CASE STUDY – INFRASTRUCTURE PROJECT

NATIONAL HIGHWAY CONSTRUCTION

BY,
HETALI DOSHI ROLL NO -21
PRATIK GHANEKAR ROLL NO-25
INDIAN NATIONAL HIGHWAY
A The country is a good example of major program revamp involving a major
shift from public procurement to a predominant focus on successful PPP in
Highways within a relatively short period.
B This shift started about 10 years ago with major political commitment
at the highest levels, with strong support from the multilaterals and the
creation of PPP focused institutions and systems.
C India is using a mix of BOT type PPP arrangements and Annuities which also
makes it instructive.
D India is an example where laws, regulations, institutions, modalities,
funding, sub national development, expansion into non traditional areas
for PPP etc are being developed on a step by step basis. That is, not all that
is advised as being required for successful PPP development was initially in
place but the country is moving to a comprehensive PPP system.
E Key considerations are considered to be political commitment, recognition
of the role of highways in economic development and severe shortage of
funds, initial development of a few successful highway projects through
contracts and strong support from the multilaterals and especially the
WB and ADB, especially in project preparation, financial support/funding
mechanisms, risk management and tendering procedures.
Background
 India is now the fourth largest economy in the world and one of the fastest
growing.However it faces both a tremendous backlog and a growing demand for
infrastructure.The Indian economy expanded significantly in fiscal year 2006.
 According to advance estimates released by the Central Statistical Organization,
the economy recorded a gross domestic product (GDP) growth rate (at factor
cost) of 9.2% at constant prices,compared with 9% in the previous year. The
increase in growth rates in recent years is reflected in the 11th (FY 2007–FY
2012) Five-Year Plan average annual growth target of 9% compared with the
10th Plan target of 8%.
 High quality infrastructure is essential to harness the growth impulses in the
economy.The Planning Commission (equivalent to a Ministry of Planning) has
observed that poor infrastructure is India’s "Achilles’ heel" which is estimated to
cost India 3-4% of lost GDP a year.
 The Planning Commission has estimated that India needs to increase its
spending on infrastructure from 4–5% to 9% of GDP if it is to achieve its growth
targets. In the highway sector, 50% of villages do not have all weather road
access and only of the strategic national highway system has 4 lanes. In the cities,
traffic congestion.
OF INFRASTRUCTURE AVAILABILITY IN INDIA

Population
(million)
National Expressways
(‘000 miles)
India 1,100 3.7
China 1,300 25
United States 300 47
Sources: ADB, International Monetary Fund, National Development and Reform
Commission.

 Lack of infrastructure also undermines the competitiveness of the economy

and poor infrastructure hinders FDI in non infrastructure businesses. Poor
infrastructure also impedes inclusive growth and poverty reduction.
 In the highway sector the GOI (Government of India) has established its
National Highway Development Program (NHDP) and the Prime Minister’s
Rural Road program.
 However, available funding has been providing less than 50% of needs.
 Following many years of hesitation with PPPs, India has made great strides in
its PPP program and especially in the highway sector. India now sees PPPs as
a necessity to mobilize sufficient resources for its infrastructure needs.
 India has been actively engaged in recent years in finding the appropriate
policy framework to make public private partnership for infrastructure
financing a viable option
 The country is seeking a comprehensive policy framework which gives the
private sector adequate confidence and incentives to invest on a massive
scale, while simultaneously providing adequate checks and balances through
transparency, competition and regulation.
The PPP Process in India
Recent trends in the PPP Framework for Highways
Policy
All contracts whether for construction or BOT are awarded through
competitive bidding.
Private sector involvement is currently through:
• Public Construction contracts
• Concessions for some stretches – based on either the lowest annuity or
the
lowest lump sum payment from the Government
• Concession contracts permit tolling on those stretches of the NHDP
Incentives:
• 100% FDI under the automatic route is permitted for all road development
projects;
• Incentives include a 100% income tax exemption for a period of 10 years;
• NHAI agreeable to provide grants/viability gap funding for marginal
projects, as
well as traffic support/guarantees, on a case by case basis;
• NHAI possible equity participation of up to 30% of the SPV established to
develop
a road project;
• Private investors’ protection against force majeure type situations
including
political, non political and legislative changes;
• Land required for highway construction can be leased to private operator
under
a PPP (but remains in the ownership of the State).
A Model Concession Agreement has been formulated and provided to
bidders. A large
pipeline of projects is being developed, amounting to the USD 50–60 billion
investment
that is estimated by NHAI will be required over the next 5 years to improve
road
infrastructure.
Legal and Regulatory
The National Highways Act, 1956, has been amended to attract private
investment in
road development, maintenance, and operation.
In order to specify the policy and regulatory framework on a fair and
transparent basis, a
Model Concession Agreement (MCA) for PPPs in national highways has been
introduced.
The government also approved a new Model Concession Agreement (MCA),
which, some
have considered is "a very attractive document as far as lenders are
concerned", as
it allows for grant funding and government guarantees, is high on
transparency, and
addresses principal concerns of lenders, such as land acquisition and
protection in the
event of default.
Dispute resolution will be governed by the 1996 Indian Arbitration and
Conciliation Act,
which incorporates the UNCITRAL provisions.
Institutions: Organizing the Government for PPPs
Steps are being taken for restructuring and strengthening of National Highways
Authority
of India (NHAI), which is the implementing agency for the National Highways
program.
Institutional mechanisms have been established to address bottlenecks arising from
delays in environmental clearance, land acquisition etc. A special focus is being
provided
for traffic management and safety1 related issues through the proposed Directorate
of
Safety and Traffic Management.

Financial, Modalities and Risk

The Viability Gap Fund (VGF) was introduced with Guidelines and appears to be
working
reasonably well.
The provision of longer term funding to match the long concession periods involved
in
PPPs is under preparation with the development of a USD 6 billion fund under the
IIFCL.
In 19 projects, private operators offered to pay upfront for the road concessions2.
Even
among the projects which opted for support under the VGF, the grant component, on
average, accounted for only 8% of the total project cost (as against the cap of 40%). A
number of modalities are being used. Reference above has been to BOOT. However,
the
annuity model is increasingly popular in India.
For high density corridors where the potential for direct tolling of road users exists
the
GOI has successfully used BOOT toll road concessions as a way of mobilizing private
financing. Under this model the private sector builds, operates and maintains the
road
for the period of the contract (usually up to 30 years), after which the road is
transferred
back to the Government. The private operator is remunerated through the collection
of tolls charged for use of the road, and, in some cases, in part by payment directly
from the Government. To date approximately 500km of national highways are
privately
managed as toll roads, raising around 10.5 billion rupees per year (USD 224 million).
This model has been used primarily for port connectivity projects, the least risky of
the
NHDP programs. Under this model, the Government and the private sector join forces
in establishing a Special Purpose Vehicle (SPV) for financing and implementing the
PPP
project. Because user entities generally can contribute to part of project financing,
these
projects have been able to achieve investment grade ratings from at least one credit
rating agency and thereby attract long term financing from such risk averse sources
as
insurance companies, pension funds, and other institutional investors.
In addition to the transfer of the initial financing, construction, O&M and
project
completion risks to the private sector, a construction faster and less
expensive than
under traditional EPC contract, the GOI has seen other advantages to
Annuity concessions
including:
• A payment structure allowing a firm calculation of NHAI’s financial
exposure
under the contract;
• A reduction in the risk of contract renegotiation with the private
contractor
resulting from the fixed nature of the annuity payments, and
• A substantial growth of domestic private sector capacity (not just in
construction,
but in operations and maintenance as well) in the roads sector.
Two toll based annuity schemes are possible:
• Toll to be collected by the public sector; or
• Toll to be collected by the concessionaires.

• Infrastructure of Contract Enforcement

 Modern concepts of regulation of contracts involved in infrastructure
require a sound framework of law and enforcement. India started out
with an English "common law" tradition, where laws were written in
terms of general principles, and courts played a major role in
interpreting principles in the light of contemporary issues.
 Over time, this common law heritage has become less important, and
the structure of Indian law has moved closer to "civil law", where
legislation contains explicit.
Financing
The early stages of the NHDP were funded traditionally from a variety of
sources (See also
Annex 1 Central Road Fund) including budgetary support,
multilateral/bilateral loans,
fuel cess, tolls and private sector. Increasingly, the NHDP will be funded by
the fuel cess,
through PPPs, tolls, and budgetary support where necessary. Loans from
multilateral
agencies will be increasingly devoted to project preparation, viability gap
funding, long
term financing of PPP projects and guarantee funds.
From the private sector perspective in India, the following were seen as key
priorities
for their equity participation:
• PPPs are viewed as representing an enormous long term opportunity for
the
private sector which will grow as projects expand significantly.
• Government initiatives to develop the framework for PPPs are welcomed
especially
streamlining the PPP process and providing VGF and IIFCL funds. Also
welcomed
are the various PPP cells and also the encouragement of PPPs at the state
level.
• Reforms and Capacity building at state and federal level are still required.
• There is still more need for information and publicity on PPP opportunities.
• The creation of a pipeline of credible and well structured projects is very
important
to sustain private sector interest
• The policy and regulatory framework needs strengthening to ensure
transparency
Role of multilaterals
In India, the government has had substantial support from multilaterals such
as WB and
ADB in PPP development. Such support has included:
• TAs to help design and implement the appropriate institutional and
enabling
environment for PPPs including capacity building.
• TAs to help design the appropriate guidelines for PPP development.
• Provision of funds to support PPP development including for project
preparation,
viability gaps funds, longer term funding not available in the commercial
market
place, guarantee funds, etc.
• Support to maximize private sector interest including transparency,
competition,
incentives and dispute resolution.
• Other critically important issues such as land acquisition and
environmental
impacts and mitigation as well as ensuring pro poor dimensions are included
in
planning and implementation.
Overview of highway development and PPP
India has an extensive road network of 3.3 million km – the second largest in the
world and an annual growth of 12-15% and 15-18% for passenger and freight traffic
respectively has been projected. Roads carry about 61% of the freight and 85% of the
passenger traffic. Highways/Expressways constitute about 66,000 km (2% of all roads)
and carry 40% of the road traffic. The Government of India until recently had been
spending about Rs.18,000 crores3 (US $ 4 billion) annually on road development
India believes that an efficient road network is necessary both for national
integration
as well as for socio-economic development. The National Highways (NH) system, with
a
total length of 65,569 km, serves as the arterial network across the country.
The current 10 year planning program of the government is the National Highway
Development Project (NHDP) and is at an advanced stage of implementation. The
NHDP
involves a total investment of Rs.220,000 crore (USD 50 b) up to 2012. Under the
National Highways Development Project (NHDP) - the largest highway project ever
undertaken by the country and with the shortest time span for completion - 14,279
kilometer of National Highways are to be converted to 4/6-lanes, at a total estimated
cost of Rs.65,000 crore (USD14+ billion at 2004 prices).
Since the opening up of the economy in 1991, initially there have been several
cautious
attempts at PPP in India with most PPPs being in the road sector.
 The following figure shows the graphical development of PPP over recent years.

Challenges
 The infrastructure needs of India are very substantial and will be difficult
to achieveunder any circumstances.
 The Government of India also has a policy to make infrastructure services
available to those who need them but cannot afford to pay the full cost of
service provision. Here, too, the government sees a substantive scope for
leveraging its support through engaging the private sector as a partner in
its development agenda.
 It was also said that, in order to be able to attract private sector players,
the government would have to improve a number of areas such as
credible dispute resolution mechanisms, and satisfactorily resolve
sensitive and contentious issues like land acquisition.
  Although the government is committed to relying on PPPs significantly in
the provision of infrastructure services, it is facing a variety of large and
small challenges in translating
its intent into action. It is noted that, in trying to scale up its program, India
was facing
the same challenges that other countries also face, namely:
• The huge scale of infrastructure needs whether funded with private sector
assistance or not.
• How to marry private sector motivation for profit with public sector concern
for
public service (and the need for inclusiveness).
• How to apportion risk in a manner that is fair, rational and sustainable.
• How to manage the partnership through tightly-framed concession
agreements
over 20–30 year periods, in a rapidly changing environment.
• How to develop capacities in the concerned financial institutions so that
they
are able to appraise projects which have a life span of 20 and more years.
There is also lack of capacity in public institutions and officials to manage the
PPP
process.
NHAI’s experience with different PPP approaches to date, for example toll
BOTs and
annuities, should be analyzed in more detail to guide the states and the
center on future
approaches towards PPPs, particularly in less-trafficked segments of the
network.
Across the states, there are significant differences in capacity for undertaking
PPP
projects. Expeditious action to remove these asymmetries and, also, to
replicate the
best practices achieved under the NHDP and successful PPP programs in
selected states,
would not only help the states to better manage their own road services, but
also play
an active role in the implementation of the National Highway PPPs in some of
the
remaining phases of the NHDP.
Conclusions and Lessons Learned
India is a country that less than ten years ago had barely dabbled in PPP.
However, at
the beginning of that period it came to the policy conclusion that its
infrastructure
needs are huge and cannot be met without PPP development. This conclusion
is being
increasingly reinforced over time.
Given its successful use in the road sector in India, the Annuity Concession
model of
PPP holds the potential to attract private finance in other sectors which often
do not
generate sufficient revenue to support BOT or concession type models, and
provides
valuable lessons to other governments looking for PPP solutions that leverage
private
finance without necessitating dramatic increases in tariffs or user fees.
From an initial start and with multilateral assistance, the Government and its
Highway
agency, the NHAI, prepared an ambitious strategic highway development plan
covering
the whole country and which is dependent on private financing. This plan is
regularly
updated.
The government at the outset seems to have taken a bold policy decision,
that PPP will
be its financial cornerstone and that even though not all elements were
either in place
at all or fully in place, the country will pursue a policy that it hopes will
provide it with
the highway infrastructure it needs with acceptable risks and at an
accelerating pace.
As that pace accelerates, it recognizes the need is for:
• Continuing to improve its human resource capacity.
• Continuing to improve its PPP frameworks-legal, regulatory, financial, risk,
etc.
• Proper monitoring of ongoing projects (lessons learned).
• Dissemination of knowledge and capacity to states and local levels.
• Extension of the program to rural roads, PBC etc and other parts of PPP that
have
not been the easiest to initially develop
• Consideration of road safety.
It seems to show that while not every piece of the recommended frameworks
for PPP
need be in place at first, key elements are necessary. Political commitment
and support
to government civil servants with assistance from the IFIs and well
experienced advisors
to assist in the preparation of solid preparatory studies are the barest
minimum at the
outset.
Experience has shown that governments should not;
• Offer projects before proper studies are completed
• Make commitments that cannot be kept
• Change the rules after award of concession
• Revisit project design• Superimpose public processes on private initiatives
• Not recognize the business nature of PPPs
Experience has shown that governments should;
• Try to align the economic interests of all parties
• Define PPPs on a package basis not just sum of different parts
• Induct private sector as partners
• Encourage initiative of officers
• Encourage plurality of approaches
Annex 1 Central Road Fund
The Central Government has created a dedicated fund, called Central Road
Fund from
collection of cess from petrol and diesel. Presently, Rs. 2 per litre is collected
as cess
on petrol and High Speed Diesel (HSD) Oil. The fund is distributed for
development and
maintenance of National Highways, State roads, rural roads and for provision
of road. overbridges/underbridges and other safety features at unmanned
railway crossings as
provided in Central Road Fund Act, 2000.
Out of the cess of Rs. 2 per litre levied, Rs. 1.5 is being allocated in the
following
manner:
1. 50% of the cess on high speed diesel (HSD) oil for development of rural
roads.
2. 50% of cess on HSD and the entire cess collected on petrol are allocated
thereafter as follows:
A An amount equal to 57.5% of such sum for the development and
maintenance
of National Highways;
B An amount equal to 12.5% for construction of road under or over bridges
and
safety works at unmanned railway crossings; and
C An amount equal to 30% on development and maintenance of State Roads.
Out of this amount, 10% shall be kept as reserved by the Central Govt. for
allocation to States for implementation of State road schemes of interstate
connectivity and economic importance to be approved by the Central
Government.
3. Balance cess of Rs. 0.5 per litre is entirely allocated for development
andmaintenance of National Highways. An allocation of Rs.12,830 crores has
been
made under the CRF for 2007-08.
National Highways 6541.06 Cr.
Rural Roads 3825.00 Cr.
Railways 724.69 Cr.
Grant to State Governments and
UTs for State roads 1565.32 Cr.
Grant to States & UTs for Roads
of Inter-State Connectivity and
Economic Importance 173.93 Cr.
Total Rs. 12830.00 Cr. the approach to PPP-type projects
proposed for implementation by the SOEs
• the process and mechanism of public consultations,
• the provision of government support for PPP projects of local governments,
• the definition of financial closure, and the re-bidding process.
There should be various possibilities to compromise between implementation
procedures
that enforce international best practice and other proposed practices that
might
inadvertently weaken the whole process to the point of eliminating
transparency,
competition and accountability so vital to PPP.
Further information- Reference
India: Public Private Partnerships in Highways Sector
International Conference on Meeting India’s Infrastructure Needs with Public
Private Partnerships
The International Experience and Perspective February 2007
 http://www.pppinindia.com/events-details.asp?id=3
 Multitranche Financing Facility India: India Infrastructure Project
Financing Facility. Report and
Recommendation of the President to the Board of Directors, Project Number:
40655 November 2007
 http://www.adb.org/projects/project.asp?id=40655
The World Bank Group, Highway Sector Financing In India, Volume I/II 2004
 www.worldbank.org.in
 www.vishwabank.org