-political force majeure
such as Act of God (normally covered by insurance), 90 per cent
of the debt not covered by insurance will be protected. However,
if the Concessionaire fails to commission the project owing to
its own default, no termination payment would be due.
Monitoring and supervision
Day-to-day interaction between the Authority and the
Concessionaire has been kept to the bare minimum by following
a hands-off approach, and the Authority shall be entitled to
intervene only in the event of a material default. Checks and
balances have, however, been provided for ensuring full
accountability of the Concessionaire.

Independent supervision
is essential

Monitoring and supervision of construction, operation and

maintenance is proposed to be undertaken through an
Independent Engineer (a qualified firm) that will be selected by
the Authority through a transparent process. Its independence
would provide added comfort to all stakeholders, besides
improving the efficiency of project operations. If required, a
public sector consulting firm may discharge the functions of the
Independent Engineer.
The MCA provides for a transparent procedure to ensure
selection of well-reputed statutory auditors, as they would play
a critical role in ensuring financial discipline. As a safeguard,
the MCA also provides for appointment of additional or
concurrent auditors.
To provide enhanced security to the lenders and greater
stability to the project operations, all financial inflows and
outflows of the project are proposed to be routed through an
escrow account.
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Support and guarantees by the Authority

Support and
guarantees by the
Authority are essential

By way of comfort to the lenders, loan assistance from the

Authority has been stipulated for supporting debt service
obligations in the event of a revenue shortfall resulting from
political force majeure or default by the Authority.
Guarantees have also been provided to protect the
Concessionaire from construction of competing roads, which
can upset the revenue streams of the project. Additional tollways
would be allowed, but only after a specified period and upon
compensation to the Concessionaire by way of an extended
concession period.
Miscellaneous

An effective dispute
resolution mechanism
is critical

A regular traffic census and annual survey has been stipulated

for keeping track of traffic growth. Sample checks by the
Authority have also been provided for. As a safeguard against
siphoning of revenue share by the Concessionaire, a floor level
of present and projected traffic has also been stipulated.
The MCA also addresses issues relating to dispute resolution,
suspension of rights, change in law, insurance, defects liability,
indemnity, redressal of public grievances and disclosure of project
documents.
Conclusion

Private participation
should improve
efficiencies and reduce
costs

10

Together with the Schedules, the proposed contractual

framework addresses the issues that are likely to arise in financing
of highway projects on DBFOT basis. The proposed regulatory
and policy framework contained in the MCA is a pre-requisite
for attracting private investment with improved efficiencies and
reduced costs, necessary for accelerating growth.

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